As filed with the Securities and Exchange Commission on August 15, 1996
Registration No. 333-5841
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------
KLEINERT'S, INC.
(exact name of registrant as specified in its charter)
Pennsylvania 13-0921860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2341
(Primary Standard Industrial
Classification Code Number)
120 West Germantown Pike
Suite 100
Plymouth Meeting, Pennsylvania 19462
(610) 828-7261
(Address, including zip code, and telephone number, including area code,
of the registrant's principal executive offices)
Joseph J. Connors
Executive Vice President
120 West Germantown Pike
Suite 100
Plymouth Meeting, Pennsylvania 19462
(610) 828-7261
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
<PAGE>
With copies to:
Steven N. Haas, Esquire Michael M. Sherman, Esquire
Cozen and O'Connor Wolf, Block, Schorr and Solis-Cohen
1900 Market Street Twelfth Floor - Packard Building
Philadelphia, Pennsylvania 19103 Fifteenth and Chestnut Streets
Philadelphia, Pennsylvania 19102
<PAGE>
KLEINERT'S, INC.
CROSS-REFERENCE SHEET
BETWEEN
ITEMS IN FORM S-4 AND LOCATION IN PROSPECTUS
Form S-4 Item Number and Caption Location in Prospectus
-------------------------------- ----------------------
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement
and Outside Front Cover of
Prospectus.........................Facing Page; Cross-Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................Inside Front and Outside Back Cover
Pages of Prospectus
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information........................Summary; The Merger, Incorporation of
Documents by Reference
4. Terms of the
Transaction........................Summary; The Annual Meeting; The Merger;
The Merger Agreement; Comparative Per
Share Data
5. Pro Forma Financial
Information........................Summary; Unaudited Pro Forma Combined
Selected Financial Information,
Unaudited Pro Forma Combined Condensed
Financial Statements; Footnotes to
Unaudited Pro Forma Combined Condensed
Financial Statements
<PAGE>
6. Material Contacts with the Company
Being Acquired.....................Summary; The Merger; The Merger
Agreement
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.......... *
8. Interests of Named Experts and
Counsel............................Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants........................Available Information; Incorporation of
Documents by Reference; Summary; The
Merger; Comparative Per Share Data;
Comparative Stock Price Information;
Beneficial Ownership of Kleinert's
Common Stock; Kleinert's Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Information Concerning Kleinert's
11. Incorporation of Certain
Information by Reference........... *
12. Information with Respect to S-2 or
S-3 Registrants.................... *
- -----------
* Not applicable or answer negative upon the date of filing of this registration
statement.
<PAGE>
Form S-4 Item Number and Caption Location in Prospectus
-------------------------------- ----------------------
13. Incorporation of Certain Information
by Reference....................... *
14. Information with Respect to
Registrants Other Than S-2 or S-3
Registrants........................ *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies.......................... *
16. Information with Respect to S-2 or
S-3 Companies...................... *
*
17. Information with Respect to
Companies Other than S-2 or S-3
Companies..........................Summary; The Merger; Comparative Per
Share Data; Comparative Stock Price
Information; Scott Mills Selected
Financial Data; Scott Mills Management's
Discussion and Analysis of Financial
Condition and Resulting Operations;
Information Concerning Scott Mills
<PAGE>
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be
Solicited..........................Summary; The Annual Meeting; The Merger;
Election of Directors; Report of Scott
Mills Board of Directors on Executive
Corporations; Beneficial Ownership of
Scott Mills Common Stock
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited
or in an Exchange Offer................. *
- ------------
* Not applicable or answer negative upon the date of filing of this registration
statement.
SCOTT MILLS, INC.
120 West Germantown Pike, Suite 100
Plymouth Meeting, Pennsylvania 19462
-----------------
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
-----------------
The Annual Meeting of the shareholders (the "Annual Meeting") of
Scott Mills, Inc. (the "Company") will be held at ______, Philadelphia,
Pennsylvania, on ______, 1996 at 10:00 o'clock a.m., local Philadelphia time,
for the following purposes:
<PAGE>
1. To consider and vote upon a proposal to approve and adopt: (i)
the Agreement and Plan of Merger dated as of June 10, 1996 (the "Merger
Agreement"), among the Company, Kleinert's, Inc., a Pennsylvania corporation,
and Kleinert's, Inc. of Alabama, an Alabama corporation and wholly-owned
subsidiary of Kleinert's, Inc.; and (ii) the Merger contemplated thereby (the
"Merger") pursuant to which an aggregate of approximately 56,000 shares
of Common Stock of Kleinert's, Inc. will be issued and approximately $__________
in cash will be paid in exchange for all issued and outstanding shares of Common
Stock of Scott Mills, Inc.
2. To elect four directors to serve until the next annual meeting
of shareholders and until their successors are duly elected and qualified.
3. To transact such other business as may properly come before
the Annual Meeting and any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on
September 5, 1996 as the record date for the Annual Meeting. Only shareholders
of record on that date are entitled to notice of and to vote at the Annual
Meeting and any adjournment and postponement thereof. A complete list of
shareholders entitled to vote at the Annual Meeting shall be open for
examination by any shareholder, for any purpose germane to the Annual Meeting,
during ordinary business hours, for a period of at least ten days prior to the
Annual Meeting at the Company's principal executive offices, 120 West Germantown
Pike, Suite 100, Plymouth Meeting, Pennsylvania 19462.
The accompanying form of proxy is solicited by the Board of Directors of the
Company. Reference is made to the attached Proxy Statement for further
information with respect to the business to be transacted at the Annual Meeting.
Duly executed but unmarked proxies will be voted "FOR" the Merger Agreement and
the Merger and "FOR" the nominees for election as director of the Company.
THE BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER. THE BOARD ALSO RECOMMENDS THAT SHAREHOLDERS VOTE IN
FAVOR OF THE BOARD'S NOMINEES FOR ELECTION AS DIRECTOR.
<PAGE>
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING, BUT
WHETHER OR NOT YOU PLAN TO BE PRESENT, YOU ARE URGED TO SIGN, DATE AND RETURN
THE ACCOMPANYING PROXY. THE RETURN OF THE ENCLOSED PROXY WILL NOT AFFECT YOUR
RIGHT TO VOTE IN PERSON. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE; NO POSTAGE IS REQUIRED IF MAILED IN THE CONTINENTAL UNITED STATES.
By Order of the Board of Directors
E. Gerald Riesenbach,
Secretary
Plymouth Meeting, Pennsylvania
September __, 1996
-----------------
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH MERGER NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED
IN THE ACCOMPANYING PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
-----------------
SUBJECT TO COMPLETION DATED AUGUST 15, 1996
<PAGE>
PROXY STATEMENT/PROSPECTUS
---------------------------------
PROXY STATEMENT
SCOTT MILLS, INC.
ANNUAL MEETING OF SHAREHOLDERS
-----------------------------------
PROSPECTUS
KLEINERT'S, INC.
Common Stock, $1.00 Par Value
-------------------------------------
This Proxy Statement/Prospectus is being furnished to holders
of Common Stock, par value $1.00 per share ("Scott Mills Common Stock"), of
Scott Mills, Inc., a Pennsylvania corporation (the "Company" or "Scott Mills"),
in connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Company's 1996 Annual Meeting of Shareholders to be held
on the date, and at the time and place set forth in the foregoing notice, and at
any adjournment or postponement thereof (the "Meeting").
At the Meeting, shareholders will be asked to consider and
vote upon those proposals set forth in the foregoing notice, including the
proposal to approve and adopt the Agreement and Plan of Merger dated as of June
10, 1996 (the "Merger Agreement") among the Company, Kleinert's, Inc., a
Pennsylvania corporation ("Kleinert's"), and Kleinert's, Inc. of Alabama, an
Alabama corporation and a wholly-owned subsidiary of Kleinert's ("Kleinert's
Alabama"), and the Merger contemplated thereby (the "Merger"). A copy of the
Merger Agreement is attached hereto as Annex "A".
Under the terms of the Merger Agreement, and subject to the
satisfaction of the conditions set forth therein, the Company will merge with
and into Kleinert's Alabama and, as a result, the separate corporate existence
of the Company shall cease and Kleinert's Alabama will be the surviving
corporation. Upon consummation of the Merger, each outstanding share of Scott
Mills Common Stock will be converted into the right to receive (a) $0.03 in cash
and (b) such fraction of a share of the Common Stock, par value $1.00 per share,
<PAGE>
of Kleinert's ("Kleinert's Common Stock") as shall have a value of $0.27 based
upon the Average Price of the Kleinert's Common Stock (together with the cash
payment, the "Per Share Merger Consideration"). The "Average Price" shall be the
average of the closing sale price for the Kleinert's Common Stock as reported on
the Nasdaq National Market for the five consecutive trading days immediately
preceding the date on which occurs the Effective Time (as defined in the Merger
Agreement). In lieu of fractional shares of Kleinert's Common Stock to which a
holder of Scott Mills Common Stock would otherwise be entitled if such holder
does not receive whole shares of Kleinert's Common Stock as part of the Merger
Consideration in exchange for such holder's shares of Scott Mills Common Stock,
the holder will be paid in cash based upon the Average Price, and no
certificates or scrip representing fractional shares of Kleinert's Common Stock
will be issued. See "The Merger." A holder of Scott Mills Common Stock who is
not satisfied that he will receive fair value for his shares of Scott Mills
Common Stock may dissent and seek an appraisal of the value of his Scott Mills
Common Stock in accordance with the provisions of the Pennsylvania Business
Corporation Law of 1988, as amended (the "Pennsylvania Law"). Each holder of
Scott Mills Common Stock who completes a proxy or otherwise votes in favor of
the Merger Agreement and the Merger waives any right to dissent or be paid any
additional consideration, if any, resulting from an appraisal. See "Dissenters'
Rights of Appraisal."
In addition to the Merger Agreement and the Merger, the
holders of Scott Mills Common Stock are being asked to consider and vote upon
the election of directors to serve until the next annual meeting of shareholders
and until their successors are duly elected and qualified. In the event the
Merger is approved and consummated, such persons shall resign as directors of
the Company effective upon the Effective Time.
<PAGE>
This Proxy Statement/Prospectus also constitutes a prospectus
of Kleinert's with respect to the shares of Kleinert's Common Stock to be issued
in the Merger in exchange for the Scott Mills Common Stock. All information
contained in this Proxy Statement/Prospectus relating to Kleinert's has been
provided by Kleinert's, and all information contained in this Proxy
Statement/Prospectus relating to Scott Mills has been supplied by Scott Mills.
The Board of Directors of Scott Mills has approved the Merger
Agreement and the Merger and recommends that shareholders vote FOR for adoption
and approval of the Merger Agreement and Merger.
This Proxy Statement/Prospectus and the accompanying form of Proxy
is first being mailed to shareholders of Scott Mills on or about September __,
1996. ------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
The date of this Proxy Statement/Prospectus is September __, 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION ..................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ........................... 5
SUMMARY ................................................................... 6
The Companies ............................................................. 6
The Meeting ............................................................... 7
The Merger ................................................................ 8
COMPARATIVE PER SHARE DATA ................................................ 13
THE ANNUAL MEETING ........................................................ 14
Solicitation of Proxies ................................................... 15
Revocation of Proxies ..................................................... 16
Voting Securities; Record Date; Quorum .................................... 16
KLEINERT'S SELECTED FINANCIAL INFORMATION ................................. 17
SCOTT MILLS SELECTED FINANCIAL INFORMATION ................................ 18
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION ............... 19
THE MERGER ................................................................ 20
Purpose and Structure of the Merger ....................................... 20
Background of the Merger .................................................. 20
Reasons for the Merger; Recommendation of the Board of Directors .......... 22
<PAGE>
THE MERGER AGREEMENT ...................................................... 24
Effective Time ............................................................ 25
Exchange of Certificates in the Merger .................................... 25
Representations and Warranties ............................................ 26
Conduct of Business Pending the Merger .................................... 26
Conditions to the Merger .................................................. 28
Termination ............................................................... 30
Effect of Termination ..................................................... 31
Indemnification of Directors and Officers ................................. 31
INTERESTS OF CERTAIN PERSONS IN THE MERGER ................................ 31
ACCOUNTING TREATMENT OF THE MERGER ........................................ 32
REGULATORY APPROVALS ...................................................... 33
DISSENTERS' RIGHTS OF APPRAISAL ........................................... 33
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ................................... 35
FEDERAL SECURITIES LAW CONSEQUENCES ....................................... 37
COMPARATIVE STOCK PRICE INFORMATION ....................................... 38
KLEINERT'S DIVIDEND POLICY ................................................ 39
SCOTT MILLS DIVIDEND POLICY ............................................... 39
KLEINERT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................................... 40
SCOTT MILLS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................................... 45
INFORMATION CONCERNING KLEINERT'S ......................................... 51
<PAGE>
INFORMATION CONCERNING SCOTT MILLS ........................................ 58
BENEFICIAL OWNERSHIP OF SCOTT MILLS COMMON STOCK .......................... 63
DESCRIPTION OF KLEINERT'S CAPITAL STOCK ................................... 65
BENEFICIAL OWNERSHIP OF KLEINERT'S COMMON STOCK ........................... 66
ELECTION OF DIRECTORS ..................................................... 68
REPORT OF THE SCOTT MILLS BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION ............................................................. 73
STOCK PERFORMANCE GRAPH ................................................... 75
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 ...... 75
RELATIONSHIP WITH INDEPENDENT AUDITORS .................................... 76
PROPOSALS OF SECURITY HOLDERS ............................................. 76
LEGAL MATTERS ............................................................. 76
EXPERTS ................................................................... 76
INDEX TO FINANCIAL STATEMENTS ............................................. 77
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<PAGE>
No persons have been authorized to give any information or to
make any representations other than those contained in this Proxy
Statement/Prospectus in connection with the solicitation of proxies or the
offering of securities made hereby and, if given or made, such information or
representation must not be relied upon as having been authorized by Scott Mills,
Kleinert's or any other person. This Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities, or the solicitation of a proxy, in any jurisdiction to or from any
person to whom it is not lawful to make any such offer or solicitation in such
jurisdiction. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities made hereunder shall under any circumstances create
an implication that there has been no change in the affairs of Scott Mills or
Kleinert's since the date hereof or that the information herein is correct as of
any time subsequent to its date.
--------------------
AVAILABLE INFORMATION
Each of Kleinert's and Scott Mills is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The reports, proxy statements and other information filed by
Kleinert's and Scott Mills with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Seven World Trade Center, Suite 1300, New York, New York,
10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 6061-2511. Copies of such material also can be obtained from the Public
Reference Section of the Commission, at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Kleinert's Common Stock is listed on the Nasdaq
National Market and such reports, proxy statements and other information
concerning Kleinert's are made available for inspection at the offices of the
National Association of Securities Dealers, Inc., 1735 "K" Street, N.W.,
Washington, D.C. 20006.
Kleinert's has filed with the Commission a Registration
Statement on Form S-4 (together with any amendments thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Kleinert's Common Stock to be offered hereby pursuant to the
Merger Agreement. This Proxy Statement/Prospectus constitutes a part of the
Registration Statement. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement. Such additional information
may be obtained from the Commission's principal office in Washington, D.C.
Statements contained in this Proxy Statement/Prospectus or in any document
incorporated by reference
-4-
<PAGE>
in this Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by Kleinert's
with the Commission pursuant to the Exchange Act, are incorporated by reference
in this Proxy Statement/Prospectus:
1. Kleinert's Annual Report on Form 10-K for the fiscal year
ended December 2, 1995;
2. Kleinert's Quarterly Report on Form 10-Q for the quarterly
period ended March 2, 1996;
3. Kleinert's Quarterly Report on Form 10-Q for the quarterly
period ended June 1, 1996; and
4. Kleinert's Current Report on Form 8-K filed on
January 4, 1996.
All documents and reports subsequently filed by Kleinert's
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Proxy Statement/Prospectus and prior to the date of the Meeting shall be
deemed to be incorporated by reference in the Proxy Statement/Prospectus and to
be a part hereof from the date of filing of such documents or reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained herein
or, with respect to Kleinert's, in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded, except
as so modified or superseded, shall not be deemed to constitute a part of this
Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates documents by
reference which are not presented herein or delivered herewith. Such documents
(other than exhibits to such documents unless such exhibits are specifically
incorporated by reference) are available to any person, including any beneficial
owner, to which this Proxy Statement/Prospectus is delivered, on written or oral
request, without charge, in the case of documents relating to either Kleinert's
or Scott Mills, directed to 120 West Germantown Pike, Suite 100, Plymouth
Meeting, Pennsylvania 19462, telephone: (610-828-7261). To ensure timely
delivery of these documents, any request should be made by September __, 1996.
-5-
<PAGE>
SUMMARY
The following is a summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. Reference is made to, and this
Summary is qualified in its entirety by, the more detailed information
contained, or incorporated by reference, in this Proxy Statement/Prospectus and
annexes hereto. Unless otherwise defined herein, capitalized terms used herein
shall have the meanings given such terms elsewhere in this Proxy
Statement/Prospectus. Shareholders are urged to read this Proxy
Statement/Prospectus in its entirety.
The Companies
Kleinert's, Inc. Kleinert's, Inc. (together with its
subsidiaries, "Kleinert's") is engaged in the
design, manufacture and sale of infants' and
children's sleepwear and playwear and
children's T-shirts. Kleinert's also
manufactures, distributes and sells certain
items of personal apparel. Until November
1993, the operations of Scott Mills were
conducted as an operating division of
Kleinert's. See "The Merger -- Background of
the Merger." The principal executive offices
of Kleinert's are located at 120 West
Germantown Pike, Suite 100, Plymouth Meeting,
Pennsylvania 19462, and the telephone number
is 610-828-7261.
Scott Mills, Inc. Scott Mills (together with its wholly-owned
subsidiary, Scott Mills, Inc. of North
Carolina, "Scott Mills" or the "Company") was
engaged until September 12, 1995 in the
knitting, dyeing and finishing of knit fabrics
for the children's and women's apparel market.
On September 12, 1995, Scott Mills announced
that, in light of poor operating results and
as part of an effort to control operating
costs, it had decided to concentrate its
business solely on its knitting operations and
subcontract its dyeing and finishing. Since
that date, it has sold substantially all of
its dyeing and finishing assets and has
concentrated solely on knitting operations.
For the fiscal year ended December 2, 1995 and
the six months ended June 1, 1996,
Kleinert's accounted for approximately 46%
and 89%, respectively, of Scott Mills' net
sales. See "Scott Mills Management's
Discussion and Analysis of Financial
Condition and Results of Operations" and
"Certain Relationships and Related
Transactions." The principal executive
offices of Scott Mills are located at 120
West Germantown Pike, Suite 100, Plymouth
Meeting, Pennsylvania 19462, and the
telephone number is 610-828-7261.
-6-
<PAGE>
The Meeting
Date, Time and Place of Meeting The Annual Meeting of Shareholders of Scott
Mills will be held at 10:00 a.m., local time,
at ________________ on ____________, __, 1996.
Record Date; Shares Holders of record of Scott Mills Common Stock
Entitled to Vote at the close of business on September 5, 1996
are entitled to notice of and to vote at the
Meeting.
Purpose of the Meeting Holders of Scott Mills Common Stock are being
asked to consider and vote upon: (i) a
proposal to approve and adopt the Merger
Agreement and the Merger and (ii) the election
of four directors (if the Merger is
consummated, such directors will tender their
resignations as directors). See "The Annual
Meeting - Introduction; Purpose of the
Meeting."
Votes Required; Security The affirmative vote of the holders of a
Ownership of Management and majority of the issued and outstanding shares
Certain Other Persons of Scott Mills Common Stock voting in person
or by proxy at the Meeting is required to
approve and adopt the Merger Agreement and the
Merger. As of the record date for the Meeting,
there were issued and outstanding 3,367,598
shares of Scott Mills Common Stock, of which
approximately 48.0% were beneficially owned by
directors and executive officers of the
Company as a group and of which approximately
43.8% were beneficially owned by directors and
executive officers of Kleinert's as a group.
Except for Wesley Edwards, a director of the
Company who is entitled to vote less than 1.0%
of the issued and outstanding shares of Scott
Mills Common Stock at the record date, and who
has not indicated his intention with respect
to the Merger proposal, each of the Company's
officers and directors has indicated his
present intention to vote for the Merger. See
"The Annual Meeting - Voting Securities;
Record Dates; Quorum", "The Merger - Interests
of Certain Persons in the Merger" and
"Beneficial Ownership of Scott Mills Common
Stock."
-7-
<PAGE>
The Merger
Effect of the Merger At the Effective Time, Scott Mills will merge
with and into Kleinert's Alabama, the separate
corporate existence of Scott Mills will cease
and Kleinert's Alabama will be the surviving
corporation in the Merger. Each outstanding
share of Scott Mills Common Stock will be
converted into the right to receive the Per
Share Merger Consideration and each
outstanding Scott Mills Option will be
converted into the right to receive the Per
Share Merger Consideration for each share of
Scott Mills Common Stock issuable upon
exercise of the Scott Mills Option, less the
exercise price per share thereof. The Average
Price of the Kleinert's Common Stock will be
the average closing price of the Kleinert's
Common Stock during the five trading days
immediately preceding the date on which the
Effective Time occurs. Only whole shares of
Kleinert's Common Stock will be issued in the
Merger. In lieu of fractional shares to which
a holder of Scott Mills Common Stock or Scott
Mills Options would otherwise be entitled,
holders of Scott Mills Shares or Scott Mills
Options will be paid in cash based upon the
Average Price.
Based upon the capitalization of each of
Kleinert's and Scott Mills on the record date
for the Meeting, and assuming the Average
Price of the Kleinert's Common Stock is the
same as the closing price for such stock on
that date, the holders of Scott Mills Common
Stock and Scott Mills Options would receive,
as a result of their holdings, approximately
56,000 shares of Kleinert's Common Stock, or
approximately 2.0% of the Kleinert's Common
Stock to be outstanding immediately following
consummation of the Merger.
-8-
<PAGE>
Reason for the Merger The Board of Directors of Scott Mills believes
that the Merger presents an opportunity for
Scott Mills' shareholders to benefit from a
larger, financially stronger company and the
growth of Kleinert's business. The Board of
Directors of Scott Mills believes that the
Merger is an appropriate course for Scott
Mills shareholders insofar as the financial
success and, therefore, shareholder value of
Scott Mills is already substantially dependent
upon Kleinert's as Scott Mills' largest
customer. See "The Merger - Reasons for the
Merger; Recommendation of the Board of
Directors." and "Scott Mills Management's
Discussion and Analysis of Financial Condition
and Results of Operations."
Recommendation of the Board The Board of Directors of Scott Mills has
of Directors approved, by affirmative vote of all of the
Directors other than Wesley Edwards, the
Merger Agreement and the Merger and recommends
that Scott Mills shareholders vote "FOR" the
Merger Agreement and the Merger. It is
expected that all of the Directors (other than
Wesley Edwards, who has not indicated his
intention) and executive officers of Scott
Mills who own Scott Mills Common Stock will
vote for the Merger Agreement and the Merger.
See "The Merger - Reasons for the Merger;
Recommendation of the Board of Directors."
No Opinion of Financial Advisor The Board of Directors concluded not to engage
a financial advisor to render an opinion as to
the fairness to the Scott Mills shareholders
of the Merger Consideration to be received in
the Merger. See "The Merger - Reasons for the
Merger; Recommendation of the Board of
Directors."
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<PAGE>
Interests of Certain Persons Except for one director and one officer, all
in the Merger of the directors and executive officers of
Scott Mills are also directors and/or
executive officers of Kleinert's. Accordingly,
notwithstanding their resignations as officers
and directors of Scott Mills at the Effective
Time, the current Board and management of
Scott Mills, by virtue of their positions with
Kleinert's, will be able to continue to direct
the management and affairs of the Surviving
Corporation. Additionally, Nathan Greenberg
and E. Gerald Riesenbach, directors of
Kleinert's, and certain other shareholders of
Kleinert's, none of whom beneficially owns in
excess of 5.0% of the issued and outstanding
shares of Kleinert's Common Stock or Scott
Mills Common Stock, have made loans to Scott
Mills which Kleinert's will assume by
operation of law in the Merger. In the absence
of the Merger, it is uncertain whether such
loans could be repaid in full by Scott Mills
when the loans matured. Pursuant to the Merger
Agreement, all Scott Mills Options will be
converted in the Merger into the right to
receive the Per Share Merger Consideration,
less the exercise price, for each share of
Scott Mills Common Stock issuable upon
exercise of such Scott Mills Options. Thus,
holders of Scott Mills Options, including
certain directors and officers of Scott Mills
and Kleinert's, will be entitled to receive in
exchange for their Scott Mills Options an
aggregate of $475 in cash and 134 shares of
Kleinert's Common Stock. Approximately 43.8%
of the issued and outstanding Scott Mills
Common Stock is beneficially owned by the
executive officers and directors of Kleinert's
as a group. See "The Merger -- Interests of
Certain Persons in the Merger," "Beneficial
Ownership of Scott Mills Common Stock" and
"Election of Directors - Certain Relationships
and Related Transactions."
-10-
<PAGE>
Effective Time of the Merger The Effective Time of the Merger is the date
and time the Articles of Merger are filed with
the Department of State of the State of
Alabama in accordance with the applicable
provisions of the Alabama Business Corporation
Act (the "Alabama Law"). It is expected that
the Effective Time will occur shortly after
the Meeting and after all necessary filings
incident to the Merger, including filings with
the Department of State of the Commonwealth of
Pennsylvania pursuant to the Pennsylvania Law,
and all other conditions as set forth in the
Merger Agreement have been satisfied or
waived. See "The Merger - The Merger
Agreement."
Exchange of Scott Mills As soon as reasonably practicable after the
Common Stock Certificates Effective Time, instructions with regard to
the surrender of Scott Mills Common Stock
certificates, together with a letter of
transmittal to be used for this purpose, will
be forwarded to Scott Mills shareholders for
use in exchanging their Scott Mills Common
Stock for the Merger Consideration. Scott Mills
shareholders should not surrender their stock
certificates for exchange until such
instructions and the letter of transmittal are
received.
Conditions to the Merger; The obligations of Scott Mills and Kleinert's
Termination of the Merger to consummate the Merger are subject to
Agreement certain conditions, including, but not limited
to: (a) approval by the Scott Mills
shareholders; (b) the absence of legal
challenges to the Merger; and (c) the accuracy
of the representations and warranties made by
the other parties and compliance by the other
parties with applicable covenants.
The Merger Agreement is subject to termination
by either Scott Mills or Kleinert's if the
Merger is not consummated by December 10, 1996
or prior to such time upon the occurrence of
certain events, regardless of whether the
Merger has been approved by the Scott Mills
shareholders. See "The Merger - The Merger
Agreement."
-11-
<PAGE>
Regulatory Filings or Approvals Except for compliance with applicable federal
and state securities laws, neither Scott Mills
nor Kleinert's is aware of any governmental or
regulatory requirements relating to the
consummation of the Merger. See "Regulatory
Approvals."
Appraisal Rights Under the Pennsylvania Law, holders of Scott
Mills Common Stock who, prior to the Meeting,
properly demand dissenters' rights and vote
against or abstain from voting with respect to
the Merger Agreement and the Merger have the
right, if the Merger is consummated, to
require the Surviving Corporation to purchase
their shares of Scott Mills Common Stock for
"fair value." To exercise such dissenters'
rights, such shareholders must comply with all
applicable procedural requirements. Kleinert's
shareholders are not entitled to dissenters'
rights under the Pennsylvania Law. See
"Dissenters' Rights of Appraisal."
Certain Federal Income Tax Kleinert's and Scott Mills intend that the
Consequences Merger qualify as a "reorganization" within
the meaning of section 368 of the Internal
Revenue Code of 1986, as amended (the "Code").
Cozen and O'Connor, Philadelphia,
Pennsylvania, has rendered a tax opinion,
dated as of the Effective Time of the Merger,
that for federal income tax purposes, (i) the
Merger will constitute a "reorganization,"
(ii) no gain or loss will be recognized by a
Scott Mills shareholder on the receipt of
Kleinert's Common Stock in exchange for Scott
Mills Common Stock as part of the Merger
Consideraton pursuant to the Merger; and (iii)
if the exchange of Scott Mills Common Stock
for Kleinert's Common Stock and cash results
in a gain, the gain will be recognized to the
extent of the cash received and, under certain
circumstances, such gain will be treated as
ordinary dividend income, but if such exchange
results in a loss, the loss will not be
recognized. The tax opinion is subject to
various assumptions and qualifications and is
not binding on the Internal Revenue Service.
See "The Merger - Certain Federal Income Tax
Consequences."
Accounting Treatment Kleinert's will account for the Merger as a
purchase and, accordingly, the acquired assets
and liabilities will be recorded at their fair
values at the Effective Time. See "Accounting
Treatment of the Merger."
-12-
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below is certain information regarding book value per common
share and income (loss) per common share from continuing operations of
Kleinert's and Scott Mills on an historical basis at and for the periods
indicated and on a pro forma basis assuming the Merger had been consummated at
June 1, 1996 for purposes of book value per share and at December 4, 1994 for
purposes of income (loss) per share from continuing operations. Neither
Kleinert's nor Scott Mills has declared or paid any cash dividends for the
periods indicated. See "Kleinert's Dividend Policy." Pro forma book value per
share is based upon outstanding shares of Kleinert's Common Stock as adjusted to
give effect to the issuance of such shares in the Merger. The information set
forth below should be read in conjunction with both the historical consolidated
financial statements of Kleinert's, including the notes thereto, and of Scott
Mills, including the notes thereto, in each case included elsewhere herein, and
to the unaudited pro forma combined condensed financial statements, including
the notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
At or for the fiscal year At or for the six months
ended December 2, 1995 ended June 1, 1996
-------------------------------------------- --------------------------------------------
Combined Combined
Kleinert's Scott Mills Pro Forma (1) Kleinert's Scott Mills Pro Forma (1)
---------- ----------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Book value per
share(2) $7.23 $ (.98) N/A $7.25 $(1.04) $7.36
Income (loss)
per share from
continuing
operations $1.15 $(1.44) $ .33 $ .28 $ (.06) $ .24
</TABLE>
- ---------------
(1) Assumes that 56,000 shares of Kleinert's Common Stock are issued in the
Merger.
(2) Computed by dividing shareholders' equity by shares outstanding at the
dates indicated.
-13-
<PAGE>
THE ANNUAL MEETING
Introduction; Purpose of the Meeting
This Proxy Statement/Prospectus is being furnished to holders
of Scott Mills Common Stock in connection with the solicitation of proxies by
the Board of Directors of the Company for use at the Company's 1996 Annual
Meeting of Shareholders to be held on ____ __, 1996 at 10:00 a.m. local time at
- ------------------------.
At the Meeting, shareholders will be asked to consider and
vote upon the proposal to approve and adopt the Merger Agreement and the Merger
contemplated thereby. In addition to the Merger Agreement and the Merger, the
holders of Scott Mills Common Stock are being asked to consider and vote upon
the election of directors to serve until the next annual meeting of shareholders
and until their successors are duly elected and qualified (in the event the
Merger is consummated, however, such persons will resign as directors of Scott
Mills effective at the Effective Time).
Under the terms of the Merger Agreement, and subject to the
satisfaction of the conditions set forth therein, the Company will merge with
and into Kleinert's Alabama as a result of which the separate corporate
existence of the Company shall cease and Kleinert's Alabama will be the
surviving corporation. Upon consummation of the Merger, each outstanding share
of Scott Mills Common Stock will be converted into the right to receive (a) $.03
in cash and (b) such fraction of a share of Kleinert's Common Stock as shall
have a value of $0.27 based upon the Average Price of the Kleinert's Common
Stock (together, the "Per Share Merger Consideration"). The "Average Price"
shall be the average of the closing sale price for the Kleinert's Common Stock
for the five consecutive trading days immediately preceding the date on which
the Effective Time occurs as reported on the Nasdaq National Market. Based upon
the closing sale price of the Kleinert's Common Stock on ____________, 1996 as
reported on the Nasdaq National Market, it is anticipated that approximately
56,000 shares of Kleinert's Common Stock and approximately $____ in cash will be
paid in the Merger in exchange for shares of Scott Mills Common Stock and Scott
Mills Options. Kleinert's shall use funds available under its existing lines of
credit to pay the cash portion of the Merger Consideration. See "Unaudited
Combined Condensed Financial Statements of Kleinert's, Inc. and Scott Mills,
Inc." In light of the relatively thin trading market for the Kleinert's Common
Stock and the lack of volatility in its market price, it is not expected that
deviations in the Average Price from the date of this Proxy Statement/Prospectus
to the Effective Time will materially increase or decrease the number of shares
of Kleinert's Common Stock expected to be issued in the Merger. See "The Merger
Agreement -- Merger Consideration" and "Comparative Stock Price Information."
Regardless of fluctuations, if any, in the Average Price, however, the value of
the fractional interest of Kleinert's Common Stock to be issued as part of the
Per Share Merger Consideration will always be $0.27. In lieu of fractional
shares of Kleinert's Common Stock to which a holder of Scott Mills Common Stock
would otherwise be entitled if such holder does not receive whole shares of
Kleinert's Common Stock as part of the Merger Consideration in exchange for all
of such holder's shares of Scott Mills Common Stock, the holder will be paid in
cash based upon the Average Price, and no certificates or scrip representing
fractional shares of Kleinert's Common Stock will be issued. See "The Merger." A
holder of Scott Mills Common Stock who is not satisfied that he will receive
fair value for his shares of Scott Mills Common Stock may dissent and seek an
appraisal of the value of his Scott Mills Common Stock in accordance with the
provisions of the Pennsylvania Law which, among other things, requires that the
shareholder vote against or otherwise abstain from voting with respect to the
Merger and Merger Agreement. Each holder of Scott Mills Common Stock who
completes a proxy or otherwise votes in favor of the Merger Agreement and the
Merger waives any right to be paid any additional consideration, if any,
resulting from an appraisal. See "Dissenters' Rights of Appraisal."
This Proxy Statement/Prospectus also constitutes a prospectus
of Kleinert's with respect to the shares of Kleinert's Common Stock to be issued
in the Merger in exchange for the Scott Mills Common Stock.
-14-
<PAGE>
Solicitation of Proxies
The enclosed proxy is being solicited by the Board for use in
connection with the Meeting and any postponement or adjournment thereof. All
shares of Scott Mills Common Stock represented at the Meeting by properly
executed proxies received prior to or at the Meeting or any postponement or
adjournment thereof and not revoked in the manner described below will be voted
in accordance with the instructions indicated on such proxies. If no
instructions are indicated, the proxies will be voted in favor of the proposal
to approve and adopt the Merger Agreement and the Merger and for the nominees of
the Board for election as director, and, at the discretion of the proxy holder,
as to any other matter which may properly come before the Meeting.
The Board knows of no matter that will be presented for
consideration at the Meeting other than those matters set forth in the Notice of
Annual Meeting. If any other matters are properly presented for action at the
Meeting or any postponement or adjournment thereof, the persons named in the
enclosed proxy will have authority to vote on such matters in their sole
discretion.
If a quorum for the Meeting is not obtained or, as to any one
or more proposals, if fewer shares are voted in favor of the proposal than the
number of shares required for such approval, the Meeting may be adjourned for
the purpose of obtaining additional proxies or votes or for any other purpose
and, at any subsequent reconvening of the Meeting, all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the meeting (except for any proxies which have theretofore effectively been
revoked or withdrawn), notwithstanding that they may have been effectively voted
on the same or any other matter at a previous meeting. Any proxies voted against
the Merger may not be voted at the Meeting in favor of adjournment of the
Meeting.
Proxies marked "Abstain" are included in determining a quorum,
but broker proxies which have not voted on a particular proposal are not
included in determining a quorum with respect to that proposal. Abstentions and
broker non-votes are not treated as votes cast in the election of directors, and
thus are not the equivalent of votes against a nominee. An abstention will be
counted as present at the Meeting and is the equivalent of a vote against
matters other than the election of directors (i.e., to take affirmative action,
the number of affirmative votes must exceed the combined number of "no" votes
and abstentions). Broker non-votes on any matter other than the election of
directors will not be counted as shares present at the Meeting nor will they
affect the vote with respect to that matter.
Scott Mills will bear the costs of the solicitation of its
proxies in connection with the Meeting, including the costs of preparing,
assembling and mailing proxy materials and the handling and tabulations of
proxies received. In addition to solicitation of proxies by
-15-
<PAGE>
mail, proxies in connection with the Meeting may be solicited by directors of
Scott Mills, at no additional compensation, by telephone, telegram, personal
interviews or otherwise. Arrangements also have been made with brokerage firms,
custodians, nominees and fiduciaries to forward solicitation materials to
beneficial owners of shares held of record by such persons or firms or their
nominees, and in connection therewith, such firms will be reimbursed for their
reasonable out-of-pocket expenses in forwarding such materials.
Neither Scott Mills nor any person acting on its behalf has
retained any other person to make solicitations or recommendations to
shareholders with respect to approval of the Merger or any other proposal
submitted to the shareholders for consideration at the Meeting.
Revocation of Proxies
Proxies may be revoked by those persons executing the proxies
at any time before the authority granted thereby is exercised by (a) delivering
to the Secretary of the Company at or before the Meeting a written notice of
revocation bearing a later date than the proxy, (b) duly executing a
subsequently dated proxy relating to the same shares and delivering it to the
Secretary of the Company at or before the Meeting or (c) attending the Meeting
and voting in person (although attendance at the Meeting will not in and of
itself constitute revocation of a proxy). Any written notice revoking a proxy
should be delivered at or prior to the Annual Meeting to the attention of the
Corporate Secretary, 120 W. Germantown Pike, Suite 100, Plymouth Meeting,
Pennsylvania, 19462.
Voting Securities; Record Date; Quorum
Only shareholders of record of Scott Mills Common Stock at the
close of business on September 5, 1996 shall be entitled to notice of and to
vote at the Meeting and at any adjournment or postponement thereof. At that
date, there were 3,367,598 shares issued and outstanding. Each share entitled
the holder thereof of record to one vote, exercisable in person or by properly
executed proxy, on all matters which properly come before the Meeting or any
adjournment or postponement thereof. The presence, in person or by proxy, of
shareholders entitled to cast at least a majority of the shares outstanding on
the record date will constitute a quorum for purposes of the Meeting. Approval
of each of the proposals presented for consideration at the Meeting, including
the proposal to adopt and approve the Merger Agreement and the Merger, requires
the affirmative vote of a majority of the shares voting in person or by proxy at
the Meeting. There is no cumulative voting in the election of directors.
-16-
<PAGE>
KLEINERT'S SELECTED FINANCIAL INFORMATION
The selected historical consolidated financial information as
of December 2, 1995, December 3, 1994, November 27, 1993, November 28, 1992 and
November 30, 1991, and for the fiscal years then ended, is derived from the
audited consolidated financial statements of Kleinert's. Reference is made to
the historical audited consolidated financial statements as of December 2, 1995
and for each of the three fiscal years then ended appearing elsewhere herein.
The unaudited selected historical consolidated financial information as of June
1, 1996, and for the six months ended June 1, 1996 and June 3, 1995, has been
derived from the unaudited consolidated condensed financial statements appearing
elsewhere herein. The unaudited consolidated condensed financial statements have
been prepared on a basis consistent with the audited consolidated financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial condition and results of operations for the periods presented. The
results for the six months ended June 1, 1996 are not necessarily indicative of
the results that may be expected for the fiscal year ended November 30, 1996.
The historical data should be read in conjunction with the "Kleinert's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. All of the data set forth below are
qualified by reference to and should be read in conjunction with the Unaudited
Pro Forma Combined Condensed Financial Statements and footnotes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
At or for the At or for the
fiscal year ended six months ended
---------------------------------------------------------------- ----------------
Dec. 2, Dec. 3, Nov. 27, Nov. 28, Nov. 30, June 1, June 3,
1995 1994(1) 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollar amounts in thousands, except per share data)
Operating Results:
Net sales $ 75,121 $ 69,262 $ 61,428 $ 58,542 $ 50,391 $ 23,011 $ 17,845
======== ======== ======== ======== ======== ======== ========
Income from
continuing operations
before cumulative
effect of change in
accounting for
income taxes $ 4,331 $ 3,872 $ 3,325 $ 3,124 $ 1,992 $ 1,049 $ 922
======== ======== ======== ======== ======== ======== ========
Loss from
discontinued
operations, net of tax
effect $ -- $ -- $ (1,263) $ (2,599) $ (456) $ -- $ --
======== ======== ======== ======== ======== ======== ========
Cumulative effect of
change in accounting
for income taxes $ -- $ 210 $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ========
Per share:
Income from
continuing operations
before cumulative
effect of change in
accounting for
income taxes $ 1.15 $ 1.04 $ .93 $ .90 $ .61 $ .28 $ .25
======== ======== ======== ======== ======== ======== ========
Loss from
discontinued
operations, net
of tax effect $ -- $ -- $ (.35) $ (.75) $ (.14) $ -- $ --
======== ======== ======== ======== ======== ======== ========
Cumulative effect of
change in accounting
for income taxes $ -- $ .06 $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ========
Total assets $ 48,222 $ 40,462 $ 41,907 $ 42,472 $ 45,753 $ 62,770 $ 51,251
======== ======== ======== ======== ======== ======== ========
Long-term debt $ 3,429 $ 4,624 $ 5,469 $ 6,643 $ 9,616 $ 7,629 $ 4,124
======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Includes 53 weeks of operations.
-17-
<PAGE>
SCOTT MILLS SELECTED FINANCIAL INFORMATION
The selected historical consolidated financial information as
of December 2, 1995, December 3, 1994, November 27, 1993, November 28, 1992 and
November 30, 1991, and for the fiscal years then ended, is derived from the
audited consolidated financial statements of Scott Mills. Reference is made to
the historical audited consolidated financial statements as of December 2, 1995
and for each of the three fiscal years then ended appearing elsewhere herein.
The unaudited selected historical consolidated financial information as of June
1, 1996, and for the six months ended June 1, 1996 and June 3, 1995, have been
derived from the unaudited consolidated condensed financial statements of Scott
Mills appearing elsewhere herein. The unaudited consolidated condensed financial
statements have been prepared on a basis consistent with the audited
consolidated financial statements and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial condition and results of operation for the periods
presented. The results for the six months ended June 1, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ended
November 30, 1996. The historical data should be read in conjunction with the
"Scott Mills Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. All of the data set forth
below are qualified by reference to and should be read in conjunction with the
historical consolidated financial statements and notes thereto, and the
Unaudited Pro Forma Combined Condensed Financial Statements and footnotes
thereto, included elsewhere herein.
<TABLE>
<CAPTION>
At or for the At or for the
fiscal year ended six months ended
------------------------------------------------------------ ----------------------
Dec. 2, Dec. 3, Nov. 27, Nov. 28, Nov. 30, June 1, June 3,
1995 1994(1) 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- -------- --------
(Dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Net sales $ 14,796 $ 17,355 $ 14,298 $ 13,054 $ 16,599 $ 4,118 $ 9,885
======== ======== ======== ======== ======== ======== ========
Net income (loss) $ (4,858) $ (2,688) $ (3,025) $ (3,383) $ (694) $ (187) $ (1,217)
======== ======== ======== ======== ======== ======== ========
Net income (loss)
per share of
common stock $ (1.44) $ (0.80) $ (.88)(2) -- (3) -- (3) $ (.06) $ (.36)
======== ======== ======== ======== ======== ======== ========
Total assets $ 2,900 $ 9,340 $ 6,669 $ 6,155 $ 6,775 $ 2,769 $ 9,463
======== ======== ======== ======== ======== ======== ========
Long-term debt, less
current portion $ 1,210 $ 3,351 $ 1,553 $ 1,203 $ 1,540 $ 1,031 $ 3,560
======== ======== ======== ======== ======== ======== ========
</TABLE>
- ------------------
(1) Includes 53 weeks of operations.
(2) Represents 1993 pro-forma loss per share (unaudited), based on the number
of common shares outstanding at November 27, 1993, the date the assets and
liabilities of the Scott Mills division were transferred to Scott Mills,
Inc.
(3) Historical loss per share data for fiscal years 1992 and 1991 have been
omitted because, as an operating division of Kleinert's, Scott Mills had
no corporate capital structure prior to its incorporation in 1993.
-18-
<PAGE>
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION
The unaudited pro forma combined selected financial
information has been derived from, or prepared on a basis consistent with, the
unaudited pro forma combined condensed financial statements included herein.
This information is presented for illustrative purposes only and, therefore, is
not necessarily indicative of the operating results or financial position that
would have occurred or that might be achieved if the Merger had occurred at an
earlier date, nor is it necessarily indicative of operating results or financial
position that may occur in the future. Further, the unaudited pro forma combined
condensed financial statements include the transaction costs of the Merger, but
excludes the potential cost savings that may be achieved and Merger related
expenses that are expected to be incurred in connection with the integration of
Kleinert's and Scott Mills' business operations.
Kleinert's, Inc.
Unaudited Pro Forma Combined Selected Financial Information
<TABLE>
<CAPTION>
At or for the At or for the
six months ended fiscal year ended
June 1, 1996 Dec. 2, 1995
------------------ -----------------
(Dollar amounts in thousands except per share data)
<S> <C> <C>
Operating Results:
Net Sales $23,444 $83,076
======= =======
Income before income taxes $ 1,414 $ 1,777
======= =======
Net income $ 895 $ 1,265
======= =======
Per share:
Net income before income taxes $ .24 $ .33
======= =======
Total assets $67,083 N/A
=======
Long-term debt, less current portion $ 8,160 N/A
=======
</TABLE>
-19-
<PAGE>
THE MERGER
Purpose and Structure of the Merger
The purpose of the Merger is for Kleinert's, through
Kleinert's Alabama, to acquire the entire equity interest of Scott Mills. To
that end, each share of Scott Mills Common Stock issued and outstanding at the
Effective Time shall be converted into the right to receive the Per Share Merger
Consideration. The number of shares of Kleinert's Common Stock to be issued in
the Merger will depend upon the determination of the Average Price which, in
turn, will be dependent upon fluctuations in the market price for the Kleinert's
Common Stock during the five trading days immediately preceding the date on
which the Effective Time occurs. Based on the market price of the Kleinert's
Common Stock as of June 10, 1996, approximately 56,000 shares of Kleinert's
Common Stock will be issued in the Merger.
As a result of the Merger, Scott Mills will merge with and
into Kleinert's Alabama, the separate corporate existence of Scott Mills will
cease and Kleinert's Alabama will be the Surviving Corporation. The Articles of
Incorporation and By-Laws of Kleinert's Alabama in effect at the Effective Time
will be the Articles of Incorporation and By-Laws of the Surviving Corporation
until thereafter amended in accordance with their respective terms and the
Alabama Law.
Background of the Merger
Prior to February 1993, the business and operations of Scott
Mills had been operated as the textile division of Kleinert's Alabama for more
than twenty years. At that time, Kleinert's was engaged both in the apparel
business and, through its textile division, in the business of knitting, dyeing
and finishing fabrics. During the five fiscal years immediately preceding fiscal
year 1994, the apparel business had generated a majority of Kleinert's
consolidated revenues and substantially all of its earnings.
As losses continued to mount in its textile division, and
notwithstanding various measures undertaken by Kleinert's to improve the
financial condition and operating performance of the textile division (including
Kleinert's making significant capital investments), Kleinert's concluded that it
was in the best interests of its shareholders to concentrate on its apparel
business and, consequently, decided in February 1993 to discontinue operating
its textile business.
Following a detailed examination of available options for its
textile division, including a possible sale of the division's assets to a buyer
with the financial resources necessary to revive its sales and operations (which
did not materialize), Kleinert's concluded to transfer the ownership of the
textile division to its shareholders. Kleinert's also concluded that sales by
its textile division to other third parties were adversely impacted by
Kleinert's ownership of the textile operation because many of the textile
divisions' other potential
-20-
<PAGE>
customers were competitors of Kleinert's in the children's apparel business. As
a separate entity, Kleinert's believed that Scott Mills would be in a better
position to build customer support and loyalty, and that it would be managed on
a day-to-day basis by individuals who would be focused exclusively on textile
operations.
Consequently, in November 1993, the assets of the textile
division (other than its accounts receivable), subject to certain liabilities,
were transferred to Scott Mills, Inc., a then wholly-owned subsidiary of
Kleinert's Alabama. In connection with the transfer of assets, Kleinert's
contributed approximately $1,300,000 to Scott Mills, an amount which Kleinert's
had anticipated was sufficient to meet Scott Mills' cash requirements for its
1994 fiscal year. Wesley Edwards, then principal operating officer of the
textile division, became President of Scott Mills, Inc. Mr. Edwards was neither
an officer nor director of Kleinert's.
On March 15, 1994, Kleinert's distributed to its shareholders
of record on November 27, 1993 all of the shares of Scott Mills Common Stock
owned by it on the basis of one share of Scott Mills Common Stock for each share
of Kleinert's Common Stock held of record. Since the distribution date, Scott
Mills has operated as a separate publicly held entity.
Integral to the Kleinert's decision to spin-off Scott Mills
into a separate entity was the engagement of new management at Scott Mills, led
by Mr. Edwards, who developed a business plan which pursued two strategies. The
primary strategy was to concentrate Scott Mills' marketing efforts on performing
commission dyeing and finishing for apparel manufacturers located within 100
miles of the Company's Gastonia, North Carolina facility. The Company's second
principal strategy was to capitalize on its ability to produce a broad range of
knit fabrics by developing relationships with large apparel manufacturers that
need different types of knit fabrics throughout the year.
Scott Mills borrowed $3,500,000 to purchase the equipment
necessary to accomplish the dyeing and finishing strategy and to add to its
knitting capacity.
Although Scott Mills was able to generate new sales in these
product areas, it was unable to operate profitably and incurred a net loss of
approximately $2,700,000 for its 1994 fiscal year. With losses continuing into
1995 without a clear plan for improvement, the Board of Scott Mills terminated
Mr. Edwards as the President and, after a thorough review of its operating
possibilities and unsuccessful attempts to sell or otherwise dispose of the
business or parts of it, it concluded in the fall of 1995 to concentrate its
business solely on knitting operations and subcontract all of its dyeing and
finishing operations. The result was the closing of the dyeing and finishing
facility, a reduction in workforce and the sale of dyeing and finishing
equipment. The Company provided a charge of approximately $2,000,000 in fiscal
year 1995 for the writedown to estimated net realizable value of assets and for
other costs associated with the cessation of dyeing and finishing operations. On
November 27, 1995 the Company sold substantially all of its dyeing and
finishing assets, free and clear of all liabilities, to Dyersburg Fabrics, Inc.,
an unaffiliated third party, for a cash purchase price of $2,750,000, which was
used by Scott Mills to repay debt to its factor and others. See "Scott Mills
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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The remaining assets of Scott Mills consist primarily of
inventory, accounts receivable and property, plant and equipment which are used
actively in the knitting of fabric for Kleinert's and other customers. For many
years, Scott Mills has provided Kleinert's with a reliable source of polyester
and acrylic fabrics which are used in a substantial number of Kleinert's
products. Kleinert's close working relationship with Scott Mills and its large
volume of purchases from Scott Mills permitted Kleinert's to rely on the
availability of Scott Mills' products to help maintain its competitive edge in
servicing its retail customers. Continuing to have the availability of the
knitting capacity to meet its internal requirements will improve Kleinert's
ability to provide retail customers with timely deliveries. While Kleinert's
will continue to be a major customer of Scott Mills, Scott Mills has
demonstrated, in the first six months of fiscal year 1996, that it will continue
to be able to sell knitting services to other customers.
As a result of the Merger, Kleinert's expects to be able to
take advantage of Scott Mills' accumulated tax loss carryforward in the amount
of approximately $6,400,000. It is anticipated that a portion of this tax loss
carryforward can be used in the current fiscal year and the balance in the
following fiscal year, and if the net operating loss carryforward is fully
utilized, it will result in a tax saving to Kleinert's of approximately
$2,500,000. At June 1, 1996, Scott Mills is indebted to Kleinert's in the amount
of approximately $2,488,000 for loans and other advances. See "Election of
Directors -- Certain Relationships and Related Transactions."
On April 17, 1996, the Scott Mills Board of Directors met and
considered a possible merger with Kleinert's. The Board reviewed the financial
position of the Company and determined that it did not have sufficient working
capital to operate independently and that, while the knitting operations were
marginally profitable, it would take a substantial amount of time to generate
the profits necessary to repay the current payables. Without additional
financing, which the Board did not believe would be readily available, the Board
could not ascertain whether or for how long the Company would be able to
continue to operate independently. Accordingly, the Board agreed to consider an
offer from Kleinert's and met again on April 18, 1996 to consider an offer from
Kleinert's to merge Scott Mills into Kleinert's. The negotiation and execution
of the Merger Agreement followed. The Per Share Merger Consideration of $.30
reflected the determination of the Kleinert's Board of Directors of the fair
value of the Scott Mills Common Stock. The composition of the Per Share Merger
Consideration between cash and shares of Kleinert's Common Stock was determined
solely by Kleinert's Board of Directors and was not subject to negotiation by
Scott Mills.
Reasons for the Merger; Recommendation of the Board of Directors
The Scott Mills Board of Directors has determined that the
Merger is fair to, and in the best interests of, Scott Mills and its
shareholders and has approved the Merger Agreement. The Scott Mills Board of
Directors recommends that the Scott Mills shareholders vote FOR the Merger
Agreement and the Merger.
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In reaching its conclusion that the Merger is in the best
interests of Scott Mills and its shareholders, the Scott Mills Board of
Directors considered a variety of factors including, among other things, the
following:
1. The current financial condition and cash position of Scott
Mills is such that, without the infusion of additional equity or debt financing,
there is substantial doubt about the Company's ability to continue as a going
concern for any sustained period, or to generate meaningful profits. Scott Mills
has been relatively unsuccessful in obtaining external financing from any third
party other than from Kleinert's and certain of its officers, directors and
shareholders. It is unlikely that any of these sources are prepared to make
additional capital investments in the Company at this time.
2. The success of Scott Mills, and consequently, increased
shareholder value, will continue to be substantially dependent upon Kleinert's
remaining Scott Mills' largest customer, regardless of whether Scott Mills were
to continue as a separate entity. The Board recognizes that on an historical
basis, there had been a synergy between Scott Mills and Kleinert's. The Board
has concluded that by again combining these two companies, this synergy will
create a stronger, more financially secure enterprise which will provide the
Scott Mills shareholders who receive Kleinert's Common Stock in the Merger with
the greater potential to maximize value for their shares.
3. Since the Spin-Off, the Scott Mills shares have been thinly
traded and are relatively illiquid. The Board believes that the Scott Mills
shareholders will best be able to maximize their share value through owning
equity in a larger, more diversified company. The Kleinert's shares, although
also thinly traded, currently trade on the Nasdaq National Market and enjoy
greater visibility among the investment community.
4. Prior to the Spin-Off, Kleinert's attempted, without
success, to find a buyer for Scott Mills when it was an operating division of
Kleinert's. The Board believes that Kleinert's engaged in an exhaustive search
for a suitable buyer at that time. The Board also unsuccessfully explored the
possible sale of Scott Mills in late 1995, and has concluded that it is unlikely
that an alternate buyer for Scott Mills can be found. Consequently, the Board
has concluded that the Merger may be the best available alternative in the
foreseeable future to enable Scott Mills shareholders to preserve, and
potentially enhance, their capital investment.
5. The Board's ability to maximize the consideration for the
Scott Mills shares is enhanced by finding a buyer which can utilize its
significant tax net operating loss carryforward. See "Selected Financial Data."
In the event of a "change of control" as defined under applicable Internal
Revenue Code regulations, a buyer's ability to utilize the tax loss carryforward
would be limited. Due to its unique position in relation to Scott Mills in that
a substantial number of Scott Mills shareholders are also Kleinert's
shareholders,
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Kleinert's believes that following the Merger, it will be able to utilize the
tax loss carryforward, although there can be no assurance that the Internal
Revenue Service will not seek to challenge the availability or utilization by
Kleinert's of the tax loss carryforward on grounds other than a "change in
control." Accordingly, the consideration to be received from Kleinert's for the
Scott Mills shares reflects, in the Board's view, a premium over the net asset
value or going concern value for Scott Mills because of the potential benefit to
Kleinert's of the tax loss carryforward. The Board does not believe that it
would have been able to obtain similar consideration from a third party which
could only avail itself of the tax loss carryforward on a more limited basis.
6. The Board also considered its somewhat unique familiarity
with the business, operations, properties, assets, financial condition and
prospects of Kleinert's in relation to Scott Mills and to the industry in
general.
The Scott Mills Board also considered certain negative
factors, including the potential and actual conflicts of interest between the
directors and officers of Scott Mills and Kleinert's (which conflicts will be
eliminated if the Merger is consummated) and the lack of a fairness opinion from
an independent financial advisor. See "Interests of Certain Persons in the
Merger."
In view of the variety of factors considered by the Scott
Mills Board in connection with its evaluation of the Merger, the Scott Mills
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors considered in reaching its conclusion.
All of the directors of Scott Mills other than Wesley Edwards
approved the Merger Agreement and the Merger. Mr. Edwards, who is the former
chief operating officer of the Company and who is entitled to vote less than
1.0% of the issued and outstanding shares of Scott Mills Common Stock, did not
participate in the Board meeting associated with the Merger. On May 31, 1995,
Mr. Edwards' employment with the Company was terminated and since that date, he
has failed to attend or otherwise participate in any meetings of the Scott Mills
Board of Directors. On September 13, 1995, Mr. Edwards commenced legal
proceedings against the Company alleging, among other things, that the Company
breached its obligations under Mr. Edwards' employment agreement by wrongfully
terminating his employment with the Company. The consummation of the Merger is
not contingent on the ultimate outcome of these legal proceedings, and neither
the Company nor Kleinert's believes that the ultimate outcome of the legal
proceedings will have a material adverse effect on Kleinert's assuming the
Merger is consummated. See "Information Concerning Scott Mills - Legal
Proceedings."
In light of the specific circumstances surrounding the Merger,
including, but not limited to, the extreme familiarity of the Scott Mills Board
with Kleinert's, the relative commonality of Scott Mills shareholders and
Kleinert's shareholders, the current financial situation faced by Scott Mills
and the lack of any reasonable or foreseeable near-term alternative to the
Merger, the Scott Mills Board did not find it financially prudent to engage an
independent financial advisor to render an opinion for the benefit of the Board
and the Scott Mills shareholders as to the fairness from a financial point of
view of the Merger Consideration to be received by the Scott Mills shareholders
in exchange for their shares. The Board believes that the expense which would
have been incurred to engage a financial advisor for this purpose would have
been an inappropriate use of Scott Mills' extremely limited cash resources
without a likely commensurate benefit to be achieved for the Scott Mills
shareholders in the form of an appreciable increase, if any, in the
consideration to be received for their shares.
THE MERGER AGREEMENT
The following summary of the Merger Agreement is qualified in
its entirety by reference to the complete text of the Merger Agreement, a copy
of which is attached hereto as Annex A and incorporated herein by reference.
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The Merger Agreement provides that, following approval of the
Merger Agreement and the Merger by the shareholders of Scott Mills, and the
satisfaction or waiver of the other conditions to the Merger, Scott Mills will
merge with and into Kleinert's Alabama and Kleinert's Alabama will be the
Surviving Corporation in the Merger. The Articles of Incorporation and By-Laws
of Kleinert's Alabama immediately prior to the Effective Time will become the
Articles of Incorporation and By-Laws of the Surviving Corporation immediately
following the Effective Time.
Effective Time
The Merger shall become effective at the Effective Time, which
is the date and time the Articles of Merger are filed with the Department of
State of the State of Alabama in accordance with the applicable provisions of
the Alabama Law, as amended. It is expected that the Effective Time will occur
shortly after the Annual Meeting and after all necessary filings incident to the
Merger as required by the applicable provisions of the Pennsylvania Law have
been made.
Merger Consideration
Upon consummation of the Merger, each outstanding share of
Scott Mills Common Stock will be converted into the right to receive (a) $0.03
in cash and (b) such fraction of a share of Kleinert's Common Stock as shall
have a value of $0.27 based upon the Average Price of the Kleinert's Common
Stock (together, the "Per Share Merger Consideration"). The "Average Price"
shall be the average of the closing sale price for the Kleinert's Common Stock
for the five consecutive trading days immediately preceding the date on which
occurs the Effective Time as reported on the Nasdaq National Market. In lieu of
fractional shares of Kleinert's Common Stock to which a holder of Common Stock
would otherwise be entitled, the holder will be paid in cash based upon the
Average Price, and no certificates or scrip representing fractional shares of
Kleinert's Common Stock will be issued. Based upon the closing sale price of the
Kleinert's Common Stock on ________, 1996, as reported on the Nasdaq National
Market, it is anticipated that approximately 56,000 shares of Kleinert's Common
Stock (representing approximately 2.0% of the Kleinert's Common Stock to be
issued and outstanding giving effect to the Merger) will be issued and
approximately $______ in cash will be paid in the Merger in exchange for Scott
Mills Common Stock and Scott Mills Options. In light of the relatively thin
trading market for the Kleinert's Common Stock and the lack of volatility in its
market price, it is not expected that deviations in the Average Price from the
date of this Proxy Statement/Prospectus to the Effective Time will materially
increase or decrease the number of shares of Kleinert's Common Stock to
be issued in the Merger.
The following table sets forth the fractional interest of a
share of Kleinert's Common Stock which would be issued as part of the Per Share
Merger Consideration in exchange for each share of Scott Mills Common Stock and
the total number of shares of Kleinert's Common Stock which would be issued as
part of the total Merger Consideration in the Merger based upon a range of
Average Prices between $14.00 and $17.00. Regardless of fluctuations, if any, in
the Average Price, however, the value of the fractional interest of Kleinert's
Common Stock to be issued as part of the Per Share Merger Consideration will
always be $0.27.
<TABLE>
<CAPTION>
==========================================================================================================================
Average Price Fraction of Kleinert's Total Number of
Common Stock to be issued Shares of Kleinert's
for one share of Scott Mills Common Stock To Be
Common Stock Issued in Merger
==========================================================================================================================
<S> <C> <C>
$14.00 2.14% 72,067
$14.50 1.86% 62,637
$15.00 1.80% 60,616
$15.50 1.74% 58,596
$16.00 1.68% 56,576
$16.50 1.63% 54,892
$17.00 1.59% 53,544
==========================================================================================================================
</TABLE>
Kleinert's and Scott Mills have agreed that if, as a result of
fluctuations in the Average Price between the date of this Proxy Statement/
Prospectus and the Effective Time, the fractional interest of a share of
Kleinert's Common Stock to comprise a portion of the Per Share Merger
Consideration would be less than one-half or greater than twice the fractional
interest which would be issued based on the Average Price determined as of the
date of this Proxy Statement/Prospectus, Scott Mills and Kleinert's will amend
this Proxy Statement/Prospectus and Scott Mills will resolicit proxies in
connection with the Merger Agreement and the Merger.
Exchange of Certificates in the Merger
As soon as reasonably practicable after the Effective Time, an
exchange agent selected by Kleinert's (the "Exchange Agent") shall mail to each
holder of record of certificates which, immediately prior to the Effective Time,
represented outstanding shares of Scott Mills Common Stock (the "Certificates"),
a transmittal letter and instructions to be used in effecting the surrender of
the Certificates in exchange for (i) a certificate representing the number of
whole shares of Kleinert's Common Stock which such holder has the right to
receive pursuant to the Merger; (ii) the cash portion of the Per Share Merger
Consideration to which such holder has a right to receive pursuant to the
Merger; and (iii) cash for fractional shares of Kleinert's Common Stock to which
such holder would otherwise be entitled. Scott Mills shareholders are requested
not to surrender their certificates for exchange until the transmittal letter
and instructions are received by them. After the Effective Time and until
surrendered as provided above, Certificates shall be deemed to represent only
the right to receive the Per
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Share Merger Consideration for each number of whole shares of Scott Mills Common
Stock formally represented by such Certificates in the Merger, and a cash
payment in lieu of any fractional shares of Kleinert's Common Stock. The holders
of Certificates shall not be entitled to receive dividends or any other
distributions from Kleinert's until such Certificates are so surrendered.
Representations and Warranties
The Merger Agreement contains various customary
representations and warranties relating to the parties to the Merger Agreement,
including, among others: (a) their respective organization, capital structure
and ownership and similar corporate matters; (b) due authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters; (c) absence of conflicts in connection with the Merger Agreement and
the Merger arising under their respective charters and by-laws, and required
consents and approvals; (d) reports and other documents filed with the
Commission and other regulatory agencies and the accuracy of the information
contained therein; (e) absence of any default under any employee benefit plan;
(f) representations pertaining to audited and unaudited financial statements and
related financial information; (g) representations relating to real estate,
personal property and contracts; (h) representations pertaining to absence of
liabilities; (i) absence of any litigation which is reasonably likely to
adversely affect the business of the parties; (j) compliance with applicable
environmental laws, regulations and orders; (k) absence of certain material
adverse events, changes or effects; (l) representations relating to insurance,
taxes, labor relations, litigation and compliance with laws; and (m) absence of
any material adverse change in the business, assets, results of operations or
financial condition of Scott Mills and Kleinert's since March 2, 1996.
Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, Scott Mills has agreed,
among other things, that, until the Effective Time and without the prior consent
of Kleinert's or except as expressly set forth in the Merger Agreement, neither
Scott Mills nor its Subsidiary will:
(a) issue, sell, pledge, dispose of or encumber any of its assets
(including, without limitation, any indebtedness owed to it or any claims held
by it) with a book or fair market value in each case in excess of $10,000 and,
in the aggregate, in excess of $30,000;
(b) dispose of any asset (other than inventory in the ordinary course
of business or those previously used in the dyeing and finishing operations)
with a book or fair market value in each case in excess of $10,000 and in the
aggregate in excess of $500,000;
(c) voluntarily permit any assets to become subject to any lien,
whether or not in the ordinary course of business;
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<PAGE>
(d) amend or propose to amend its charter or by-laws or similar
organizational documents;
(e) split, combine or reclassify any shares of its capital stock;
(f) declare, set aside or pay any dividend or distribution, payable
in cash, stock, property or otherwise, with respect to any of its capital stock;
(g) redeem, purchase or otherwise acquire or offer to redeem, purchase
or otherwise acquire any shares of its capital stock other than pursuant to
options specifically referred to in the Merger Agreement;
(h) authorize or propose any of the foregoing, or enter into any
contract, agreement, commitment or arrangement to do any of the foregoing;
(i) except directly in connection with the Merger, issue, sell, pledge
or dispose of, or authorize, propose or agree to the issuance, sale, pledge or
disposition of, any shares, or any options, warrants or rights of any kind to
acquire any shares, or any securities convertible into or exchangeable for any
shares of, its capital stock of any class, or any other securities in respect
of, in lieu of, or in substitution for its shares outstanding on the date of the
Merger Agreement;
(j) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof, or make any investment either by purchase of stock or securities,
contributions to capital, property transfer, or, except in the ordinary course,
purchase of any property or assets of any other individual or entity;
(k) incur any indebtedness for borrowed money or issue any debt
securities, except short-term indebtedness incurred in the ordinary course of
business and consistent with past practice and which in the aggregate does not
exceed $10,000;
(l) voluntarily incur any other material liability or obligation
(absolute, accrued, contingent or otherwise) except in the ordinary course of
business and consistent with past practice and which in aggregate does not
exceed $10,000;
(m) authorize or effect any change in its capitalization or any
release or relinquishment of any material contract right;
(n) waive, release, grant or transfer any rights of material value or
modify or change in any material respect any agreement or arrangement or any
lease, other than in the ordinary course of business and consistent with past
practice;
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<PAGE>
(o) authorize or commit to any of the actions prohibited hereby, or
enter into or modify any contract, agreement, commitment or arrangement to do
any of the actions prohibited hereby;
(p) adopt or amend any Employee Benefit Plan (as defined in the Merger
Agreement) or increase in any manner the compensation or fringe benefits of any
employee, or pay any benefit not required by any existing plan or arrangement
other than as provided for in the Merger Agreement;
(q) make any material Tax (as defined in the Merger Agreement) election
or settle or compromise any material Federal, state, local or foreign Tax
liability;
(r) continue to maintain all usual business books and records in
accordance with past practices and not change its method of accounting;
(s) use its best efforts to keep available the services of its
employees and to preserve the existing relationship with the clients, suppliers
and others with whom it deals;
(t) keep the premises occupied by it and all of the equipment and other
tangible personal property in good order and repair and perform all necessary
repairs and maintenance;
(u) comply with and not amend, modify or terminate any Corporation
Agreements (as defined in the Merger Agreement) and comply with all applicable
laws, rules and regulations; and
(v) maintain in full force and effect all of the insurance policies
currently in force and make no diminution of any insurance coverage.
Conditions to the Merger
The respective obligations of Kleinert's, Kleinert's Alabama and Scott
Mills to effect the Merger are subject to the fulfillment of the following
conditions, any of which may be waived by the party or parties on whose behalf
the conditions are made:
(a) The Merger Agreement and the Merger shall have been approved and
adopted by the requisite number of shareholders of Scott Mills as provided by
the Pennsylvania Law;
(b) No claim shall have arisen in respect of the Merger;
(c) The representations and warranties of the parties set forth in the
Merger Agreement shall have been true and correct in all material respects at
and as of the Effective
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<PAGE>
Time as if made at and as of such time, except as affected by transactions
contemplated or permitted by the Merger Agreement and except to the extent that
any such representation or warranty was made as of a specified date, in which
case such representation or warranty shall have been true and correct as of such
date;
(d) Each of Kleinert's, Kleinert's Alabama and Scott Mills shall have
performed each covenant, agreement, obligation and condition to be performed by
it under the Merger Agreement on or prior to the Effective Time;
(e) No preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission, nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, shall be in effect at Closing (as defined in the Merger Agreement)
which would prevent the consummation of the Merger;
(f) Each of Kleinert's and Scott Mills shall have received evidence, in
form and substance reasonably satisfactory to its counsel, that such licenses,
permits, consents, approvals, waivers, authorizations, qualifications and orders
of domestic governmental authorities and parties to contracts and leases
associated with the business of the other as are necessary in connection with
the consummation of the transactions contemplated by the Merger Agreement have
been obtained;
(g) No order of any court or any governmental, regulatory or
administrative agency or commission shall be in effect which restrains,
prohibits or adversely affects the transactions contemplated by the Merger
Agreement, and there shall not have been threatened, nor shall there be pending,
any action or proceeding (i) by or before any court or governmental agency or
other regulatory or administrative agency or commission challenging any of the
transactions contemplated by the Merger Agreement or seeking monetary relief by
reason of the consummation of such transactions, or (ii) except with respect to
litigation commenced by Wesley Edwards against Scott Mills and disclosed in the
Merger Agreement, by any present or former owner of any capital stock or equity
interest in Kleinert's or Scott Mills (whether through a derivative action or
otherwise) against Kleinert's, Kleinert's Alabama, Scott Mills, any of their
respective subsidiaries or any of their respective officers, directors or
stockholders; and
(h) Each of the directors and executive officers of Scott Mills shall
have executed a release releasing Kleinert's and Scott Mills from and against
any and all claims and actions by reason of their serving as a director, officer
or employee of Scott Mills prior to the Effective Time, which release will be
effective at the Effective Time, and will be in form and substance satisfactory
to counsel to Kleinert's.
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Termination
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, whether prior to or after approval by the
shareholders of Scott Mills:
(a) By mutual written consent of the Boards of Directors of Kleinert's
and Scott Mills; or
(b) By either Kleinert's or Scott Mills, if a court of competent
jurisdiction or governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or shall have taken any other
action, in each case permanently restraining, enjoining or otherwise prohibiting
the transactions contemplated by the Merger Agreement and such order, decree,
ruling or other action shall have become final and nonappealable; or
(c) By either Kleinert's or Scott Mills, if the Effective Time shall
not have occurred on or before 180 days following the date of the Merger
Agreement, unless the absence of such occurrence shall have been due to the
failure of the party seeking to terminate the Merger Agreement to perform in all
material respects each of its obligations under the Merger Agreement required to
be performed by it prior to the Effective Time; or
(d) By either Kleinert's or Scott Mills, if the Merger Agreement and
the Merger shall have failed to been approved and adopted by the requisite vote
of shareholders of Scott Mills; or
(e) By Kleinert's, if Scott Mills shall have failed to perform in any
material respect its obligations under the Merger Agreement or if there shall
have been a material breach of a warranty or a material misrepresentation by
Scott Mills given thereunder; or
(f) By Scott Mills, if Kleinert's or Kleinert's Alabama shall have
failed to perform in all material respects their respective obligations under
the Merger Agreement or if there shall have been a material breach of a warranty
or a material misrepresentation by Kleinert's or Kleinert's Alabama given under
the Merger Agreement; or
(g) By Kleinert's or Scott Mills, if there shall have occurred a
material adverse change in the business, assets, properties, results of
operations, financial condition or prospects of the other between March 2, 1996
and the date of termination of the Merger Agreement.
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<PAGE>
Effect of Termination
In the event the Merger Agreement is terminated and the Merger
abandoned, the Merger Agreement will become void and there will be no liability
on the part of the parties thereto.
Indemnification of Directors and Officers.
Kleinert's has agreed to cause the Articles of Incorporation and
By-Laws of Kleinert's Alabama to contain provisions with respect to
indemnification in the manner set forth in the Articles of Incorporation and
By-Laws of Scott Mills as of the Effective Time (to the extent not inconsistent
with the Alabama Law) and to not amend, repeal or otherwise modify the
indemnification provisions for a period of six years following the Effective
Date which would adversely affect the rights of any individuals who immediately
prior to the Effective Time were directors or officers of Scott Mills.
Additionally, Kleinert's and Kleinert's Alabama have jointly and severally
agreed to indemnify and hold harmless the present and former officers and
directors of Scott Mills in connection with liabilities arising from any claim
based in whole or in part on the fact that such person was a director or officer
of Scott Mills and arising out of actions or omissions occurring at or prior to
the Effective Time, in each case to the fullest extent permitted under
applicable Alabama law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Scott Mills
pursuant to the foregoing provisions, Scott Mills has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Additionally, Kleinert's has agreed to maintain in effect for a period
of two years following the Effective Time the directors' and officers' liability
insurance in effect on behalf of the officers and directors of Scott Mills
immediately prior to the Effective Time; provided, however, that Kleinert's
shall be obligated to pay only up to 200% of the annual premium with respect to
such policy during each year the policy is continued and, to the extent the
coverage cannot be maintained at such level, to purchase as much coverage as
possible at that amount of premium. At August 13, 1996, Scott Mills maintained
a $1,000,000 directors' and officers' liability insurance policy and paid an
annual premium of approximately $65,000 therefor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain of the officers and directors of Scott Mills have interests in
the Merger in addition to their interests as shareholders of Scott Mills
generally. The following summarizes these conflicts, which may be in conflict,
at least in certain instances, with the interests of the Scott Mills
shareholders, all of which will be eliminated if the Merger is consummated.
Messrs. Jack Brier, William Foreman and E. Gerald Riesenbach,
constituting the directors of Scott Mills other than Joseph Connors and Wesley
Edwards, are directors of Kleinert's, and Joseph Connors is Executive Vice
President of Kleinert's. Each of such persons will remain as directors and/or
officers of Kleinert's following the Merger. Accordingly, notwithstanding the
Merger and the resignation of the officers and directors of Scott Mills at the
Effective Time, the officers and directors of Scott Mills who are also officers
and directors of Kleinert's will retain their positions with Kleinert's and,
after the Effective Time, will be able to continue to direct the policies and
operations of the Surviving Corporation. None of the officers and directors of
Kleinert's or Scott Mills is a party to any
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employment, termination, consulting or other agreement other than Jack Brier,
the Chairman of Kleinert's and Scott Mills, who has an employment agreement
with Kleinert's. See "Kleinert's Executive Compensation."
Additionally, Wesley Edwards, a director of Scott Mills, Nathan
Greenberg, a director of Kleinert's, and E. Gerald Riesenbach, a director of
both Kleinert's and Scott Mills, together with certain other shareholders of
Kleinert's who are also shareholders of Scott Mills, and none of whom owns in
excess of 5.0% of the issued and outstanding shares of Kleinert's Common Stock
or Scott Mills Common Stock, loaned an aggregate of $500,000 to Scott Mills in
December 1994. See "Election of Directors -- Certain Relationships and Related
Transactions." The loans, which mature in December 1999, bear interest at a per
annum rate of 8.5%. By reason of the Merger, Kleinert's will assume the
obligation to repay these loans in full, together with accrued interest thereon.
Absent the Merger, there can be no assurance that Scott Mills would be able to
meet its obligations to repay these loans in full when due.
Approximately 43.8% of the issued and outstanding common stock of Scott
Mills is beneficially owned by officers and directors of Kleinert's as follows:
(Jack Brier -- 368,347 shares (10.3%); William Forman -- 262,500 shares (7.6%);
E. Gerald Riesenbach -- 820,000 shares (24.1%); and Joseph J. Connors -- 61,100
shares (1.8%). See "Beneficial Ownership of Scott Mills Common Stock."
Pursuant to the Merger Agreement, each Scott Mills Option will be
converted in the Merger into the right to receive the Per Share Merger
Consideration into which each Scott Mills Option is exercisable, less the
exercise price thereof. Certain directors and officers of Scott Mills who hold
Scott Mills Options with exercise prices less than the value of the Per Share
Merger Consideration will receive Per Share Merger Consideration for their Scott
Mills Options. Scott Mills Options to purchase an aggregate of 430,000 shares of
Scott Mills Common Stock were granted at exercise prices ranging from $.0625 to
$2.00 per share. All of the Scott Mills Options, other than those to purchase
20,000 shares at an exercise price of $.0625 per share, are exercisable at a
price per share in excess of the Per Share Merger Consideration and, therefore,
will be cancelled for no consideration in the Merger. It is anticipated that
based upon the closing sale price of the Kleinert's Common Stock of $____ on
August __, 1996, holders of the Scott Mills Options to purchase the 20,000
shares of Scott Mills Common Stock would be entitled to receive 134 shares of
Kleinert's Common Stock and approximately $475 in cash in exchange for their
Scott Mills Option in the Merger. See "Beneficial Ownership of Scott Mills
Common Stock."
The Merger Agreement provides that, from and after the Effective Time,
Kleinert's and Kleinert's Alabama will jointly and severally indemnify, defend
and hold harmless each person who was or at any time prior to the date of the
Merger Agreement or who becomes prior to the Effective Time an officer, director
or employee of Scott Mills against losses, claims, damages, costs, expenses and
similar amounts paid in settlement with the approval of Kleinert's. Kleinert's
also has agreed to maintain, for a period of two years following the Effective
Time, the directors' and officers' liability insurance maintained by Scott Mills
immediately prior to the Effective Time. See "The Merger Agreement --
Indemnification of Directors and Officers."
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for by Kleinert's under the purchase
method of accounting in accordance with generally accepted accounting
principles. Therefore, the aggregate Merger Consideration paid by Kleinert's
will be allocated to Scott Mills' assets based on their fair market values, and
the results of operations of Scott Mills will be included in the consolidated
results of operations of Kleinert's only for the period subsequent to the
Effective Time.
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<PAGE>
REGULATORY APPROVALS
Neither Kleinert's nor Scott Mills is aware of any governmental or
regulatory requirements, filings or approvals relating to the consummation of
the Merger other than compliance with applicable federal and state securities
laws.
DISSENTERS' RIGHTS OF APPRAISAL
Under applicable provisions of the Pennsylvania Law, holders of Scott
Mills Common Stock will have the right to dissent and obtain payment of the fair
value of their shares by complying with the provisions of Subchapter D of
Chapter 15 of the Pennsylvania Business Corporation Law ("Subchapter D").
Accompanying this Proxy Statement/Prospectus as Annex B is a copy of the text of
the applicable provisions of the Pennsylvania Law that prescribe the procedures
for the exercise of dissenters' rights and for determining the value of their
shares. Shareholders of Scott Mills who seek to exercise dissenters' rights must
carefully follow the procedure described in such statutory provisions. The
following summary of such provisions is qualified in its entirety by reference
to such statutory provisions.
Any Scott Mills shareholder who wishes to dissent and obtain payment of
the fair value of his shares (i) must file with Scott Mills prior to the Meeting
a written notice of intention to demand that he be paid the fair value for his
shares if the Merger is effectuated, (ii) must effect no change in the
beneficial ownership of his shares from the date of such filing continuously
through the Effective Date, and (iii) must refrain from voting his shares in
approval of the Merger. A dissenter who fails to follow these procedures in any
respect shall not acquire any right to payment of the fair value of his shares.
Neither a proxy nor a vote against the proposed Merger shall constitute the
required written notice nor shall the failure to vote constitute a waiver by
such holder of his dissenters' rights. A record holder of shares of a business
corporation may assert dissenters' rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of
common stock beneficially owned by any person and discloses the name and address
of the person or persons on whose behalf he dissents. In that event, his rights
shall be determined as if the shares as to which he has dissented and his other
shares were registered in the names of different shareholders. A beneficial
owner of shares of a business corporation who is not the record holder may
assert dissenters' rights with respect to shares held on his behalf and shall be
treated as a dissenting shareholder under the terms of Subchapter D if he
submits to Scott Mills not later than the time of the assertion of dissenters'
rights a written consent of the record holder. A beneficial owner may not
dissent with respect to some but less than all shares of common stock owned by
the owner, whether or not the shares so owned by him are registered in his name.
If the Merger is approved by the required vote at the Meeting, Scott
Mills shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the
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<PAGE>
fair value of their shares and who refrained from voting in favor of the Merger.
The notice shall (i) state where and when a demand for payment must be sent and
certificates representing Scott Mills Common Stock must be deposited in order to
obtain payment, (ii) supply a form for demanding payment that includes a request
for certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the shares,
and (iii) be accompanied by a copy of Subchapter D. A shareholder who fails to
timely demand payment or fails to timely deposit certificates as required by
such notice shall not have any right to receive payment of the fair value of his
shares. The dissenter shall retain all other rights of a shareholder until those
rights are modified by effectuation of the Merger. Within 60 days after the date
set for demanding payment and depositing certificates, if the Merger has not
been effectuated Scott Mills shall return any certificates that have been
deposited. Scott Mills may thereafter send a new notice setting a new date for
demanding payment and depositing certificates.
Promptly after effectuation of the Merger, or upon timely receipt of
demand for payment if the Merger has already been effectuated, Kleinert's
Alabama as successor to Scott Mills shall either remit to dissenters who have
made demand and deposited certificates the amount that Kleinert's Alabama
estimates to be the fair value of the shares, or give written notice that no
remittance will be made. The remittance or notice shall be accompanied by (i)
the closing balance sheet and statement of income of Scott Mills for a fiscal
year ending not more than 18 months before the date of remittance or notice
together with the latest available interim statements, (ii) a statement of
Kleinert's Alabama estimate of the fair value of the shares and (iii) a notice
of the right of the dissenter to demand payment or supplemental payment, as the
case may be, accompanied by a copy of Subchapter D. If Kleinert's Alabama does
not remit the amount of its estimate of the fair value of the shares as provided
above, it shall return any certificates that have been deposited. Kleinert's
Alabama may make a notation on any such certificates that such demand has been
made. If shares with respect to which notation has been so made shall be
transferred, each new certificate issued therefor shall bear a similar notation,
together with the name of the original dissenting holder or owner of such
shares. A transferee of such shares shall not acquire by transfer any rights in
the corporation other than those that the original dissenter had after making
demand for payment of their fair value.
If the dissenter believes that the amount stated or remitted by
Kleinert's Alabama is less than the fair value of his shares, he may send to
Kleinert's Alabama his own estimate of the fair value of the shares, which shall
be deemed a demand for payment of the amount or the deficiency. Where the
dissenter does not file his own estimate within 30 days after the mailing by
Kleinert's Alabama of its remittance or notice, the dissenter shall be entitled
to no more than the amount stated in the notice or remitted to him by
Kleinert's.
Within 60 days after the latest of (i) effectuation of the Merger or
(ii) timely receipt of any demands for payment by a dissenter or (iii) timely
receipt of any estimate of fair
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<PAGE>
value by the dissenter, if any demands for payment remain unsettled, Scott Mills
may file in court an application for relief requesting that the fair value of
the shares be determined by the court. All dissenters, wherever residing, whose
demands have not been settled, shall be made parties to the proceeding as in an
action against their shares. A copy of the application shall be served on each
such dissenter. The jurisdiction of the court shall be plenary and exclusive.
The court may appoint an appraiser to receive evidence and recommend a decision
on the issue of fair value. The appraiser shall have such power and authority as
may be specified in the order of appointment or in any amendment thereof. Each
dissenter who is made a party shall be entitled to recover the amount by which
the fair value of his shares is found to exceed the amount, if any, previously
remitted, plus interest. If Scott Mills fails to file an application with the
court, any dissenter who made a demand and who has not already settled his claim
against Scott Mills may do so in the name of Scott Mills at any time within 30
days after the expiration of the 60 day period for filing by Scott Mills. If a
dissenter does not file an application within the 30 day period, each dissenter
entitled to file an application shall be paid Scott Mills' estimate of the fair
value of the shares and no more, and may bring an action to recover any amount
not previously remitted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger qualify for Federal income tax
purposes as a reorganization under section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"); that no gain or loss be recognized for Federal
income tax purposes by Scott Mills, Kleinert's or Kleinert's Alabama; and that
the tax treatment to Scott Mills shareholders of the exchange of their stock for
shares of Kleinert's Common Stock and cash be as described below. Consummation
of the Merger is conditioned on the receipt by Scott Mills and Kleinert's of an
opinion from Cozen and O'Connor, dated the Effective Date and summarized below,
that: (i) the Merger will qualify as a reorganization under section 368(a) of
the Code; (ii) neither of these companies will recognize gain or loss for
Federal income tax purposes by reason of the Merger; (iii) no gain or loss will
be recognized by a Scott Mills shareholder on the receipt of Kleinert's Common
Stock in exchange for Scott Mills Common Stock as part of the Merger
Consideration pursuant to the Merger; and (iv) if the exchange of Scott Mills
Common Stock for Kleinert's Common Stock and cash results in a gain, the gain
will be recognized to the extent of the cash received and, under certain
circumstances, such gain will be treated as ordinary dividend income, but if
such exchange results in a loss, the loss will not be recognized. The tax
opinion will be based in part on representations and assumptions relating to
certain facts, circumstances and intentions of the parties to the Merger.
Pursuant to the Merger Agreement, Scott Mills shareholders will receive
both cash and Kleinert's Common Stock in exchange for their Scott Mills Common
Stock. Although a Scott Mills shareholder will not recognize gain or loss on the
receipt of Kleinert's Common Stock, the receipt of cash will have the following
tax consequences. If the exchange of Scott Mills Common Stock for Kleinert's
Common Stock and cash results in a gain, the gain will be recognized to the
extent of the cash received and such gain may be taxed as ordinary dividend
income, as discussed below. If, however, the exchange results in a loss, the
loss will not be recognized, and the amount of the disallowed loss will be
included in the shareholder's adjusted basis of the Kleinert's Common Stock. The
tax consequences of the exchange to a Scott Mills shareholder will also depend
in part on whether his Scott Mills shares were acquired at different times and
at different prices.
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<PAGE>
The determination of whether the cash paid in the Merger to a Scott
Mills shareholder has the effect of the distribution of a dividend is made by
comparing the proportionate interest of the shareholder in Kleinert's after the
Merger (including Kleinert's Common Stock owned immediately prior to the Merger)
with the proportionate interest which the shareholder would have had if the
consideration for the exchange of his Scott Mills shares had been paid solely in
the form of Kleinert's Common Stock and as if Kleinert's had then redeemed the
portion of such shareholder's Kleinert's Common Stock which was equal in value
to the amount of cash which the shareholder actually received. This hypothetical
redemption is tested for dividend equivalence under section 302 of the Code,
taking into account the constructive ownership rules of Code section 318. If the
cash payment is determined not to be a dividend under the foregoing rules, any
gain recognized on the Merger by a Scott Mills shareholder will be capital gain,
provided that the Scott Mills shares were held as a capital asset as of the
Effective Date, and will be long-term capital gain if such shares had been held
for more than one year.
No fractional shares of Kleinert's Common Stock will be issued in the
Merger. Instead, Kleinert's will pay cash in lieu of fractional shares. For
federal income tax purposes, Scott Mills shareholders will be treated as having
received a fractional share of Kleinert's Common Stock and then as having
received cash in redemption by Kleinert's of the fractional share interest. Any
gain or loss resulting from the receipt of such cash will be capital gain or
loss (assuming the Scott Mills Common Stock was a capital asset in the hands of
the shareholder), unless under the facts and circumstances relating to that
shareholder the payment is considered essentially equivalent to a dividend.
A Scott Mills shareholder who perfects appraisal rights and receives
solely cash in exchange for his shares should recognize gain or loss from the
transaction in an amount equal to the difference between the amount of cash
received and his tax basis in the surrendered shares. This gain or loss will be
a capital gain or loss, provided that the shares are capital assets in the hands
of the shareholder on the Effective Date.
The tax basis of the shares of Kleinert's Common Stock to be received
by Scott Mills shareholders pursuant to the Merger will be the same as the tax
basis of the shares of Scott Mills Common Stock exchanged therefor, decreased by
the amount of cash received in the Merger, and increased by the amount of gain,
if any, recognized in the exchange, including any recognized gain which is
treated as a dividend. The holding period of the Kleinert's shares for which
shares of Scott Mills are to be exchanged will include the period that such
Scott Mills shares were held by the holder, provided that the Scott Mills shares
are held as capital assets on the Effective Date.
Unless an exemption applies, the Exchange Agent will be required to
withhold 31% of any cash payments to which a Scott Mills shareholder is entitled
in the Merger, unless the shareholder provides his tax identification number
(i.e. social security number or employer identification number) and certifies
that such number is correct. Each Scott Mills shareholder is required to
complete and sign the substitute Form W-9 that will be included as part of the
letter of transmittal in order to avoid backup withholding (Form W-8 if the
shareholder is a nonresident alien or foreign entity), unless an applicable
exemption applies and is substantiated in a manner satisfactory to Kleinert's
and the Exchange Agent.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY. IT DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER.
IN ADDITION, IT DOES NOT DISCUSS THE FEDERAL INCOME TAX CONSIDERATIONS WHICH MAY
BE RELEVANT TO CERTAIN PERSONS, INCLUDING HOLDERS OF OPTIONS OR WARRANTS, AND
MAY NOT APPLY TO CERTAIN HOLDERS SUBJECT TO SPECIAL TAX RULES, INCLUDING DEALERS
IN SECURITIES, FOREIGN HOLDERS AND PERSONS WHO ACQUIRED THEIR SCOTT MILLS SHARES
PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS COMPENSATION. THE DISCUSSION
IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING TREASURY
REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS,
ALL OF WHICH ARE SUBJECT TO CHANGE. ANY SUCH CHANGE COULD AFFECT THE CONTINUING
VALIDITY OF THIS DISCUSSION.
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<PAGE>
AS THE DISCUSSION INDICATES, THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER TO SCOTT MILLS SHAREHOLDERS DEPEND, TO A GREAT EXTENT, ON INDIVIDUAL
CIRCUMSTANCES AND, BECAUSE TAX SITUATIONS VARY, EACH SCOTT MILLS SHAREHOLDER
SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO HIM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Kleinert's Common Stock received by Scott Mills
shareholders in the Merger will be freely transferrable, except that shares of
Scott Mills Common Stock received by persons who are deemed to be "affiliates"
(as such term is defined under the Securities Act) of Scott Mills prior to or at
the Effective Time may be resold by them only in transactions permitted by the
resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144
in the case of such persons who become affiliates of Kleinert's) or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Kleinert's or Scott Mills generally include individuals or entities that
control, are controlled by or are under common control with, such party and may
include certain officers and directors of such party as well as principal
shareholders of such party. This joint Proxy Statement/Prospectus does not cover
any resales of Kleinert's Common Stock received by persons who may be deemed to
be affiliates of Kleinert's or Scott Mills. Certain of these affiliates may
enter into a registration rights agreement with Kleinert's pursuant to which
they will be granted the right to have the shares of Kleinert's Common Stock
received by them in the Merger registered under certain circumstances.
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<PAGE>
COMPARATIVE STOCK PRICE INFORMATION
Kleinert's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol "KLRT." The following table sets forth
for the periods indicated the high and low closing sale prices as reported by
Nasdaq.
Stock Price Range
-------------------
High Low
------- -------
Fiscal Year 1994
Nov. 28, 1993 -- Feb. 26, 1994 $12 1/4 $11
Feb. 27, 1994 -- May 28, 1994 12 1/2 11 1/4
May 29, 1994 -- Sept. 3, 1994 17 1/2 11 1/2
Sept. 4, 1994 -- Dec. 3, 1994 18 3/4 15 1/4
Fiscal Year 1995
December 4, 1994 -- Mar. 4, 1995 $22 1/4 $15 3/4
Mar. 5, 1995 -- June 3, 1995 21 1/2 18
June 4, 1995 -- Sept. 2 1995 18 3/4 16
Sept. 3, 1995 -- Dec. 2, 1995 18 15 1/4
Fiscal Year 1996
December 3, 1995 -- March 2, 1996 $17 1/2 $15 3/4
March 3, 1996 -- June 1, 1996 17 1/4 15
June 2, 1996 -- August 13, 1996 18 1/2 15 1/2
Kleinert's Common Stock is thinly traded. The average weekly trading
volume in fiscal years 1996, 1995 and 1994 was approximately 9,400, 9,100 and
7,200 shares, respectively. On June 10, 1996, the last trading date immediately
preceding the first public announcement of the Merger, the closing sales price
for the Kleinert's Common Stock was $16.00. On that date there were in excess of
250 holders of record of the Kleinert's Common Stock.
Scott Mills' Common Stock is traded in the over-the-counter market
under the symbol "SMLL" on the Nasdaq SmallCap Market. The following table sets
forth the high and low bid quotations for the Scott Mills Common Stock since May
18, 1994, the first day of trading. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
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<PAGE>
Stock Price Range
-----------------
High Low
------ -------
Fiscal Year 1994
May 18, 1994 -- May 28, 1994 $1.00 $ .75
May 29, 1994 -- Sept. 3, 1994 2.00 1.00
Sept. 4, 1994 -- Dec. 3, 1994 1.88 .50
Fiscal Year 1995
December 4, 1994 -- Mar. 4, 1995 $1.00 $.6250
Mar. 5, 1995 -- June 3, 1995 1.50 .75
June 4, 1995 -- Sept. 2, 1995 1.50 .50
Sept. 3, 1995 -- Dec. 2, 1995 .50 .0625
Fiscal Year 1996
December 3, 1995 -- March 2, 1996 $ .0625 $.0625
March 3, 1996 -- June 1, 1996 .125 .0625
June 2, 1996 -- August 13, 1996 .1875 .125
Scott Mills' Common Stock is thinly traded. The average trading volume
in fiscal years 1996 and 1995 was less than 8,100 shares per week. On June 10,
1996, the last trading date immediately preceding the first public announcement
of the Merger, the closing high and low bid quotations for the Scott Mills
Common Stock were $.125 and $.125, respectively. It is estimated that on that
date there were in excess of 250 holders of record of Scott Mills Common Stock.
KLEINERT'S DIVIDEND POLICY
No cash dividends have been paid with respect to Kleinert's Common
Stock during the past five fiscal years. Kleinert's working capital loan
agreements provide that no cash dividends may be paid on the Kleinert's Common
Stock unless its consolidated net worth exceeds $15,000,000 after the payment of
cash dividends. Kleinert's working capital loan agreements also require that
Kleinert's maintain certain financial covenants, including those relating to
pretax income, working capital, tangible net worth, debt and capital
expenditures. Kleinert's was in compliance with all such financial covenants as
of March 2, 1996, and expects to remain in compliance giving effect to the
consummation of the Merger. Kleinert's does not expect to pay cash dividends in
the foreseeable future, but rather, expects to use its cash to expand its
operations and become less of a borrower during those portions of its fiscal
year when, due to the seasonal nature of its business, Kleinert's requires
increased working capital.
SCOTT MILLS DIVIDEND POLICY
Scott Mills has not paid any cash dividends since its inception. Scott
Mills intends to retain earnings, if any, to provide funds for the operation of
its business and, accordingly, does not plan to pay cash dividends on its Scott
Mills Common Stock in the future. Any decision as to the future payment of
dividends will depend on the earnings and financial position of Scott Mills and
on such other factors as the Board of Directors, in its sole discretion, deems
relevant.
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<PAGE>
KLEINERT'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results Of Operations
Fiscal Year 1995 Compared to Fiscal Year 1994 and Fiscal Year 1993
Net Sales. The following table presents, for the periods indicated, Kleinert's
net sales by product line and segment. Amounts presented below relate only to
continuing operations.
Fiscal Year Ended
-----------------------------------------
(000's omitted)
Dec. 2, Dec. 3, Nov. 27,
1995 1994 1993
------- ------ --------
Sleepwear $37,015 $34,601 $28,610
Playwear 31,432 29,892 29,004
T-shirts 5,640 3,604 2,634
------- ------- -------
Total Children's Apparel 74,087 68,097 60,248
Personal Apparel 1,034 1,165 1,180
------- ------- -------
TOTAL $75,121 $69,262 $61,428
======= ======= =======
Kleinert's business is highly seasonal. The second half of the fiscal
year (June through November) typically accounts for greater than 70% of
Kleinert's annual sales as retail customers typically build inventory levels
prior to the August-September "back to school" period and continue to re-stock
throughout the fall for the Christmas holiday shopping season. For example, the
fourth quarter typically accounts for greater than 50% of the volume for the
second half of the fiscal year. Sales volume during the third fiscal quarter can
vary depending upon ordering patterns that generally firm up in the July-August
time frame. Although Kleinert's first and second quarter business is generally
significantly lower, the Pixie acquisition, described below, is expected to
enable Kleinert's to leverage its strong presence within the major retail
customers and grow Pixie's line of spring and summer children's wear, resulting
in improved first and second quarter business in the future.
Net sales increased $5,859,000, or 8.4%, in fiscal year 1995 compared to
fiscal year 1994. This increase was primarily due to a 7% increase ($2,414,000)
in sleepwear, a 5% increase ($1,540,000) in playwear and a 56% increase
($2,036,000) in T-shirt sales. The increases represented an increase in market
share since retail selling prices remained relatively constant throughout both
years.
Net sales increased $7,834,000, or 13%, in fiscal year 1994 compared to
fiscal year 1993. This increase was primarily due to a 21% increase ($5,991,000)
in sleepwear and a 37% increase ($970,000) in T-shirt sales. The increase in net
sales represented an increase in market share since retail selling prices
remained relatively constant throughout both years.
A substantial portion of the increased market share during the periods
presented has resulted from the successful implementation of sleepwear and
playwear programs at some of the largest retail chains in the country.
Kleinert's has developed a well earned reputation for quality and on-time
delivery. Having been given increased opportunities to work with the successful
large retailers in an ever consolidating field, Kleinert's has proven its
reputation and received additional business. Kleinert's has supported its
product penetration primarily by expanding its design effort both by increasing
its staff and adding to its state-of-the-art computer assisted design equipment.
The year ended December 3, 1994 contained 53 weeks and the years ended
December 2, 1995 and November 27, 1993 were 52 week years. Sales during the
month of December, during which the last week of the 53 week fiscal year would
have been derived, were $1,700,000, $2,100,000, and $1,200,000 in the fiscal
years 1995, 1994 and 1993, respectively. Consequently, the impact of the
additional week for the year ended December 3, 1994, relative to total sales for
the entire fiscal year, was not significant.
Gross Profit. The following table presents, for the periods indicated,
Kleinert's gross profit dollars (net sales less cost of goods sold) and gross
profit as a percentage of net sales (profit margin) for each of its segments.
Amounts presented below relate only to continuing operations:
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<TABLE>
<CAPTION>
(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
-------------------- --------------------- -----------------------
% of Net Sales % of Net Sales % of Net Sales
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Children's Apparel $13,114 17.7% $12,039 17.7% $10,639 17.7%
Personal Apparel 371 35.9% 437 37.5% 393 33.3%
------- ------- -------
Total $13,485 18.0% $12,476 18.0% $11,032 18.0%
======= ======= =======
</TABLE>
Gross profit increased $1,009,000 in fiscal year 1995 compared to
fiscal year 1994 and the profit margin remained stable at 18.0% when compared to
fiscal year 1994. Gross profit increased $1,444,000 in fiscal year 1994 compared
to fiscal year 1993 while the profit margin remained stable at 18.0% when
compared to fiscal year 1993.
General corporate expenses which are included in cost of goods sold
increased $743,000 to $1,704,000 in fiscal year 1995 compared to $961,000 in
fiscal year 1994. The increase was primarily the result of increased salaries,
legal expenses and reduced reimbursement from Scott Mills to Kleinert's for
certain corporate support services in fiscal year 1995 when compared to fiscal
year 1994. See "Certain Relationships and Related Transactions."
Total overhead included in cost of goods sold also included a large fixed
cost component related to Kleinert's Alabama's Elba, Alabama manufacturing
facility that has remained relatively constant and has not increased in
proportion to the additional sales volume. This has served to stabilize margins
in spite of extreme competitive pressure on product pricing and the increase in
general corporate expenses noted between fiscal year 1994 and 1995. Kleinert's
intends to continue to maintain margins at current levels by controlling fixed
costs and seeking to lower variable costs through volume purchasing of raw
materials and sourcing of labor as required.
General corporate expenses which are included in cost of goods sold
decreased $563,000 in fiscal year 1994 compared to fiscal year 1993 principally
due to the reimbursement by Scott Mills for management time and other expenses
spent by Kleinert's on its behalf.
Depreciation and amortization expense was $676,000, $674,000 and
$695,000 in the three fiscal years ended December 2, 1995, December 3, 1994 and
November 27, 1993, respectively.
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<PAGE>
Selling, General and Administrative Expenses. The following table
presents, for the periods indicated, Kleinert's selling, general and
administrative expenses, including design, merchandising and related expenses,
in dollars and as a percentage of net sales for each of its segments. Amounts
presented below relate only to continuing operations:
<TABLE>
<CAPTION>
(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
-------------------- ------------------- --------------------
% of Net Sales % of Net Sales % of Net Sales
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Children's Apparel $4,971 6.7% $4,967 7.3% $4,322 7.2%
Personal Apparel 180 17.4% 183 15.7% 303 25.7%
------ ------ ------
Total $5,151 6.9% $5,150 7.4% $4,625 7.5%
====== ====== ======
</TABLE>
The percentage of selling, general and administrative expenses to net
sales ("expense ratio") decreased to 6.9% in fiscal year 1995 from 7.4% in
fiscal year 1994. The decrease represented increased sales volume compared to
relatively constant expenses when comparing fiscal year 1995 to fiscal year
1994.
The expense ratio decreased slightly in fiscal year 1994 when compared
to fiscal year 1993 due principally to increased expenses in the children's
apparel division which were offset by lower expenses in the personal apparel
division. The increased expenses in the children's apparel division were
principally due to more designers and higher marketing salaries. The decrease in
expenses in the personal apparel segment was due to lower product development
costs and administrative expenses.
Interest Expense. Interest expense in fiscal year 1995 was $1,651,000,
a $248,000 increase when compared to fiscal year 1994. The increase was
principally due to higher average short-term borrowing levels and higher
short-term interest rates. Interest expense in fiscal year 1994 was $1,403,000,
a $115,000 increase when compared to fiscal year 1993. The increase was due
primarily to higher short-term interest rates partially offset by lower average
short-term borrowing levels.
Discontinued Operations. In February 1993, Kleinert's declared the
textile division, Scott Mills, a discontinued operation. In July 1993,
Kleinert's decided to spin-off the Scott Mills division to its shareholders. In
November 1993, Kleinert's contributed substantially all of its textile
division's assets, subject to substantially all of its liabilities, to Scott
Mills, Inc., a newly formed corporation, for all of the outstanding shares of
the corporation and the Board of Directors declared a distribution of one share
of Scott Mills, Inc. common stock for every one share of Kleinert's Common Stock
payable to the shareholders of record of Kleinert's Common Stock at the close of
business on November 27, 1993. The distribution occurred on
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March 15, 1994 and resulted in 100% of the outstanding shares of Scott Mills
Common Stock being distributed to Kleinert's shareholders.
The textile division was classified in Kleinert's consolidated
statement of operations as a discontinued operation for fiscal year 1993.
Textile sales and losses which were excluded from continuing operations during
the period are set forth below:
Fiscal Year 1993
----------------
(000's omitted)
Textile net sales $ 9,578
=======
Operating loss before income tax benefit $ 2,677
Income tax benefit (922)
-------
Net loss 1,755
Less fiscal year 1992 provision for
additional operating losses through date
of disposal, net of income tax benefit of $249 (492)
-------
Loss from discontinued operations $ 1,263
=======
Income Taxes
The effective tax rates for fiscal years 1995, 1994 and 1993
relating to continuing operations were 35.2%, 34.6%, and 35.0%, respectively.
Six Months ended June 1, 1996 Compared to Six Months ended June 3, 1995
Kleinert's apparel business is highly seasonal. Consequently, the sales
and operating results for the six months ended June 1, 1996 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
November 30, 1996.
Six Months Ended
-------------------------------------------
(000's omitted)
Increase
June 1, 1996 June 3, 1995 (Decrease)
------------ ------------ ----------
Net Sales $23,011 $17,845 $ 5,166
======= ======= =======
Gross Profits $ 5,205 $ 4,529 $ 676
======= ======= =======
Selling, general and
administrative expenses $ 2,798 $ 2,396 $ 402
======= ======= =======
Net sales increased by $5,166,000, or 29%, to $23,011,000 from
$17,845,000 for the six months ended June 1, 1996 compared to the six months
ended June 3, 1995. Sales of products associated with the business arising from
Kleinert's acquisition of the assets of Pixie Playmates, Inc. ("Pixie") and
Certified Sewing Services, Inc. ("Certified") and the shares of Certified
Apparel Services of Honduras, S.A. ("CASH") on December 16, 1995 (see
"Information Concerning Kleinert's") accounted for an approximately 19%
increase, and the remaining 10% increase related to Kleinert's continuing
business. The increase in Kleinert's sales from continuing business related
primarily to knitsets. Test programs and good sales results at very large retail
chains during 1995 were successful and have resulted in considerable growth for
Kleinert's with these customers. Gross profit increased by $676,000, or 15%,
primarily as a result of increased sales volume.
Selling, general and administrative expenses increased $402,000, or 17%,
primarily reflecting expenses associated with the Pixie business.
It is Kleinert's intention to integrate many systems and functions that
are currently being performed independently at Pixie. It is expected that
savings generated by this integration will offset any increases in selling,
general and administrative expenses that might otherwise occur and thus, will
serve to reduce Pixie related expense in the future.
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<PAGE>
Interest expense in the first six months of 1996 was $760,000 compared to
$685,000 in the first six months of 1995, reflecting increased borrowing levels
associated with financing the Pixie acquisition.
Net income increased 14% to $1,049,000 for the first six months of 1996
compared to $922,000 for the first six months of 1995. Approximately 7% of the
increase was attributable to the basic Kleinert's business, while the Pixie
acquisition accounted for the balance.
Impact of Inflation and Changing Prices on Sales and Income from Operations
Although Kleinert's costs for raw materials, labor and equipment are
influenced by inflation, management believes that inflation has not had a
material impact on Kleinert's operations prior to fiscal year 1994. In fiscal
year 1994, Kleinert's experienced an increase in raw material prices which
continued into fiscal year 1995. The impact of margins of increased raw material
prices was offset primarily by increased sales volume that permitted the
absorption of relatively stable fixed costs. Consequently, margins remained
stable without a corresponding increase in selling prices. Raw material prices
are not expected to change significantly in 1996. Kleinert's does not expect to
be able to increase its selling prices to any great extent during fiscal year
1996; therefore, Kleinert's continues to examine all of its costs in an effort
to maintain its profit margins.
Liquidity and Capital Resources
At June 1, 1996, Kleinert's had working capital of $22,981,000 compared
to $16,377,000 at June 3, 1995. Net cash used in operating activities increased
$1,513,000 from $(5,784,000) in the first six months of fiscal year 1995 to
($7,297,000) in the first six months of fiscal year 1996. This reflected
increases in inventory when comparing the first six months of fiscal year 1996
to the comparable 1995 period, principally reflecting approximately $2,000,000
of inventory acquired in the Pixie acquisition, offset by reductions in
inventory levels related to improved sales of carryover goods during the first
six months of 1996 when compared to the same period of 1995.
Cash used in investing activities increased $4,271,000 to $(5,174,000) in
the first six months of 1996 from $(903,000) in the same period of 1995. The
increase was primarily the result of the acquisition of the assets of Pixie and
Certified and of the capital stock of CASH for an aggregate cash purchase price
of $4,650,000. See "Information Concerning Kleinert's."
Net cash provided by financing activities increased by $5,428,000 to
$12,188,000 in the six months ended June 1, 1996 from $6,760,000 for the
comparable period in 1995. The increase was primarily the result of
approximately $1,938,000 of proceeds from the sale of common stock upon the
exercise of stock options, proceeds from refinancing of existing term debt, and
the addition of a $4,650,000 term debt facility to finance the purchase of the
Pixie and Certified assets and the shares of CASH. The term loan is in the form
of an amended and restated term loan note with the same bank as the original
term loan. The total borrowing at June 1, 1996 was $8,049,000 which is payable
in quarterly installments of $300,000 through September, 2002 with a final
installment of $249,000 due December 2002. The interest rate is based on LIBOR
but has been effectively fixed at 7.00% by an interest rate swap agreement with
the same bank.
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<PAGE>
It is expected that the Pixie acquisition will enhance Kleinert's
earnings and, ultimately, its cash flows; however, due to the seasonality of the
Company's business, additional working capital requirements are anticipated in
periods when production levels exceed sales.
Kleinert's uses it short-term borrowings to build inventory levels for
shipment in the fall season.
Kleinert's believes that cash flow generated by operations, together with
amounts available under its existing credit arrangements, should be sufficient
to fund its working capital needs in fiscal year 1996 and for the future.
Kleinert's has unsecured lines of credit aggregating $42,500,000 of which
$18,850,000 was outstanding at June 1, 1996. The following table sets forth
certain information concerning this indebtedness:
<TABLE>
<CAPTION>
Principal
Name of Lender Interest rate at June 1, 1996 Amount Outstanding
- -------------- ----------------------------- ------------------
<S> <C> <C>
CoreStates Bank, N.A. 6.40% $6,850,000
Brown Brothers, Harriman
and Co. 6.20% 2,000,000
PNC Bank 6.44% 5,000,000
Republic National Bank
of New York 7.00% 5,000,000
</TABLE>
Kleinert's expects to fund its capital needs primarily from cash flow
generated by operations over the next twelve months. Since Kleinert's uses its
short-term lines of credit to fund working capital needs, any additional
financing related to capital needs is generally provided either by lease
financing or other long-term sources. Currently, Kleinert's has no material
capital commitments.
Income Taxes
The provision for income taxes is based upon the effective tax rates
expected to be recognized for the full fiscal year 1996. The rate for the first
six months of 1996 was 36.3%, which was equal to the rate for the first six
months of fiscal year 1995 of 36.3%.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued FASB
Statement No. 121 Accounting for the Impairment of Long-Lived Assets to Be
disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed. Kleinert's expects the
impact of adoption in 1997 will be insignificant.
In October 1995, the Financial Accounting Standards Board issued FASB
Statement No. 123, Accounting for Stock-Based Compensation. The new standard
prescribes new accounting and reporting standard which reflect the standards'
"fair value method" to estimate expense associated with stock based
compensations plans. Companies may elect to continue to use existing accounting
rules or adopt the "fair value method" for expense recognition. Companies that
elect to continue to use existing accounting rules will be required to provide
pro-forma disclosures of what net income and earnings per share would have been
had the new "fair value method" been used. Kleinert's will elect to continue to
use existing accounting rules. Both statements are effective for fiscal years
beginning after December 15, 1995 and, accordingly, will not be required until
fiscal year 1997.
SCOTT MILLS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This discussion takes into account sales to Kleinert's at prices which
approximate cost for the period prior to November 28, 1993 because Scott Mills
was a division of Kleinert's prior to such date. Sales to Kleinert's after
November 27, 1993 are at prices approximating market.
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<PAGE>
Results Of Operations
Fiscal Year 1995 Compared to Fiscal Year 1994 and Fiscal Year 1993
Net Sales. Fabric sales occur when Scott Mills sells piece goods it
owns and manufactures; therefore, it includes the price of the raw material,
typically greige goods. Commission sales occur when Scott Mills processes raw
material owned by others. Sales to Kleinert's are included in fabric sales.
The following table presents, for the periods indicated, Scott Mills'
net sales by category.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------
(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
------------ ------------ -------------
<S> <C> <C> <C>
Fabric $12,615 $15,540 $13,711
Commission 2,181 1,815 587
------- ------- -------
$14,796 $17,355 $14,298
======= ======= =======
</TABLE>
Net sales declined 15% or $2,559,000 during fiscal year 1995 compared to
fiscal year 1994, reflecting primarily reduced sales levels caused by aligning
production capabilities with a more realistic sales plan, Scott Mills' decision
to discontinue the dyeing and finishing operations in September 1995 and poor
conditions in the retail apparel market in general. Net sales increased
$3,057,000 or 21% in fiscal year 1994 compared to fiscal year 1993 due to higher
fabric and commission sales. Approximately $1,500,000 of the $1,800,000 increase
in fabric sales was the result of higher sales to Kleinert's. Higher commission
sales in fiscal year 1994 occurred as Scott Mills implemented its strategy of
developing a commission business. As a result of the cessation of the dyeing and
finishing operations, commission sales are expected to decrease during fiscal
year 1996.
Scott Mills has relatively few customers due principally to the
consequences of the delivery and quality problems which occurred when Scott
Mills was engaged in the dyeing and finishing business. However, there continues
to be a market for a good primary and secondary source of acrylic, 100%
polyester and polycotton fabrics in the children's sleepwear and activewear
markets. Scott Mills has engaged a new sales executive and is aggressively
pursuing these markets.
Gross Profit (Loss). Scott Mills announced on September 12, 1995 that, in
light of poor operating results and as part of its ongoing effort to control
operating costs, it had decided to concentrate its business solely on its
knitting operations and subcontract all of its dyeing and finishing. During the
fiscal year ended December 2, 1995, Scott Mills recorded a charge to earnings of
$2,044,000 to provide for the writedown to estimated net realizable value of
assets and for other costs associated with its decision to cease dyeing and
finishing operations.
As part of the provision for closing the dyeing and finishing operation,
$1,640,000 of the charge represented the writedown of the assets to their net
realizable market value and $404,000 of the charge represented other costs
associated with the cessation of the operations, including accruals for
severance pay and noncancelable lease costs. On November
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<PAGE>
27, 1995, Scott Mills sold substantially all of its dyeing and finishing assets,
free and clear of all liabilities, to Dyersburg Fabrics, Inc. ("Dyersburg"), an
unaffiliated textile manufacturer. The Company received $2,750,000 on the sale
and used the proceeds to repay its secured term debt to its factor and others.
During the same period, significant reductions in overhead expenses were
implemented as Scott Mills continued to initiate action to aggressively respond
to operating problems previously identified, including those which arose from an
overly aggressive sales plan, operating inefficiencies and quality control
problems. These measures included decreasing production and costs to levels
designed to rebuild customer confidence. Although Scott Mills' measures
negatively impact net sales and operating results in the short-term, Scott Mills
believes that these measures were necessary in an attempt to improve operating
results in the long-term. There can be no assurance, however, that Scott Mills'
objectives will be achieved.
The following table presents, for the periods indicated, Scott Mills'
gross profit (loss) in dollars and gross profit (loss) as a percentage of net
sales.
Fiscal Year Ended
----------------------------------------------------
(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
------------ ------------ -------------
Gross Profit (Loss) $(1,191) $(989) $(1,542)
% of Net Sales (8.0%) (5.7%) (10.8%)
The percentage of gross profit (loss) to net sales (gross margin) changed
from (5.7%) in fiscal year 1994 to (8.0%) in fiscal year 1995. The unfavorable
change in the percent of gross loss reflected both the inefficiencies
experienced in operations during the first nine months of 1995 that led to the
decision to close down the dyehouse operations and to insufficient production
pounds in the latter months of the fiscal year to fully absorb fixed overhead
costs.
The percentage of gross profit (loss) to net sales (gross margin) changed
from (10.8%) in fiscal year 1993 to (5.7%) in fiscal year 1994. Scott Mills'
installation and testing of new equipment lasted from November 1993 to July 1994
and resulted in inefficient operations of the plant during that period.
General corporate expenses (which represented an allocation of expenses
by Kleinert's of corporate costs primarily for management, legal and financial
services rendered on behalf of Scott Mills) (See "Certain Relationships and
Related Transactions") which were included in cost of goods sold amounted to
$208,000 and $300,000 in 1994 and 1993, respectively. A similar allocation for
cost of sales was not made in fiscal year 1995.
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<PAGE>
Depreciation expense was $980,000, $860,000 and $615,000 in fiscal years
1995, 1994 and 1993, respectively. The majority of the increased depreciation
expense during the period from 1993 through 1995 was the result of the purchase
or capital lease of dyeing and finishing equipment.
Selling, General and Administrative Expenses. In fiscal year 1995, the
percentage of selling, general and administrative expenses ($919,000) to net
sales (the "expense ratio") was 6.2%, a decrease compared to fiscal year 1994,
primarily reflecting reductions associated with the closing of dyehouse
operations.
In fiscal year 1994, the expense ratio was 8% (on the basis of selling,
general and administrative expenses of $1,338,000), which is similar to the
fiscal year 1993 expense ratio (net of royalty expense) of 7.7%.
In fiscal year 1993, the expense ratio was 9.1%. Of selling, general and
administrative expenses of $1,297,000, $198,000 was a royalty expense payable to
Kleinert's based on Scott Mills' net sales for the use of the "Scott Mills"
trademark. Commencing in fiscal year 1994 Scott Mills had the right to use its
trademark without the payment of any royalties, because the trademark was
distributed to Scott Mills as part of the spin-off.
Interest Expense. Interest expense in fiscal year 1995 was $704,000
compared to $397,000 in fiscal year 1994 and $186,000 in fiscal year 1993. The
increase was due primarily to higher levels of subordinated term debt, higher
loan advances against factored accounts receivable and a full year of interest
from term debt related to equipment installed during fiscal year 1994. Interest
expense has decreased following the sale of the dyehouse assets and the
repayment of the equipment loan.
Taxes. Scott Mills has a federal income tax loss carryfoward (NOL) of
$6,453,000 available for future years as a result of losses incurred in fiscal
year 1994 and 1995. These NOLs expire through 2010. There was no income tax
benefit recognized in fiscal year 1993, since there was no state or federal loss
carryback available. The tax loss related to fiscal year 1993 was not carried
forward into fiscal year 1994 and fiscal year 1995 since these losses were fully
utilized in the Kleinert's 1993 consolidated return.
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<PAGE>
Six Months ended June 1, 1996 Compared to the Six Months ended June 3, 1995
The following table presents, for the periods indicated, the Company's
net sales by category.
Six Months Ended
June 1, June 3,
1996 1995
------ -------
($000's)
Fabric $4,076 $8,259
Commission 42 1,626
--------- -------
$4,118 $9,885
--------- -------
Net sales decreased 58% or $5,767,000 in the first six months of fiscal
year 1996 compared to the first six months of fiscal year 1995. The Company
significantly decreased its fabric and commission sales as a result of closing
its dyehouse in September 1995. Kleinert's accounted for 89% of the net sales in
the first six months of 1996. The Company believes Kleinert's will continue as a
major customer although the Company has hired a sales executive to market the
Company's products to other children's apparel customers.
Gross Profit (Loss). The following table presents for the periods
indicated, the Company's gross profit (loss) in dollars and as a percentage of
net sales.
Six Months Ended
June 1, June 3,
1996 1995
---- ------
($000's)
Gross Profit (Loss) $ 124 $(266)
% of Net Sales 3.0% (2.7%)
Gross margins were a positive 3.0% in the first six months of 1996
compared to a negative 2.7% in the first six months in 1995. The manufacturing
operation in the first six months of 1996 contained only the knitting operations
as compared to knitting, dyeing and finishing operations in 1995. The Company
has dramatically reduced its operating costs due to subcontracting its dyeing
and finishing business. This has permitted the Company to produce pounds yet
still generate a gross profit. The Company experienced a negative gross margin
of $10,000 during the second quarter of 1996 primarily as a result of
unanticipated price increases for outside dyeing and finishing. The Company was
able to place some of this business at competing dyeing and finishing
subcontractors at more favorable prices and intends to place substantially more
business at the same vendors in the third quarter of 1996, thus bringing costs
more in line with profit margins attained in the first quarter of 1996.
Provision - closing, dyeing and finishing facility. The Company provided
an additional $138,000 to reflect anticipated additional losses on the sale of
dyehouse assets at lower amounts than originally estimated and to reflect
additional equipment moving costs.
Selling, General and Administrative Expenses. The Company incurred no
selling or administrative expenses in the first
quarter of 1996. In the second quarter of 1996 selling and administrative
expenses and bonus accruals reflect expenses related to a new sales executive
hired during the quarter and bonus accruals. The addition of this position is
expected to help the Company to increase non-affiliated sales to the children's
apparel market. All corporate expenses are included in cost of goods sold.
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<PAGE>
Interest Expense. Interest expense decreased 57% to $147,000 in the
first six months of 1996 when compared to the first six months of 1995 due to
the Company selling its dyehouse assets and significantly reducing its capital
lease obligations and paying off its term debt in November 1995.
Taxes. No income tax benefit is reflected in the first six months of
1996 and the first six months of 1995 since the realization of such benefit
could not be reasonably assured.
Impact of Inflation
Scott Mills' raw material costs experienced increases in the first half
of 1996; however, costs trended downward by the end of fiscal year 1996 to below
the levels at the beginning of fiscal year 1995 before any price increases.
Management believes that, prior to 1994, only utility costs (i.e. water, sewer,
natural gas and electric) had an inflationary impact on Scott Mills' operations
in the last five years, none of which were material.
Liquidity and Capital Resources
Steps designed to control operating costs include reductions in
personnel, adjusting production levels to more accurate sales forecasts and, as
previously described, subcontracting its dyeing and finishing operations.
Scott Mills is subcontracting its dyeing and finishing business with
several unaffiliated vendors, including Dyersburg. The terms of each commission
dyer and finisher is on an order-to-order basis.
Scott Mills also is negotiating with its vendors to defer payment of
amounts it currently owes until Scott Mills has the cash resources with which to
satisfy its obligations in an orderly fashion. Scott Mills believes that these
efforts will result in increased operating efficiencies and assist Scott Mills
in meeting its future financial obligations as they become due. In the event
these efforts prove unsuccessful and the Merger
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<PAGE>
is not consummated, Scott Mills will be required to seek financing from external
sources, including those of the type upon which Scott Mills previously has
relied, to meet its obligations as they become due. There can be no assurance,
however, that sufficient liquidity will exist to enable Scott Mills to continue
as a going concern.
Expected depreciation in fiscal year 1996 is approximately $230,000. This
compares with depreciation expense of $980,000 in fiscal year 1995, $860,000 in
fiscal year 1994 and $615,000 in fiscal year 1993. The reduction in anticipated
depreciation relates primarily to the closing of the dyehouse and the sale or
disposal of dyeing and finishing equipment.
Scott Mills' indebtedness consists principally of borrowings from
Kleinert's and from certain directors and shareholders of Kleinert's and Scott
Mills, and certain capital lease obligations, all of which will be assumed by
Kleinert's in the Merger.
Scott Mills executed a working capital agreement with Kleinert's Alabama
during fiscal year 1995 pursuant to which Kleinert's Alabama may, at Scott
Mills' request, provide short-term borrowings. The borrowings, which are payable
upon demand by Kleinert's Alabama, are secured by a lien on all of Scott Mills'
assets. Repayments to Kleinert's are made by deductions against invoice billings
to Kleinert's by Scott Mills for textiles purchased by Kleinert's. At June 1,
1996, $2,488,000 was outstanding and due Kleinert's Alabama under this
agreement.
On December 4, 1994, Scott Mills borrowed $500,000 from Kleinert's, Inc.,
of Delaware, a wholly-owned subsidiary of Kleinert's, on a subordinated basis.
The loan bears interest at 8.5% per annum, which is paid annually, and is due on
December 4, 1999. The loan will be eliminated in consolidation after the
consummation of the Merger. Also on December 4, 1994, certain directors and
officers of Scott Mills, together with certain other persons affiliated with
Scott Mills and Kleinert's, none of whom beneficially owns in excess of 5.0% of
the issued and outstanding shares of Kleinert's Common Stock or Scott Mills
Common Stock, advanced loans to Scott Mills aggregating $500,000. These loans
were evidenced by subordinated five year term notes bearing interest at 8.5% per
annum. The notes are convertible into shares of Scott Mills Common Stock at a
price of $.50 per share. At June 1, 1996, the entire $500,000 principal balance
remained outstanding. Although there is no existing agreement among Scott Mills
and these lenders regarding conversion of the notes in connection with the
Merger, Scott Mills does not anticipate that any of the notes will be converted
into Scott Mills Common Stock prior to the Effective Time.
In December 1993, Scott Mills entered into a factoring agreement with a
lender which agreed to make cash advances of up to 85% of Scott Mills' eligible
accounts receivable. In connection therewith, Kleinert's agreed to indemnify the
lender against any liability from certain claims resulting from the transfer of
assets from the Scott Mills division of Kleinert's to Scott Mills pursuant to
the Spin-Off. In November 1995, Scott Mills terminated its factoring arrangement
using the proceeds from the sale of the dyeing and finishing assets to
Dyersburg.
At June 1, 1996, Scott Mills also had capital lease obligations
aggregating $81,000.
Impact of Recently Issued Accounting Standards. In March 1995, the
Financial Accounting Standards Board issued FASB Statement No. 121 Accounting
for the Impairment of Long-Lived Assets to Be disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. Scott Mills expects the impact of adoption in 1997
will be insignificant.
In October 1995, the Financial Accounting Standards Board issued FASB
Statement No. 123, Accounting for Stock-Based Compensation. The new standard
prescribes new accounting and reporting standard which reflect the standards'
"fair value method" to estimate expense associated with stock based
compensations plans. Companies may elect to continue to use existing accounting
rules or adopt the "fair value method" for expense recognition. Companies that
elect to continue to use existing accounting rules will be required to provide
pro-forma disclosures of what net income and earnings per share would have been
had the new "fair value method" been used. Scott Mills will elect to continue to
use existing accounting rules. Both statements are effective for fiscal years
beginning after December 15, 1995 and accordingly will not be required until
fiscal year 1997.
INFORMATION CONCERNING KLEINERT'S
Kleinert's is engaged in the design, manufacture and sale of infants' and
children's sleepwear and playwear and children's T-shirts. Kleinert's also
manufactures, distributes and sells certain items of personal apparel.
Kleinert's was founded in 1869 under the name of I.B. Kleinert Rubber
Company and was reincorporated in Pennsylvania under its current name in 1970.
Kleinert's principal executive offices are located at 120 West Germantown Pike,
Suite 100, Plymouth Meeting, Pennsylvania 19462 and its telephone number is
(610) 828-7261.
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<PAGE>
On December 19, 1995, Kleinert's, through its newly formed wholly-owned
subsidiary, Kleinert's, Inc. of Florida, consummated a transaction (the
"Transaction") pursuant to which Kleinert's acquired substantially all of the
assets of Pixie Playmates, Inc. ("Pixie") and Certified Sewing Services, Inc.
("Certified"), two Florida corporations, and all of the capital stock of
Certified Apparel Services of Honduras, Inc., C.A., a Honduran corporation
("CASH"). Pixie, Certified and CASH, all of which are affiliated entities, are
engaged in the manufacture and sale of children's apparel.
In consideration for the assets of Pixie and Certified and the shares of
CASH, Kleinert's paid an aggregate purchase price of $4,650,000 in cash, of
which $500,000 was retained by Kleinert's until April 1996 upon confirmation of
inventory quantities and completion of an audit of CASH. The purchase price was
financed by Kleinert's through an additional term debt facility under an
existing bank financing agreement.
To more reasonably reflect the seasonality of operations, Kleinert's
fiscal year ends the Saturday nearest November 30. Fiscal year 1995 was a fifty
two week year and fiscal year 1994 was fifty three week year.
Apparel
Children's Apparel. The sleepwear manufactured by Kleinert's consists of
blanket sleepers made of 100% polyester fleece in sizes ranging from newborn to
girls' and boys' size 14 and knit sets made of interlock, jersey, doubleknit or
terrycloth fabric for infants in sizes ranging from newborn to size 24 months.
All of Kleinert's sleepwear is made of 100% polyester and complies with the
requirements of the Consumer Products Safety Commission relating to flammability
standards (see "Marketing"). Sales of sleepwear represented 50% of children's
apparel net sales in fiscal year 1995.
Kleinert's playwear consists primarily of activewear sets and separates
in sizes ranging from newborn through girls' and boys' size 14. Activewear sets
are two-piece jog sets consisting of pants and a top made of polyester cotton
blend, 100% acrylic fleece or interlock fabric. Separates are the same as the
jog sets, except separates consist of either the top or the pant. Kleinert's
also manufactures and sells T-shirts, primarily for children, made of 100%
cotton or polyester cotton blend, and polo shirts, made of cotton blend in sizes
ranging from infant through toddler. Sales of playwear including T-shirts/polo
shirts represented 50% of children's apparel net sales in fiscal year 1995.
Kleinert's has screen print and embroidery equipment which is used in the
apparel manufacturing process. Kleinert's in-house staff of artists creates
designs which are meticulously engineered onto cut parts and then sewn in the
manufacturing process. Typically the screen print equipment is used in the
manufacture of jog sets and the embroidery equipment is used in the manufacture
of Kleinert's sleepwear products.
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<PAGE>
Kleinert's apparel products are sold at retail prices generally ranging
from $7.00 to $18.00 for sleepwear, from $6.00 to $14.00 for playwear and from
$5.00 to $9.00 for T-shirts/polo shirts (see "Marketing").
Personal Apparel. Kleinert's manufactures and sells dress and garment
shields and distributes personal apparel and sanitary items. Dress and garment
shields protect clothing from underarm perspiration stains. The retail price of
the personal apparel items sold by Kleinert's generally ranges from $4.25 to
$15.90. Kleinert's distributes adult incontinence products under the names "Safe
'N Dry" and "Feel and Sure." These products are distributed in conjunction with
Hygienics Industries, Inc., in accordance with an exclusive licensing
arrangement. Sales of personal apparel items represented less than 5% of
Kleinert's consolidated net sales during each of the last three fiscal years.
Manufacturing
Production. Kleinert's infants' and children's playwear and sleepwear is
cut, sewn, inspected, packaged and warehoused at Kleinert's 340,000 square foot
Elba, Alabama facility. The Elba facility performs the same functions with
respect to T-shirts and polo shirts, except for the sewing and inspection of
T-shirts, which are currently performed at Kleinert's 22,000 square foot
Greenville, Alabama facility. The 78,000 and 7,000 square foot Kleinert's, Inc.
of Florida facilities near Tampa Bay perform essentially the same functions as
the Elba facility with respect to woven children's wear products and some knit
products. The knit products are cut first at the Elba facility. Kleinert's
Honduras facility is primarily engaged in the sewing, inspection and packaging
of woven and knit products.
The apparel manufacturing process begins with purchased fabric, which is
then cut into specific garment parts such as sleeves, fronts, backs and collars,
and then bundled. The cut parts are sewn in an assembly line format with various
adornments, such as screen printing or embroidery added before the cut parts are
sewn. Fabric is inspected prior to cutting and each garment is inspected at
least twice, once during sewing and once after it is sewn, but before it is
warehoused. Quality control tests are also performed after cut parts are printed
or embroidered. Samples of each lot of sleepwear are tested to ensure compliance
with government flammability standards and samples from all lots of sleepwear,
playwear and T-shirts are wash tested for shrinkage and colorfastness.
In an effort to control more closely its apparel manufacturing process,
Kleinert's during the past five years has installed new equipment and upgraded
existing equipment at a cost of approximately $2,480,000. Kleinert's has
installed a completely integrated screen print system, a "real time"
work-in-process system to better monitor and control the manufacturing process
and additional embroidery machines. During fiscal year 1994, Kleinert's
installed in its Elba, Alabama facility the initial portion of a real-time
computer based data collection and information warehouse processing system which
has enabled
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improved monitoring of the movement of finished goods as they are warehoused and
processed for shipment. This system provides up-to-the minute information both
to management and its retail customers and permits Kleinert's to ship more goods
in the ever shrinking shipping window as a result of implementation of "Quick
Response" via Electronic Data Interchange ("E.D.I."). The installation of the
system was completed during fiscal year 1995, enabling Kleinert's to fully
utilize the system's benefits during the fiscal year 1995 fall shipping season.
Kleinert's Elba facility currently operates one eight-hour shift a day
for sewing and two shifts a day (when needed) for cutting, screen print and
embroidery, five days a week. The Greenville and Florida facilities currently
operate one eight-hour shift a day, five days a week. The Honduras facility
operates on five and one-half day weeks.
During fiscal years 1995 and 1994, Kleinert's spent $5,808,000 and
$4,086,000, respectively, for contract sewing of T-shirts, jog sets, basic
separates, polo shirts and prams. Kleinert's will continue to use outside
contractors to manufacture various products in order to meet peak season
deliveries which are in excess of the existing in-house manufacturing capacity
of Kleinert's.
Kleinert's has conducted business with several contract sewers in the
past few years depending upon the type of product to be manufactured. The
principal contractor has been Precision Textiles Inc. (P.T.I.), which has sewn
primarily fleece sets or separates; however, Kleinert's believes that there are
readily available alternate sources for contract sewing. Kleinert's has been the
primary customer of P.T.I. for the past few years.
Raw Materials. During fiscal year 1995, approximately 42% of the fabric
purchased for Kleinert's children's apparel division was purchased from two
vendors, including 14% from Scott Mills and approximately 28% from Dyersburg.
Vendors are selected on the basis of quality, price and service; however,
Kleinert's fabric needs could be met by other vendors at prices that, in most
cases, are competitive. The remaining materials used in the manufacture of
children's apparel were purchased from a variety of sources.
Raw materials for Kleinert's personal apparel products are purchased
from a limited number of sources. Kleinert's believes that alternative sources
are readily available at competitive prices.
Marketing
Kleinert's apparel products are sold primarily by an in-house sales staff
of seven people which is organized on the basis of specific customers. In
addition, there are three independent commissioned sales representatives. The
independent commissioned sales representatives account for less than 20% of
total children's apparel sales. Sales efforts are principally conducted from
Kleinert's New York City showroom.
Kleinert's sells most of its apparel to national chain stores, mass
merchandisers, department stores and specialty stores, such as Target Stores,
J.C. Penney, Wal-Mart, K-Mart, Federated, Nordstrom and Mercantile Stores.
During fiscal year 1995 sales of apparel were made to less than 800 customers.
No single customer accounted for more than 10% of Kleinert's consolidated net
sales for fiscal year 1995 other than Target Stores and
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<PAGE>
J.C. Penney, which accounted for approximately 19% and 14%, respectively, of
consolidated net sales during the period.
In recent years Kleinert's has received awards from its customers in
recognition of Kleinert's outstanding quality and service. The awards are
indicative of strategic partnerships which Kleinert's has been successful in
developing over many years of providing quality service and merchandise,
particularly as the number of retailers continues to decrease. The result of
Kleinert's emphasis on quality is demonstrated by Kleinert's returns and
allowances being less than 3% of gross sales in each of the last three fiscal
years. This compares with an industry average exceeding 7% of gross sales.
The apparel division has quick response programs in place with major
customers and communicates with many of its vendors and customers via E.D.I.
This E.D.I. system allows customers and vendors to communicate purchase orders,
invoices, advance shipping notices and available inventory lists electronically.
The real-time, work-in-process and warehouse systems aid Kleinert's in servicing
the customer by enabling Kleinert's to monitor on a "real time" basis goods on
the sewing floor and in the warehouse, thereby permitting Kleinert's to
circumvent production bottlenecks that could cause late deliveries.
Kleinert's markets its personal apparel products exclusively under the
Kleinert's label through chain, variety and drug stores, wholesale distributors,
fabric centers and direct mail order.
Backlog. The backlog of orders for apparel goods was approximately
$4,486,000 at February 2, 1996 compared with $8,270,000 at January 27, 1995. The
amount of unfilled orders at a particular time is affected by a number of
factors including the scheduling of manufacturing and product shipping, which in
many instances is dependent on the desires of the customer. The decrease in open
orders at February 2, 1996 is due in large part to higher shipping production
levels of knitsets and T-shirts when compared to January 27, 1995. Kleinert's
anticipates that all orders will be filled during the current fiscal year.
Competition
The infants' and children's apparel markets are highly competitive and
include many manufacturers from around the world in all product lines, including
some which are larger and have substantially greater market share and resources
than Kleinert's. Kleinert's believes that it competes with other manufacturers
in each of its markets on the basis of price, quality, service and availability
of products.
Foreign competition has been a significant factor in the apparel
industry. Kleinert's believes that it can best compete with foreign competition
by providing superior customer service, responding quickly to changes in
customer demand and providing more timely deliveries. Purchasing from domestic
manufacturers may permit retailers to reduce their
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inventory levels and lower the risk that product availability will not match
consumer demand.
Kleinert's experiences only limited competition in the personal apparel
market.
Employees
As of January 1, 1996, Kleinert's had 1,454 full time employees including
approximately 1,270 in manufacturing (of which 751 are in Elba, 96 in
Greenville, 193 in the Florida plants and 230 in Honduras, 24 in merchandising,
design and sales, 101 in clerical/administration and 59 in general management).
Historically, the number of employees increases during the summer and fall due
to seasonal factors. None of Kleinert's United States employees are party to a
collective bargaining agreement and Kleinert's believes its employee relations
are satisfactory. The employees in Honduras are under a collective bargaining
agreement, as required by Honduras laws. Kleinert's considers its relationship
with its employees to be good.
Governmental and Environmental Regulation
The Company and its operations are subject to federal, state and local
laws, as well as Honduran law in the case of Certified Apparel Services of
Honduras, Inc., including the Consumer Product Safety Act, the Flammable Fabrics
Act, and the rules and regulations promulgated thereunder. The Company believes
it is in substantial compliance with all applicable governmental requirements
under these laws and regulations.
The Company and its operations are subject to federal, state and local
laws and regulations concerning the protection of the environment. The Company
is not currently the subject of any proceedings under these laws and
regulations, and believes it is in substantial compliance with all applicable
governmental requirements under these laws and regulations.
The Company does not anticipate that environmental or Occupational Safety
Health Act (O.S.H.A.) laws and regulations, or compliance with other federal,
state and local laws and regulations, will require substantial expenditures or
materially affect its results of operations or financial condition during the
foreseeable future unless conditions unknown to the Company are discovered or
new or stricter requirements are imposed.
Properties
Kleinert's conducts its manufacturing operations from two plants in
Alabama, one in Elba and one in Greenville, two plants in Florida and one plant
in Honduras. Kleinert's principal executive offices are located in Plymouth
Meeting, Pennsylvania, a suburb of Philadelphia. Kleinert's sales, marketing,
merchandising and design functions are conducted
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from its offices located in New York, New York. Kleinert's believes that its
plants and equipment are well maintained and are sufficient, when combined with
production from outside contractors, to meet expected output levels in fiscal
year 1996.
In addition, Kleinert's leases an office in Wilmington, Delaware for
its subsidiary, Kleinert's, Inc. of Delaware.
The following table sets forth a summary of the principal facilities
owned or leased by Kleinert's as of January 1, 1996:
<TABLE>
<CAPTION>
SQUARE BASIS OF
LOCATION PRIMARY USE FEET OCCUPANCY
-------- ----------- -------- ---------
<S> <C> <C> <C>
Elba, Alabama Manufacture of children's apparel 340,000 Owned
Elba, Alabama Finished goods warehouse 11,000 Lease expiring
November 30, 1997
Greenville, Alabama Sewing of T-shirts and polo shirts 22,000 Lease expiring
February 14, 1997(1)
New York, New York Marketing, merchandising and 12,878 Lease expiring
design of infants' and children's March, 2001
wear
Plymouth Meeting, Executive offices 3,900 Lease expiring
Pennsylvania October, 1996
Largo, Florida Manufacture of children's apparel 78,000 Lease expiring
December, 1998(2)
Safety Harbor, Florida Manufacture of children's apparel 7,000 Lease expiring
July, 1997(2)
San Pedro Sula Cuelas, Manufacture of children's apparel 34,000 Lease expiring
Honduras, CA August, 1996(2)
San Pedro Sula Cuelas, Visitors' housing facility 1,400 Lease expiring
Honduras, CA May, 1997
</TABLE>
(1) Kleinert's has an option to renew the lease for one additional year, and has
an option to purchase this facility, including approximately 5.6 acres of land,
for $140,000. Certain portions of the rental payments may be applied against the
purchase price.
(2) Kleinert's has options to renew these leases.
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Legal Proceedings
Kleinert's currently is not a party to any material litigation.
INFORMATION CONCERNING SCOTT MILLS
Scott Mills was engaged until September 12, 1995 in the knitting,
dyeing and finishing of knit fabrics for the children and women's apparel
market. On September 12, 1995, Scott Mills announced that in light of poor
operating results and as part of its ongoing effort to control operating costs,
it had decided to concentrate its business solely on its knitting operations and
subcontract out all of its dyeing and finishing. On November 27, 1995, Scott
Mills sold substantially all of its dyeing and finishing assets to an
unaffiliated third party. Since September 12, 1995, the Company has been engaged
solely in knitting operations. Although the Company has experienced a period of
reduced cash flow as a result of these strategic changes, management has
undertaken these changes with the expectation that they will eventually lead to
improved operating results. There can be no assurance, however, that these
objectives will be achieved.
Scott Mills was incorporated on August 30, 1993 as a wholly-owned
subsidiary of Kleinert's Alabama. Prior to November 27, 1993, the business of
Scott Mills had been conducted as a division of Kleinert's Alabama. See "The
Merger - Background of the Merger" and "Certain Relationships and Related
Transactions." As used herein, unless the context otherwise indicates, the term
Scott Mills refers to Scott Mills, Inc. and its subsidiary, Scott Mills, Inc.,
of North Carolina, commencing November 28, 1993, and for periods prior to that
date, to a division of Kleinert's Alabama.
Scott Mills' fiscal year ends on the Saturday nearest November 30. In
fiscal year 1995 Scott Mills' fiscal year ended December 2, 1995 and contained
fifty-two weeks. The fiscal year ended December 3, 1994 contained fifty-three
weeks and the fiscal year ended November 27, 1993, contained fifty-two weeks.
The Company's executive offices are located at 120 W. Germantown Pike, Plymouth
Meeting, PA 19462, telephone number (610) 828-7261. The textile plant is located
at 2223 Plastics Drive, Gastonia, NC 28052.
Products and Customers
Scott Mills currently knits polyester, cotton/polyester blend, cotton
and acrylic fabrics at its Gastonia, North Carolina facility for sale to others,
including Kleinert's. Until September 1995, Scott Mills also was engaged in
dyeing and finishing fabrics. At that time, it eliminated that portion of its
operations and subcontracted that business to third parties. During fiscal year
1995, 54% of Scott Mills' net sales were to parties other than Kleinert's,
primarily garment manufacturers, including other children's wear manufacturers.
Scott Mills
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maintains an inventory of greige goods (undyed fabric) in order to respond
immediately to production requests. No customer other than Kleinert's accounted
for more than 10% of Scott Mills' net sales during fiscal year 1995. Scott Mills
is substantially dependent on Kleinert's, and expects that it will continue to
be dependent until its fabric sales to other third parties can be further
developed. In attempting to broaden its customer base, Scott Mills has focused
its efforts in addressing past customer problems, including shipping delays and
quality control problems. Scott Mills believes that the steps it has taken to
address these concerns will increase customer support for its product.
Although 100% polyester fabric historically accounted for the majority
of Scott Mills' textile sales, Scott Mills has increased its sales of other
fabrics, including 100% acrylic, 50% polyester/50% cotton and 100% cotton. These
other fabrics have characteristics which appeal to different segments of the
apparel market. Scott Mills believes that the ability to provide its customers
with several types of fabrics will improve Scott Mills' ability to become a
significant source of fabric used for the women's and children's apparel market.
Market Overview and Competition
The domestic textile industry is highly competitive and no one firm
dominates the United States market. In recent years there has been a trend
toward consolidation and capacity reduction in the U.S. textile industry.
A large number of domestic and foreign producers compete with Scott
Mills, most of which are larger and have greater financial resources than Scott
Mills. Although domestic textile producers currently are Scott Mills' greatest
competitors, foreign textile and apparel producers are significantly increasing
their penetration of the domestic market. Scott Mills expects foreign producers
to further expand their market share at the expense of domestic producers in the
years ahead.
The long-term prospects of Scott Mills will also be affected by the
ability of its apparel customers to remain competitive in the face of foreign
competition. Textile import decisions by U.S. retailers and apparel
manufacturers are influenced by a number of factors, including raw material
costs, lead times, political instability and infrastructure deficiencies of
newly industrializing countries, fluctuating currency exchange rates, individual
government policies and international agreements regarding textile and apparel
trade.
Raw Materials and Supplies
The principal raw materials used by Scott Mills are acrylic, polyester
and poly cotton yarns. The raw materials are knitted into five basic
constructions -- terrycloth, interlock, jersey, mini jacquard and rib. In
addition, Scott Mills makes variations of those basic constructions, including
fleece and novelty fabrics.
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Scott Mills believes that the consistent quality of raw materials and
services provided by its vendors is very important; therefore, it relies on one
principal supplier for each of its principal raw materials rather than relying
on a diversified supplier base. While the number of potential suppliers has
decreased in recent years, Scott Mills believes there are alternative sources of
raw materials should the need arise in the future.
Manufacturing
Scott Mills' manufacturing process begins with circular knitting
machines which knit various types of greige goods (undyed fabric) in a tube
producing jersey, interlock, mini jacquard, terrycloth, rib or novelty fabric.
After knitting, the fabric is batched into lots for dyeing, which since
September 1995 has been subcontracted to third parties. The knitting facility
normally operates 24 hours a day, five days a week. Fabric dyeing is a time
consuming operation, with cycle times ranging from four to twelve hours
depending on the type of fabric and the dye color. The finishing process sets
the width and length of the fabric as it is dried. In addition to the normal
drying process, fleece fabrics such as acrylic fleece are "napped" -- fed
through machines that fluff one side of the fabric using rotating wire brushes.
Subcontracting parties also mechanically compact 100% cotton fabric in order to
reduce wash shrinkage of garments without using resins. Reducing wash shrinkage
is becoming increasingly important to the retail consumer.
All fabrics are tested for consistency of fabric color in the dye
vessels and are tested again on a random basis after the last finishing process.
In addition, a piece of every fabric lot produced is sent through a series of
quality control tests to ensure compliance with the Consumer Product Safety Act,
Flammable Fabrics Act, Textile Fiber Products Identification Act and other rules
and regulations promulgated by the Consumer Products Safety Commission.
Marketing
Sales of Scott Mills' textile products are directed through Scott
Mills' in-house management primarily to garment manufacturers, including
children's wear manufacturers.
Backlog. The backlog of orders for the knitting operation was
approximately $907,000 at February 2, 1996. The backlog for the knitting, dyeing
and finishing operation was $1,644,000 at January 27, 1995. The reduced level of
orders reflects improvements in processing customer orders on a timely basis,
the elimination of the dyeing and finishing operations and reduced customer
purchases reflecting a more accurate mix of Scott Mills' business.
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Employees
As of January 1, 1996, Scott Mills had 43 full-time employees in
Gastonia, North Carolina, including 38 engaged in manufacturing, 2 clerical
employees, 3 engaged in general management. None of Scott Mills' employees are
covered by a collective agreement and Scott Mills believes its employee
relations are satisfactory.
Governmental and Environmental Regulation
Scott Mills and its operations are subject to federal, state and local
laws, including the Occupational Safety and Health Act ("OSHA"), the Consumer
Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Products
Identification Act and the rules and regulations promulgated thereunder. Scott
Mills believes it is in substantial compliance with all applicable governmental
requirements under these laws and regulations.
Scott Mills and its operations are subject to federal, state and local
laws and regulations concerning the protection of the environment, including
those relating to the generation and discharge of waste water, the generation,
storage, transportation and disposal of other wastes, and emissions into the
air. Scott Mills is not the subject of any proceedings under these laws and
regulations and believes it is in substantial compliance with all applicable
governmental requirements under these laws and regulations.
Scott Mills does not anticipate that environmental or OSHA law and
regulations, or compliance with other federal, state and local laws and
regulations, will require substantial expenditures or materially affect its
results of operations or financial condition during the foreseeable future
unless conditions unknown to Scott Mills are discovered or new or stricter
requirements are imposed.
Properties
Scott Mills does not own any real property. Scott Mills currently
leases a 27,000 square foot facility in Gastonia, North Carolina which it uses
for knitting operations and as a warehouse for yarn and finished goods. The
lease expires in April 2001, and Scott Mills has an option to purchase the
facility during the lease term for approximately $788,000.
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Scott Mills also subleases office space for its executive offices in
Plymouth Meeting, Pennsylvania from Kleinert's at an annual rent of $14,400
which is included in the fees Scott Mills pays Kleinert's for certain services.
See "Certain Relationships and Related Transactions."
Legal Proceedings
On September 13, 1995, a complaint was filed against Scott Mills in the
Superior Court Division of the General Court of Justice in Gaston, County, North
Carolina by Wesley R. Edwards, the Company's former chief operating officer and
a director. The complaint alleges, among other things, that Scott Mills breached
its obligations under Mr. Edwards' employment agreement by wrongfully
terminating his employment with Scott Mills. The complaint seeks damages in the
amount of approximately $722,000, consisting of amounts allegedly due Mr.
Edwards under his employment agreement as well as amounts to which Mr. Edwards
would allegedly be entitled by statute if it is determined that his employment
was wrongfully terminated. Scott Mills has filed an answer to the complaint in
which it denies Mr. Edwards' allegations and states that Mr. Edwards' employment
was terminated for cause. Scott Mills intends to vigorously defend against the
allegations.
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BENEFICIAL OWNERSHIP OF SCOTT MILLS COMMON STOCK
The following table sets forth certain information concerning the
holdings of each person who was known to Scott Mills to be the beneficial owner
of more than five percent (5%) of Scott Mills Common Stock and all shares
beneficially owned by each director, each nominee for director and by all
directors and executive officers as a group at the close of business on the
record date, September 5, 1996. Each of the persons named below has sole voting
power and sole investment power with respect to the shares set forth opposite
his name, except as otherwise noted. The information in the table was furnished
by the persons listed.
<TABLE>
<CAPTION>
Title of Class Name of Beneficial Owner Number of Shares Percent of Class
- -------------- ------------------------ ---------------- ----------------
<S> <C> <C> <C>
Common Jack Brier 368,347(1) 10.3%
Stock
Common Joseph J. Connors 61,100(2) 1.8%
Stock
Common Wesley Edwards 100,000(3) 2.9%
Stock
Common William Forman 262,500(4) 7.6%
Stock
Common E. Gerald Riesenbach 820,000(5) 24.1%
Stock
Common Estate of Louis Yaeger in
Stock care of the Bank of New York 270,785(6) 8.0%
Common All Directors and Executive
Stock Officers as a Group (five 1,663,647(1)(2)(3)(4)(5)(7) 48.0%
persons)
</TABLE>
(1) Includes 50,322 shares of Scott Mills Common Stock owned by Mr. Brier's
wife as to which Mr. Brier disclaims any beneficial interest. Also
includes immediately exercisable options to purchase 200,000 shares of
Scott Mills Common Stock granted under the 1993 Incentive Stock Option
Plan, the per share exercise price for which is greater than the
current market price for the Scott Mills Common Stock. Does not include
780,000 shares of Scott Mills Common Stock held in trust for the
benefit of Mr. Brier's children and as described in Note 5 below. The
address of Mr. Brier is c/o Scott Mills, Inc., 120 W. Germantown Pike,
Plymouth Meeting, Pennsylvania, 19462.
(2) Includes immediately exercisable options to purchase 40,000 shares of
Scott Mills Common Stock granted under the 1993 Incentive Stock Option
Plan as to which the
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per share exercise price for options to purchase 30,000 shares is
greater than the current market price for the Scott Mills Common Stock.
(3) Represents shares issuable upon conversion of a convertible
subordinated term loan note. See "Election of Directors - Certain
Relationships and Related Transactions."
(4) Includes an immediately exercisable option to purchase 100,000 shares
of Scott Mills Common Stock granted under the 1993 Incentive Stock
Option Plan, the exercise price for which is greater than the current
market price for the Scott Mills Common Stock. The address of Mr.
Forman is 8302 Old York Road, B66, Elkins Park, Pennsylvania, 19117.
(5) Includes an immediately exercisable option to purchase 40,000 shares of
Scott Mills Common Stock granted under the 1993 Incentive Stock Option
Plan as to which the per share exercise price for options to purchase
30,000 shares is greater than the current market price for the Scott
Mills Common Stock. Also includes 780,000 shares of Scott Mills Common
Stock held as trustee under an Indenture of Trust for the Benefit of
Jack Brier's Children, as to which shares Mr. Riesenbach disclaims
beneficial ownership. Also includes 20,000 shares issuable upon
conversion of a convertible subordinated term loan note. See "Election
of Directors - Certain Relationships and Related Transactions." The
address of Mr. Riesenbach is c/o Cozen and O'Connor, 1900 Market
Street, Philadelphia, Pennsylvania, 19103.
(6) The address of the Bank of New York is 48 Wall Street, New York, New
York, 10015.
(7) Also includes 1,700 shares issuable upon conversion of a convertible
subordinated term loan note held by an officer of Scott Mills. See
"Election of Directors - Certain Relationships and Related
Transactions."
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DESCRIPTION OF KLEINERT'S CAPITAL STOCK
The statements made under this caption include summaries of certain
provisions contained in Kleinert's Articles of Incorporation and in the
Pennsylvania Law. These statements do not purport to be complete and are
qualified in their entirety by reference to such articles, Kleinert's By-laws
and the Pennsylvania Law.
Common Stock
The Company is authorized to issue 10,000,000 shares of Kleinert's Common
Stock, $1.00 par value, of which 3,694,931 shares are issued and outstanding as
of August 2, 1996.
Holders of Kleinert's Common Stock are entitled to receive, subject to
the rights of any preferred stock then outstanding, dividends when and as
declared by the Board of Directors out of funds legally available therefor. See
"Kleinert's Dividend Policy." Holders of Kleinert's Common Stock have no
preemptive rights to purchase additional shares. Holders of Kleinert's Common
Stock are entitled to share on a pro rata basis, subject to the rights of any
preferred stock then outstanding, in the assets of Kleinert's legally available
for distribution to shareholders in the event of Kleinert's liquidation,
dissolution or winding up.
Holders of Kleinert's Common Stock are entitled to one vote per share
with respect to all matters voted upon by shareholders, including the election
of directors. Holders of Kleinert's Common Stock do not have cumulative voting
rights. The lack of cumulative voting by shareholders means that a significant
minority shareholder will not necessarily be able to elect one or more designees
to the Board of Directors. Therefore, that provision may be deemed anti-takeover
in nature.
The outstanding shares of Kleinert's Common Stock are fully paid and
non-assessable.
The transfer agent and registrar of Kleinert's Common Stock is American
Stock Transfer and Trust Company, New York, New York.
Preferred Stock
Kleinert's is authorized to issue 2,000,000 shares of preferred stock.
Shares of preferred stock may be issued from time to time at the discretion of
the Board of Directors without shareholder approval. The Board of Directors may
authorize issuances in one or more series and may fix and determine dividend and
liquidation preferences, voting rights, conversion privileges, redemption terms
and other privileges and rights of the shares of each series so authorized.
Kleinert's has no present plans to issue any shares of such stock.
The authorization of 2,000,000 shares of preferred stock, which the Board
of Directors may issue without shareholder approval for any corporate purpose,
may be considered "anti-takeover" in nature in that such provision may delay,
discourage or make more difficult the assumption of control of Kleinert's by
another entity or person through a tender offer, merger, proxy contest or other
transaction or series of transactions.
Pennsylvania Anti-takeover Laws
Certain provisions of the Pennsylvania Law, place limitations on mergers
and other "business combinations" between a Pennsylvania corporation and an
"interested shareholder" under certain circumstances. Such provisions may be
deemed to be anti-takeover in nature in that they may deter, discourage or make
more difficult the assumption of control of a Pennsylvania corporation,
including Kleinert's, by another entity or person.
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BENEFICIAL OWNERSHIP OF KLEINERT'S COMMON STOCK
The following table sets forth certain information concerning the
holdings of each person who was known to Kleinert's to be the beneficial owner
of more than five percent (5%) of Kleinert's Common Stock and all shares
beneficially owned by each director, each nominee for director, each executive
officer and by all directors and executive officers as a group at the close of
business on the record date, September 5, 1996. Each of the persons named below
has sole voting power and sole investment power with respect to the shares set
forth opposite his name, except as otherwise noted. The information in the table
was furnished by the persons listed.
<TABLE>
<CAPTION>
Title of Class Name of Beneficial Owner Number of Shares Percent of Class
- -------------- ------------------------ ---------------- ----------------
<S> <C> <C> <C>
Common Stock Jay B. Andrews 70,833(1) 1.9%
Common Stock Jack Brier 1,317,997(2) 34.3%
Common Stock Kenneth Brier 81,872(3)(4) 2.20%
Common Stock Joseph J. Connors 46,200(5) 1.2%
Common Stock William Forman 200,000(6) 5.4%
Common Stock Nathan Greenberg 39,000 1.05%
Common Stock Marvin Grossman 126,250(7) 3.4%
Common Stock E. Gerald Riesenbach 10,000 .3%
Common Stock Estate of Louis Yaeger in 270,785(8) 7.3%
care of The Bank of New
York
Common Stock All Directors and Executive 1,892,152(1)-(7) 49.7%
Officers as a Group (eight
persons)
</TABLE>
(1) Represents immediately exercisable options to purchase 70,833 shares of
Kleinert's Common Stock granted under the 1991 Incentive Stock Option
Plan.
(2) Includes 48,822 shares of Kleinert's Common Stock owned by Mr. Brier's
wife as to which Mr. Brier disclaims any beneficial interest. The
address of Mr. Brier is c/o Kleinert's, Inc., 120 W. Germantown Pike,
Plymouth Meeting, Pennsylvania, 19462.
(3) Includes immediately exercisable options to purchase 25,000 shares of
Kleinert's Common Stock granted to Mr. Kenneth Brier under
Non-Statutory Stock Option Agreements.
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(4) Includes 400 shares of Kleinert's Common Stock owned by Mr. Brier's
wife for herself and 900 shares of Kleinert's Common Stock owned by
their minor children, as to which Mr. Brier disclaims any beneficial
interest.
(5) Includes immediately exercisable options to purchase 25,000 shares of
Kleinert's Common Stock granted under the 1991 Incentive Stock Option
Plan.
(6) The address of Mr. Forman is 8302 Old York Road,, B66, Elkins Park,
Pennsylvania, 19117.
(7) Includes immediately exercisable options to purchase 37,500 shares of
Kleinert's Common Stock granted under the 1991 Incentive Stock Option
Plan.
(8) The address of The Bank of New York is 48 Wall Street, New York,
New York, 10015.
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<PAGE>
KLEINERT'S EXECUTIVE COMPENSATION
Following the Merger, the Surviving Corporation will be a wholly-owned
subsidiary of Kleinert's. Consequently, the directors and officers of Keinert's
will direct the management and policies of the Surviving Corporation. The
following sets forth information regarding compensation paid to Kleinert's
executive officers during the fiscal year ended December 2, 1995.
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid during each of Kleinert's last three fiscal years to Kleinert's
Chief Executive Officer and to each of Kleinert's other executive officers
whose salary and bonuses during fiscal year 1995 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
--------------
Annual Compensation Number of
------------------------------------------- Securities All Other
Name and Principal Fiscal Other Annual Underlying Compensation
Position Year Salary($) Bonus($) Compensation(1) Options (#) ($)(2)
------------------- -------- --------- --------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack Brier(3) ............... 1995 400,000 153,000 -- -- 140,000
Chairman of the Board; ...... 1994 300,000 124,000(4) -- -- --
Chief Executive Officer ..... 1993 300,000 110,000(4) -- -- --
Marvin Grossman ............. 1995 300,000 -- 61,381(5) -- 35,000
President of Kleinert's, Inc. 1994 298,000 -- 34,353(5) -- --
of Alabama .................. 1993 275,000 25,000 26,727(5) -- --
Jay Andrews ................. 1995 300,000 30,000 -- -- --
Executive Vice President of . 1994 298,000 -- -- -- --
Kleinert's, Inc. of Alabama . 1993 275,000 25,000 -- -- --
Joseph J. Connors ........... 1995 200,000 10,000 -- -- 8,750
Executive Vice President .... 1994 190,000 -- -- -- --
1993 158,333 -- -- -- --
</TABLE>
- ------
(1) Except as set forth in the above table regarding Marvin Grossman, such
compensation did not exceed for any named officer the lesser of $50,000
or 10% of such officer's total annual salary and bonus for 1995.
(2) Represents annual pre-retirement death benefits and annual retirement
benefits payable under Kleinert's Supplemental Income Plan, which for
Mr. Grossman and Mr. Connors are payable under a 15-year certain and life
annuity. Mr. Brier's benefit becomes payable at age 73 and is payable
over 7 years. Mr. Grossman's benefit becomes vested ratably through 1995.
Mr. Connors' benefit becomes vested at age 65.
(3) Mr. Brier also devotes significant time to Scott Mills as its Chairman and
Chief Executive Officer. The compensation set forth opposite Mr. Brier's
name in the table above reflects compensation paid by Kleinert's.
(4) See "Employment Agreement" below.
(5) Includes the value of commissions paid to Mr. Grossman ($26,492 in 1993,
$34,143 in 1994 and $61,381 in 1995).
<PAGE>
Fiscal Year End 1995 Option Values
The following table sets forth certain information relating to the number and
value of unexercised options to purchase Kleinert's Common Stock at December 2,
1995. No options were granted to, and no outstanding options were exercised by,
the named executive officers during fiscal year 1995.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
at December 2, 1995 at December 2, 1995
(Exercisable/Unexercisable) (Exercisable/Unexercisable)(1)
----------------------------------------- ----------------------------------
<S> <C> <C>
Jack Brier ............. 375,000/-- $4,181,250/--
Marvin Grossman ........ 37,500/-- 331,875/--
Jay Andrews ............ 62,500/-- 553,125/--
Joseph J. Connors ...... 25,000/-- 221,250/--
</TABLE>
- ------
(1) Values are calculated by subtracting the exercise price from the fair
market value of the Kleinert's Common Stock at December 2, 1995.
Employment Agreement
In November 1994, Jack Brier, Chairman of Kleinert's Board of Directors
and Chief Executive Officer, entered into a three-year employment agreement
with Kleinert's pursuant to which Mr. Brier is paid an annual salary of
$400,000. Pursuant to his current employment agreement and his prior
employment agreement, Mr. Brier also is entitled to receive an incentive
bonus equal to 3.1% of Kleinert's pre-tax income in excess of $1,901,000
(representing pre-tax income for fiscal year 1989) for any fiscal year ending
during the employment term. In fiscal year 1993, Mr. Brier earned $110,000,
which was paid in fiscal year 1994. In fiscal year 1994, Mr. Brier earned
$124,000 under this bonus agreement, which was paid in fiscal year 1995. In
fiscal year 1995 Mr. Brier earned a bonus of $153,000, which was paid in
fiscal year 1996.
Pension Plans
Kleinert's has a retirement program for substantially all of its
employees, including officers and directors who are employees, subject to
certain age and service requirements. The retirement program is composed of a
formula, which is .8% of annual earnings for each year of service. Normal
retirement is at age 65.
Total projected annual pension benefits at age 65 for Messrs. Brier,
Connors, Grossman and Andrews approximate $29,561, $40,224, $23,096, and
$28,156, respectively, and estimated credited years of service for each is 13,
39, 21 and 23 years, respectively.
ELECTION OF DIRECTORS
The Company's By-Laws provide that the Board of Directors has the
authority to determine the number of the Company's directors, provided that the
number not be less than three nor more than eleven. The Board has fixed the
number of directors at four, each of whom will be elected at the Meeting to
serve until the next annual meeting of shareholders and until his successor is
duly elected and qualified. Notwithstanding the foregoing, however, if the
Merger Agreement and the Merger are approved at the Meeting and the Merger is
consummated, each of the directors of Scott Mills will tender his resignation as
a director to become effective at the Effective Time. All of the nominees for
director are presently directors of Scott Mills. As stated above, the enclosed
proxy will be voted FOR the election as directors of such persons unless a
contrary instruction is given.
Management believes that all of the nominees are willing and able to
serve the Company as directors. If any nominee at the time of election is unable
or unwilling to serve or is otherwise unavailable for election, and as a
consequence thereof, other nominees are designated, the persons named in the
proxy or their substitutes will have the discretion and authority to vote or to
refrain from voting for other nominees in accordance with their judgment. The
Board of Directors does not have a nominating committee.
The following is a description of the nominees for election as director
and of the executive officers of the Company:
Director
Name Age Position Since
---- --- -------- -----
Jack Brier 70 Chairman 1993
Joseph J. Connors 39 Director 1993
William Forman 63 Director 1993
E. Gerald Riesenbach 57 Director and 1993
Secretary
Edwin Gowan* 59 Treasurer and Chief
Financial Officer
- -------------------------
* Mr. Gowan is not a nominee for director.
Jack Brier has been Chairman of the Board and Chief Executive Officer of
Scott Mills since its inception in August 1993. Mr. Brier is also Chairman and
Chief Executive Officer of Kleinert's, a position he has held for more than five
years, and devotes a significant portion of his working time to its operations.
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<PAGE>
Joseph J. Connors has been a director since August 1993. Mr. Connors has
been Executive Vice President of Kleinert's since 1993 and was Vice President of
Finance of Kleinert's from 1986-1993. Mr. Connors also is a director of
Mountbatten Surety, Inc., a standard Pennsylvania domiciled surety company.
William Forman has been a director since August 1993. Mr. Forman is a
private investor and has been a director of Kleinert's since 1984.
E. Gerald Riesenbach has been a director since August 1993. Mr.
Riesenbach is a partner of Cozen and O'Connor, the general counsel of Scott
Mills since February 1995. Prior to February 1995 and for more than five years,
Mr. Riesenbach was a partner of Wolf, Block, Schorr and Solis-Cohen, the general
counsel to Scott Mills from August 1993 until February 1995. He also is a
director of Kleinert's.
Edwin Gowan has been the Treasurer and Chief Financial Officer of Scott
Mills since June 1994. Prior to joining Scott Mills, Mr. Gowan was Vice
President of American Rental Centers, a food catering company, from July 1991 to
May 1994.
Committees
The Board of Directors maintains a Stock Option Committee. During fiscal
year 1995, the Stock Option Committee was responsible for establishing and
recommending to the Board of Directors those executive officers to whom stock
options should be granted and the number of shares of Scott Mills Common Stock
to which such options should be subject. Messrs. Connors and Riesenbach served
on the Committee, which met once during fiscal year 1995. The Company does not
have a standing compensation, nominating or audit committee. If the Merger is
not consummated, the Board of Directors intends to establish a joint
Compensation and Stock Option Committee, which will have the additional
responsibility of establishing salaries and bonuses of executive officers.
Board Meetings
The Board of Directors held six meetings during fiscal year 1995. Other
than Wesley Edwards (see "Information Concerning Scott Mills -- Legal
Proceedings"), none of the current directors attended less than 75% of the
aggregate of the total number of meetings of the Board of Directors and the
total number of meetings held by all committees of the Board of Directors in
which such director served.
Compensation of Directors
Directors do not receive any cash compensation for their services on the
Company's Board of Directors, but are reimbursed for reasonable travel and
lodging expenses incurred in attending Board and Committee meetings. Directors
are eligible to receive grants of stock options under the Company's 1993 Stock
Incentive Plan. Members of the Stock Option Committee receive non-discretionary
grants of stock options on an annual basis, the purpose of which is to enable
the Stock
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<PAGE>
Incentive Plan to satisfy the conditions relating to administration of employee
stock option plans set forth in Rule 16b-3 promulgated under the Exchange Act.
In each of fiscal year 1995 and fiscal year 1996, Messrs. Riesenbach and
Connors, the members of the Stock Option Committee, each received
non-discretionary grants of stock options to purchase 10,000 shares of Scott
Mills Common Stock.
Compensation Committee Interlocks and Insider Participation
Mr. Brier, Chairman of the Board of the Company, is also Chairman of the
Board and Chief Executive Officer of Kleinert's. He is also a member of the
Stock Option Committee of Kleinert's.
Mr. Connors, a member of the Stock Option Committee, is an executive
officer of Kleinert's and, in such capacity, oversaw the financial and
accounting functions of the Company's predecessor at a time when such
predecessor was a division of Kleinert's. See "Certain Relationships and Related
Transactions."
Mr. Riesenbach, a member of the Stock Option Committee, is a partner in
the law firm of Cozen and O'Connor, outside general counsel of the Company. He
is also a member of the Compensation Committee and Stock Option Committee of
Kleinert's.
Scott Mills Executive Compensation
The following table sets forth information with respect to compensation
paid by Scott Mills or its predecessor (see "Certain Relationships and Related
Transactions") during each of the last three fiscal years to Scott Mills' Chief
Executive Officer. No executive officer received salary and bonus in excess of
$100,000 for fiscal year 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------- -----------------------------------
Number of
Other Annual Securities
Name and Principal Compensation Underlying All Other
Position Fiscal Year Salary($)(1) Bonus($) ($) Options (#) Compensation(2)
- ------------------ ----------- ------------ --------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jack Brier (1) 1995 $ 56,250 -- -- -- $ 1,031(2)
Director, Chairman 1994 $106,250 -- -- 200,000 $ 1,594(2)
of the Board 1993 $150,000 -- -- -- --
</TABLE>
(1) Mr. Brier divides his time between Scott Mills and Kleinert's and receives
compensation and benefits from Kleinert's in consideration for his services
to such company. See "Certain Relationships and Related Transactions." The
compensation set forth in this table is the amount paid to Mr. Brier for
services rendered on behalf of Scott Mills and its predecessor.
(2) Represents employer contributions to the Company's 401(k) Savings Plan.
Fiscal Year End 1995 Option Values
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<PAGE>
The following table sets forth certain information relating to the number
and value of unexercised options at December 2, 1995. No options were granted to
the named person in the Summary Compensation Table above, and no options were
exercised by such person, during fiscal year 1995.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at December 2, 1995 December 2, 1995
Name (Exercisable/Unexercisable) (Exercisable/Unexercisable) (1)
- ---- ------------------------- -------------------------
Jack Brier 200,000/-- $-0-
(1) Values are calculated by subtracting the exercise price from the fair
market value of the Scott Mills Common Stock at December 2, 1995. Since the
price of the Scott Mills Common Stock was less than the exercise price for
the options, the options had no value on such date.
Certain Relationships And Related Transactions
Plan of Reorganization - Spin-Off
On November 27, 1993, pursuant to a certain Plan of Reorganization,
Kleinert's transferred substantially all of the assets of its Scott Mills
division, subject to certain liabilities, to Scott Mills, which at the time was
an indirect wholly-owned subsidiary of Kleinert's.
On March 15, 1994, Kleinert's distributed, by dividend to its
shareholders of record as of November 27, 1993, all of the issued and
outstanding common stock of Scott Mills (the "Spin-Off"). The purpose of the
Spin-Off was to create two independent companies which would enable Kleinert's
to concentrate its resources on its core apparel business, which involves the
design, manufacture, marketing and sale of infant's and children's clothing for
sale to retailers under both Kleinert's labels and private labels, and would
enable Scott Mills to concentrate its resources on the textile manufacturing
business.
In connection with the Spin-Off, Kleinert's contributed $1,300,000 to
Scott Mills, which represented the amount which Kleinert's anticipated was
sufficient to meet Scott Mills' cash requirements for its 1994 fiscal year. In
addition, Kleinert's retained the accounts receivable and agreed to pay the
Scott Mills' accounts payable at November 27, 1993. See "The Merger --
Background of the Merger."
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<PAGE>
Kleinert's Loan and Financing Transaction
Scott Mills executed a working capital agreement with Kleinert's
Alabama during fiscal year 1995 pursuant to which Kleinert's Alabama may, at
Scott Mills' request, provide in short-term borrowings. The borrowings, which
are payable upon demand by Kleinert's Alabama, are secured by a lien on all of
Scott Mills' assets. Repayments to Kleinert's are made by deductions against
invoice billings to Kleinert's by Scott Mills for textile fabrics purchased by
Kleinert's. At June 1, 1996, $2,488,000 was outstanding and due Kleinert's
Alabama under this agreement.
On December 4, 1994, Scott Mills borrowed $500,000 from Kleinert's,
Inc. of Delaware, a wholly-owned subsidiary of Kleinert's, on a subordinated
basis. The loan bears interest at 8.5% per annum, which is paid annually, and is
due on December 4, 1999. Also on December 4, 1994, Messrs. Edwards, Riesenbach
and Gowan, together with certain other persons affiliated with Scott Mills and
Kleinert's, (including Nathan Greenberg, a director of Kleinert's, and certain
other shareholders of Kleinert's, none of whom beneficially owns in excess of
5.0% of the issued and outstanding shares of Kleinert's Common Stock or Scott
Mills Common Stock) advanced loans to Scott Mills aggregating $500,000: (Mr.
Edwards - $50,000; Mr. Riesenbach - $10,000; Mr. Gowan - $10,000; Mr. Greenberg
- - $50,000). These loans were evidenced by subordinated five year term notes
bearing interest at 8.5% per annum. The notes are convertible into shares of
Scott Mills Common Stock at a price of $.50 per share. At June 30, 1996, the
<PAGE>
entire $500,000 principal balance remained outstanding. Although there is no
existing agreement among Scott Mills and these lenders regarding conversion of
the notes in connection with the Merger, Scott Mills does not anticipate that
any of the notes will be converted into Scott Mills Common Stock prior to the
Effective Time. See "The Merger -- Interests of Certain Persons in the Merger."
In December 1993, Scott Mills entered into a factoring agreement with a
lender which agreed to make cash advances of up to 85% of Scott Mills' eligible
accounts receivable. In connection therewith, Kleinert's agreed to indemnify the
lender against any liability from certain claims resulting from the transfer of
assets from the Scott Mills division of Kleinert's to Scott Mills pursuant to
the Spin-Off. In November 1995, Scott Mills terminated its factoring
arrangement.
Common Officers, Directors and Shareholders
Certain of the current directors of Scott Mills and its Chairman also
serve as officers, directors and/or employees of Kleinert's and receive
compensation from Kleinert's for such services. Accordingly, conflicts of
interest have arisen (including, for example, in connection with funding
provided by Kleinert's to Scott Mills as described above) and are likely in the
future to arise with respect to certain corporate opportunities and other
matters in light of their relationship with Scott Mills and Kleinert's. These
conflicts of interest will be eliminated if the Merger is consummated. If the
Merger is not consummated, these conflicts will likely continue to exist and no
procedures have been implemented to address these conflicts other than the
exercise by the directors of Scott Mills and Kleinert's of their duty of good
faith and loyalty to their respective shareholders. See "Interests of Certain
Persons in the Merger."
Performance of Management Services
Kleinert's provides certain third party services on behalf of Scott
Mills, including data processing, treasury functions, accounts payable, check
processing and management functions. Funds disbursed on behalf of Scott Mills
are subsequently reimbursed to Kleinert's. As a consequence, the balance due to
Kleinert's fluctuates based on the timing of disbursements on behalf of Scott
Mills and the timing of reimbursement by Scott Mills. The balance payable to
Kleinert's at June 1, 1996 was $2,488,000 and consisted primarily of the
unreimbursed balance of these disbursements, and management expense and interest
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<PAGE>
allocations. This unreimbursed balance due Kleinert's is secured by all assets
of Scott Mills. Advances under the working capital agreement are made at
Kleinert's discretion.
Kleinert's charged Scott Mills management fees of $85,000, $293,000 and
$415,000 in fiscal years 1995, 1994 and 1993 (while Scott Mills was still a
division of Kleinert's), respectively, for services performed by Kleinert's on
behalf of Scott Mills, including, financial, legal, accounting, credit and
collection, tax administration, risk management and human resources and general
management. Such charges were primarily allocated based on Kleinert's estimate
of the total cost of such services and the percentage of time or usage of such
services by Kleinert's to Scott Mills. Management believes the allocation method
was reasonable and the charges for these services are comparable to those which
would have been charged to Scott Mills by an unrelated party.
Office Lease
Scott Mills subleases its executive office space in Plymouth Meeting,
Pennsylvania from Kleinert's for an annual rental of $14,400.
Customer Relationships
Kleinert's was Scott Mills' largest customer during fiscal year 1995 and
individually accounted for 46% of Scott Mills' consolidated net sales. During
the three months ended March 2, 1996, Kleinert's accounted for approximately 91%
of Scott Mills' consolidated net sales. Although Kleinert's expects to continue
to purchase from Scott Mills during the remainder of fiscal year 1996 (assuming
the Merger is not consummated), there can be no assurance that Kleinert's will
continue to purchase from Scott Mills the same amount of piece goods that it has
purchased in the past.
REPORT OF THE SCOTT MILLS BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The compensation of executive officers of the Company (and its
predecessor) had been established by the Chairman of the Board of Directors of
Kleinert's prior to the effective date of the Spin-Off in November 1993, and
prior to the establishment of the Stock Option Committee (see "Certain
Relationships and Related Transactions"). The type and amount of such
compensation was established based on the Chairman's judgment of the executive's
past and prospective contribution to the Company's performance. There was no
formal bonus program for executive officers in fiscal year 1995.
In connection with the Spin-Off, the Company created a joint Compensation
and Stock Option Committee of the Board of Directors. This Committee is
responsible for determining the compensation levels of the Company's executive
officers, such compensation to be comprised of three separate components:
salary, bonus and stock options. The objective of the Committee is to provide
compensation and benefits that will attract and retain highly qualified
executive officers and key employees in an effort to enhance shareholder value.
The Company attempts to realize these goals by providing competitive
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<PAGE>
compensation and permitting executive officers to take an ownership stake in the
Company. The Committee has access to independent compensation data and are
authorized, if determined appropriate in any particular case, to engage outside
compensation consultants.
The Company's philosophy with respect to setting base salary is to
compensate its executive officers at a rate that is competitive to salaries of
officers of companies comparable to the Company in business, size and location.
The Committee believes that employee equity ownership provides
significant additional motivation to executive officers to maximize value for
the Company's shareholders and, therefore, periodically recommends to the Board
of Directors grants of stock options to the Company's executive officers and
directors. Stock options are granted typically at prevailing market price and,
therefore, will only have value if the Company's stock price increases over the
exercise price. The Committee believes that the grant of stock options provides
a long term incentive to such persons to contribute to the growth of the Company
and establishes a direct link between compensation and shareholder return,
measured by the same index used by shareholders to measure Company performance.
The terms of options granted by the Board of Directors, including vesting,
exercisability and option term, are determined by the Board of Directors upon
recommendation by the Committee, which recommendation is based upon relative
position and responsibility of each executive officer, historical and expected
contributions of each officer of the Company, previous option grants to
executive officers and a review of competitive equity compensation for executive
officers of similar rank in companies that are comparable to the Company's
industry, geographic location and size. For information regarding recent options
granted to the Company's executive officers and directors, reference is made to
the table set forth in the proxy statement under the caption "Scott Mills
Executive Compensation."
Board of Directors
Jack Brier William Forman
Joseph J. Connors E. Gerald Riesenbach
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<PAGE>
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
common stock of the Company with the cumulative return on the S&P Midcap 400
Index and the S&P Textile-Apparel Manufacturers Index for the period commencing
May 17, 1994 (the first date on which Scott Mills Common Stock was publicly
traded). This graph assumes the investment of $100 in the Company's common stock
on May 17, 1994 and in such indices over the same period.
[GRAPH]
In the printed version there appears a line graph depicting the following.
5/18/94 1994 1995
------- ---- ----
S&P MidCap 400 (entire) 100 99.41 131.69
S&P 500-subcategory #465 Textiles 100 101.47 104.06
Scott Mills 100 83.33 8.33
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons who own more than ten percent (10%) of a registered class
of the Company's common stock (collectively, the "Reporting Persons") to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and to furnish the Company with copies of these reports. Based on the
Company's review of the copies of these reports received by it, the Company
believes that all filings required to be made by the Reporting Persons for the
period December 3, 1994 through December 2, 1995 were made on a timely basis.
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<PAGE>
RELATIONSHIP WITH INDEPENDENT AUDITORS
Scott Mills engaged Ernst & Young LLP as its independent auditors to
audit the Company's financial statements for the fiscal year ending December 2,
1995. A representative of Ernst & Young LLP will be present at the meeting with
the opportunity to make a statement if he desires to do so and to answer
appropriate questions.
PROPOSALS OF SECURITY HOLDERS
All proposals of any shareholder of the Company which the holder desires
be presented at the next Annual Meeting of Shareholders and be included in the
proxy statement and form of proxy prepared for that meeting must be received by
the Company at its principal executive offices no later than ________, 1996. All
such proposals must be submitted in writing to the Secretary of the Company at
the address appearing on the notice accompanying this proxy statement.
LEGAL MATTERS
The legality of the shares of Kleinert's Common Stock to be issued in the
Merger to the Scott Mills shareholders will be passed upon by Cozen and
O'Connor. Additionally, Cozen and O'Connor will issue an opinion to the effect
that the Merger will have the Federal income tax consequences summarized herein
under "Certain Federal Income Tax Consequences of the Merger." E. Gerald
Riesenbach, a senior member of Cozen and O'Connor, is a director of Kleinert's
and Scott Mills.
EXPERTS
The consolidated financial statements of Kleinert's Inc. at December 2,
1995, and for each of the two years in the period then ended, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, and for the year ended November 27, 1993, by Price
Waterhouse LLP, independent accountants, as set forth in their respective
reports thereon appearing elsewhere herein, and are given upon the authority of
such firms as experts in accounting and auditing.
The consolidated financial statements of Scott Mills Inc. at December 2,
1995, and for each of the two years in the period then ended, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, and for the year ended November 27, 1993, by Price
Waterhouse LLP, independent accountants, as set forth in their respective
reports thereon (which contain explanatory paragraphs with respect to their
ability to continue as a going concern as mentioned in Note 2 to the
consolidated financial statements) appearing elsewhere herein, and are given
upon the authority of such firms as experts in accounting and auditing.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
Historical Audited Consolidated Financial Statements of Kleinert's, Inc.:
<S> <C>
Reports of Independent Auditors ........................................................... F-1
Consolidated Balance Sheets at December 2, 1995 and December 3, 1994 ...................... F-3
Consolidated Statements of Operations for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993 ................................ F-5
Consolidated Statements of Shareholders' Equity for the fiscal years ended.
December 2, 1995, December 3, 1994 and November 27, 1993 ................................ F-6
Consolidated Statements of Cash Flow for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993 ................................ F-7
Notes to Consolidated Financial Statements ................................................ F-9
Historical Unaudited Consolidated Financial Statements of Kleinert's, Inc.:
Consolidated Statements of Operations for the six months ended
June 1, 1996 and June 3, 1995 ........................................................... F-29
Consolidated Balance Sheets at June 1, 1996 and June 3, 1995 .............................. F-30
Consolidated Statements of Cash Flow for the six months ended
June 1, 1996 and June 3, 1995 ........................................................... F-32
Notes to Unaudited Consolidated Financial Statements ...................................... F-34
Historical Audited Consolidated Financial Statements of Scott Mills, Inc.:
Report of Independent Auditors ............................................................ F-36
Report of Independent Accountants ......................................................... F-37
Consolidated Balance Sheets at December 2, 1995 and December 3, 1994 ...................... F-38
Consolidated Statements of Operations for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993 ................................ F-40
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993 ................................ F-41
Consolidated Statements of Cash Flow for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993 ................................ F-42
Notes to Consolidated Financial Statements ................................................ F-44
Historical Unaudited Consolidated Financial Statements of Scott Mills, Inc.:
Consolidated Statements of Operations for the six months ended
June 1, 1996 and June 3, 1995 .......................................................... F-61
Consolidated Balance Sheets at June 3, 1996 and December 2, 1995 ......................... F-62
Consolidated Statements of Cash Flow for the six months ended
June 1, 1996 and June 3, 1995 .......................................................... F-65
Notes to Unaudited Consolidated Financial Statements ..................................... F-66
Unaudited Pro Forma Combined Condensed Financial Statements of
Kleinert's, Inc. and Scott Mills, Inc. ...................................................... F-68
Unaudited Pro Forma Combined Condensed Balance Sheet at June 1, 1996...................... F-69
Unaudited Pro Forma Combined Condensed Statements of Operations for the
six months ended June 1, 1996 and for the fiscal year
ended December 2, 1995 ................................................................. F-71
Footnotes to Unaudited Pro Forma Combined Condensed
Financial Information .................................................................. F-72
</TABLE>
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<PAGE>
Historical Audited Consolidated Financial Statements of Kleinert's, Inc.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Kleinert's, Inc.
We have audited the accompanying consolidated balance sheets of Kleinert's Inc.
as of December 2, 1995 and December 3, 1994 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended December 2, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kleinert's, Inc.
at December 2, 1995 and December 3, 1994, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 2, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Company changed
its method of accounting for income taxes.
/s/ ERNST & YOUNG LLP
------------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
February 9, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of Kleinert's, Inc.
In our opinion, the accompanying consolidated statements of operations, of
shareholders' equity and of cash flows of Kleinert's, Inc. and its subsidiaries
present fairly, in all material respects, the results of their operations and
their cash flows for the year ended November 27, 1993, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company'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 generally accepted auditing
standards 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.
/s/ PRICE WATERHOUSE LLP
----------------------------
Price Waterhouse LLP
Philadelphia, Pennsylvania
February 14, 1994
F-2
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 2, 1995 AND DECEMBER 3, 1994
($000's omitted)
ASSETS 1995 1994
------ ---- ----
Current assets:
Cash $ 327 $ 132
Accounts receivable (net of allowances
for doubtful accounts of $259 and
$188, respectively) 21,899 18,036
Inventories:
Raw materials 4,222 4,077
Work-in-process 4,321 2,942
Finished goods 5,987 5,677
------- -------
Total inventories 14,530 12,696
------- -------
Other current assets 2,380 1,613
------- -------
Total current assets 39,136 32,477
------- -------
Property, plant and equipment, at cost
Building and leasehold improvements 5,106 4,622
Machinery and equipment 6,070 5,578
Furniture and fixtures 368 369
------- -------
11,544 10,569
Less accumulated depreciation 6,051 5,427
------- -------
Net property, plant and equipment 5,493 5,142
------- -------
Cash surrender value (net) 2,402 2,087
Other assets 1,191 756
------- -------
$48,222 $40,462
======= =======
See notes to consolidated financial statements
F-3
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(continued)
DECEMBER 2, 1995 AND DECEMBER 3, 1994
($000's omitted)
LIABILITIES and SHAREHOLDERS' EQUITY 1995 1994
- ------------------------------------ ---- ----
Current liabilities:
Notes payable and current portion of
long-term debt $ 14,195 $ 10,695
Accounts payable 5,024 3,585
Accrued expenses 1,360 1,686
-------- --------
Total current liabilities 20,579 15,966
Deferred income taxes 134 123
Long-term debt 3,429 4,624
-------- --------
Total liabilities 24,142 20,713
-------- --------
Shareholders' equity
Preferred stock - par value $1.00 per
share, 2,000,000 shares authorized,
none issued -- --
Common stock - par value $1.00 per
share, 10,000,000 shares authorized,
3,798,398 shares issued, 3,798 3,798
Capital in excess of par value 10,626 10,626
Retained earnings 12,872 8,541
-------- --------
27,296 22,965
Less:
Treasury stock, at cost, 466,967
common shares (3,216) (3,216)
-------- --------
Total shareholders' equity 24,080 19,749
-------- --------
$ 48,222 $ 40,462
======== ========
See notes to consolidated financial statements
F-4
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
($000's omitted)
1995 1994 1993
------- ------- --------
Net sales $75,121 $69,262 $ 61,428
Cost of goods sold 61,636 56,786 50,396
------- ------- --------
Gross profit 13,485 12,476 11,032
------- ------- --------
Selling, general and administrative
expenses 5,151 5,150 4,625
Interest expense 1,651 1,403 1,288
------- ------- --------
6,802 6,553 5,913
------- ------- --------
Income from continuing operations
before income taxes and cumulative
effect of change in accounting
for income taxes 6,683 5,923 5,119
Provision for income taxes 2,352 2,051 1,794
------- ------- --------
Income from continuing operations
before cumulative effect of change
in accounting for income taxes 4,331 3,872 3,325
Discontinued operations:
Loss from operations of
discontinued textile business net
of applicable income tax benefit -- -- (1,263)
------- ------- --------
Income before cumulative effect of
change in accounting for income
taxes 4,331 3,872 2,062
------- ------- --------
Cumulative effect of change in
accounting for income taxes -- 210 --
------- ------- --------
Net income $ 4,331 $ 4,082 $ 2,062
======= ======= ========
Earnings per share:
Income from continuing operations
before change in accounting for income
taxes $ 1.15 $ 1.04 $ .93
Discontinued operations -- -- (.35)
Cumulative effect of change in
accounting for income taxes -- .06 --
------- ------- --------
Net income $ 1.15 $ 1.10 $ .58
======= ======= ========
Weighted average shares outstanding 3,750 3,702 3,569
======= ======= ========
See notes to consolidated financial statements
F-5
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
($000's omitted except share data)
<TABLE>
<CAPTION>
Number of Capital in Total
Shares Common Excess of Retained Treasury Shareholders'
Outstanding Stock Par Value Earnings Stock Equity
----------- ----- --------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 28, 1992 3,255,098 $ 3,653 $ 9,788 $ 6,398 $(2,383) $17,456
Exercise of non-statutory stock
options 137,500 137 725 862
Repurchase of common stock (25,000) (289) (289)
Dividend payable (4,001) (4,001)
Net income -- -- -- 2,062 -- 2,062
---------- ------- -------- ------- ------- -------
Balance, November 27, 1993 3,367,598 3,790 10,513 4,459 (2,672) 16,090
Exercise of incentive stock
options 8,333 8 61 69
Repurchase of common stock (44,500) (544) (544)
Tax benefit of exercise of stock
options 52 52
Net income -- -- -- 4,082 -- 4,082
---------- ------- -------- ------- ------- -------
Balance, December 3, 1994 3,331,431 3,798 10,626 8,541 (3,216) 19,749
========== ======= ======== ======= ======= =======
Net income -- -- -- 4,331 -- 4,331
---------- ------- -------- ------- ------- -------
Balance, December 2, 1995 3,331,431 $ 3,798 $ 10,626 $12,872 $(3,216) $24,080
========== ======= ======== ======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
($000's omitted)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash flows from operations:
Net income $ 4,331 $ 4,082 $ 2,062
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 676 674 1,361
Cumulative effect of change in
accounting principle -- (210) --
Provision for estimated operating
losses on discontinued operations -- -- (492)
Loss on disposal of fixed assets -- 29 2
Provision for losses on
accounts receivable 71 80 39
Change in assets and liabilities:
Increase in accounts
receivable (3,915) (318) (1,613)
(Increase) decrease in inventory (1,834) (943) 1,736
(Increase) decrease in other
current assets (767) (450) 652
Increase (decrease) in accounts
payable and accrued expenses 1,186 (1,529) 1,998
Increase (decrease) in income
taxes payable (73) -- (20)
Increase in deferred income taxes 11 89 36
------- ------- -------
Total adjustments (4,645) (2,578) 3,699
------- ------- -------
Net cash (used in) provided by
operating activities (314) 1,504 5,761
------- ------- -------
Cash flows from investing activities:
Capital expenditures (1,012) (618) (704)
Note receivable related party (500) -- --
Proceeds from sale of non-operating
property -- 185 --
Decrease in restricted cash -- -- 237
Additions to other assets (384) (457) (570)
Proceeds from note receivable 100 -- --
------- ------- -------
Net cash used in investing
activities (1,796) (890) (1,037)
------- ------- -------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
($000's omitted)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings and (repayments) under
revolving line-of-credit agreement 3,500 1,389 (3,229)
Proceeds from long-term debt -- 544 289
Dividends paid -- (1,300) --
Principal payments on debt (1,195) (1,389) (1,445)
Principal payments on capital leases -- (18) (604)
Proceeds from exercise of stock options -- 69 862
Payments to acquire treasury stock -- (544) (289)
------- ------- -------
Net cash provided by (used in)
financing activities 2,305 (1,249) (4,416)
------- ------- -------
Net increase (decrease) in cash 195 (635) 308
Cash at beginning of period 132 767 459
------- ------- -------
Cash at end of period $ 327 $ 132 $ 767
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,730 $ 1,150 $ 1,650
Income taxes $ 2,046 $ 2,289 $ 1,010
Equipment purchased under capital leases -- -- $ 140
Accrued dividends payable -- -- $ 4,001
Tax benefit of exercise of stock options -- $ 52 --
Note receivable on sale of non-operating
property -- $ 350 --
</TABLE>
The Consolidated Statements of Cash Flows include activity related to the
Discontinued Operations for fiscal year 1993.
See notes to consolidated financial statements
F-8
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies
Business of the Company - The Company manufactures and sells infants' and
children's sleepwear and activewear and personal apparel, including such items
as dress and garment shields. The Company's principal customers are national
chain stores, mass merchandisers, department stores and specialty stores. See
Note 10 for information on business segments. The Company treated its textile
division (Scott Mills) as a discontinued operation during fiscal year 1993.
Scott Mills was spun-off in a tax-free distribution on November 27, 1993.
Principles of Consolidation - The consolidated financial statements include
the accounts of Kleinert's, Inc. (Kleinert's) and its wholly-owned subsidiaries,
Kleinert's, Inc. of Alabama, Kleinert's, Inc. of Delaware and Kleinert's, Inc.
of New York. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-9
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
Fiscal Year - The Company utilizes a 52-53 week fiscal year ending on the
Saturday nearest November 30. Fiscal year 1995 and 1993 are fifty two week
years. Fiscal year 1994 was a fifty three week year.
Inventories - Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis. Aggregate corporate general and
administrative charges were $1,704,000, $961,000 and $1,524,000 for fiscal years
1995, 1994 and 1993, respectively. Such costs remaining in inventory at December
3, 1995 and November 27, 1994 were approximately $390,000 and $211,000,
respectively.
Revenue Recognition - The Company's sale of product is made net of returns,
allowances and discounts.
Property, Plant and Equipment - The Company depreciates property, plant and
equipment over their estimated useful lives, principally on a straight-line
basis.
Useful Lives
------------
Buildings 30-40 years
Leasehold improvements Term of lease
Machinery and equipment 3-10 years
Furniture and fixtures 3-5 years
Earnings Per Share - Earnings per share has been computed based on the
weighted average number of common shares outstanding
F-10
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
and common stock equivalent shares deemed outstanding during each period
presented.
Goodwill - Goodwill, included in other assets, represents the excess of the
cost over the fair value of the net assets at the date of acquisition and is
being amortized using the straight-line method over 40 years.
Income Taxes - Effective November 28, 1993, the Company accounts for income
taxes under the provisions of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" (FAS #109). This statement requires
recognition of deferred tax assets and liabilities for all timing differences
resulting from reporting certain income and expense items differently for income
tax and financial accounting purposes. In prior fiscal years income taxes were
accounted for under APB Opinion No. 11. The impact of the adoption of the change
in accounting for income taxes during fiscal year 1994 was $210,000.
Financial Statement Reclassification - Certain prior years' amounts in the
consolidated financial statements have been reclassified to conform to the
fiscal year 1995 presentation.
Stock Based Compensation - The Company accounts for stock options according
to the provisions of Accounting Principles
F-11
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
Board Opinion 25 (APB 25), Accounting for Stock Issued to Employees. In October
1995, the Financial Accounting Standards Board issued FASB Statement No. 123,
Accounting for Stock-Based Compensation. The new standard prescribes new
accounting and reporting standards which reflect the standards' "fair value
method" to estimate expense associated with stock based compensations plans.
Companies may elect to continue to use existing accounting rules or adopt the
"fair value method" for expense recognition. Companies that elect to continue to
use existing accounting rules will be required to provide pro-forma disclosures
of what net income and earnings per share would have been had the new "fair
value method" been used. The Company will elect to continue to use existing
accounting rules. The new statement is effective for fiscal years beginning
after December 15, 1995. Accordingly, the new standards pro-forma disclosure
provisions will be required for the Company for its fiscal year ending November
29, 1997.
Accounting for the Impairment of Long-Lived Assets - In March 1995, the
FASB issued Statement No. 121 Accounting for the Impairment of Long-Lived Assets
to Be disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
F-12
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
are less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
statement is effective for fiscal years beginning after December 15, 1995 and
accordingly will not be required until fiscal year 1997. The Company expects the
impact of adoption in 1997 will be insignificant.
2. Financing Arrangements (continued)
Financing arrangements consist of the following:
1995 1994
---- ----
Current Long-Term Current Long-Term
------- --------- ------- ---------
($000's omitted)
Term loans $ 1,000 $ 2,649 $ 1,000 $ 3,649
Short-term borrowings,
reclassified -- -- -- --
Revolving line
of credit 13,000 -- 9,500 --
Revenue bond 195 780 195 975
Capital leases -- -- -- --
------- ------- ------- -------
$14,195 $ 3,429 $10,695 $ 4,624
======= ======= ======= =======
F-13
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
2. Financing Arrangements (continued)
The following information relates to the Company's short-term revolving
lines of credit:
Weighted
Weighted Maximum Amount Average Amount
Average Outstanding At Outstanding
Interest Any Fiscal Month-End During The
Rate (1) During the Period Period (2)
-------- ----------------- ----------
($000's omitted)
1995 7.0% $23,480 $13,521
1994 6.3% $20,540 $11,388
1993 5.6% $19,475 $12,866
(1) The weighted average interest rate for each period was computed by
dividing interest expense by the weighted average amount outstanding.
(2) The weighted average amount outstanding for each period was computed by
averaging the daily balances during the year.
The Company's agreement with its banks provided for a $42,000,000 unsecured
line of credit for use in fiscal year 1995 bearing interest between 6.40% and
the prime rate (8.75% as of December 2, 1995) and required compensating
balances. For fiscal year 1996, the Company has available $42,000,000 in
unsecured lines of credit. On December 2, 1995 the unused portion of the lines
of credit was $29,000,000. The Company's unsecured term loan is payable in
quarterly installments of $250,000 through September 1999 and bears interest at
the prime rate plus one-quarter percent. The prime rate was 8.75% at December 2,
1995 and 8.5% at December 3, 1994. On November 10, 1994 the Company amended the
term loan to borrow an additional $544,000.
2. Financing Arrangements (continued)
The banking agreements require the Company to maintain financial statement
covenants, including requirements on pre-tax income, working capital, tangible
net worth, debt and capital expenditures. In addition, no cash dividends may be
paid on the common stock unless the Company's net worth exceeds $15,000,000
after the payment of dividends. With the exception of this net worth covenant,
retained earnings are free of restrictions and the Company had $9,080,000 of
retained earnings available for dividends at December 2, 1995. The Company holds
an industrial revenue bond from the Industrial Development Board of the City of
Elba, Alabama collateralized by a first mortgage on the Elba, Alabama facility.
This loan is payable in annual installments of $195,000 with the final payment
due in October 2000. Interest is payable quarterly at a variable rate of 85% of
the bank's prime rate. Prime rate was 8.75% at December 2, 1995 and 8.5% at
December 3, 1994.
Aggregate maturities of long-term debt after December 2, 1995, are as
follows: 1996 - $1,195,000; 1997 - $1,195,000; 1998 - $1,195,000; 1999 -
$844,000; 2000 - $195,000; thereafter - 0.
Borrowings against the cash surrender value of officers' life insurance
policies amounted to $3,450,000 and $3,030,000 as of December 2, 1995 and
December 3, 1994, respectively. These
F-14
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
2. Financing Arrangements (continued)
borrowings are recorded as a reduction in the related assets and bear interest
ranging from 7.11% to 7.20% in fiscal year 1995.
3. Discontinued Operations
On February 11, 1993, the Board of Directors approved a plan to dispose of
the Company's textile division, known as Scott Mills. In August 1993, the
Company organized Scott Mills, Inc., and its wholly-owned subsidiary, Scott
Mills, Inc. of North Carolina, to operate the Scott Mills Division independently
of the Company effective after November 27, 1993. On November 16, 1993, the
Board of Directors declared a distribution of one share of Scott Mills, Inc.
common stock for every one share of Kleinert's, Inc. common stock payable to the
holders of record of Kleinert's, Inc. common stock, par value $1.00 per share,
at the close of business on the record date, November 27, 1993.
The distribution, which occurred on March 15, 1994, resulted in the
separation of the Company into two publicly-owned companies with each company
continuing to engage in the business in which it had previously engaged. Certain
directors of Scott Mills, Inc. including its Chief Executive Officer, also serve
as officers, or directors of the Company.
In connection with the transfer of assets to Scott Mills, the Company
contributed $1,300,000 in cash to Scott Mills and retained the accounts
receivable and accounts payable at November 27, 1993. The assets distributed to
Scott Mills included cash,
F-15
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
3. Discontinued Operations (continued)
leasehold improvements, machinery and equipment, furniture and fixtures,
deposits on machinery and other assets including prepaid expenses and cash
surrender value of life insurance policy.
In April 1994 the Internal Revenue Service granted the Company's previously
filed Private Letter Ruling request for tax free treatment of the transfer of
Scott Mills ownership to the Company's shareholders.
The accompanying consolidated financial statements reflect the textile
division as a discontinued operation for fiscal year 1993; accordingly, the
operating results of the textile division are excluded from continuing
operations for that year.
The loss from discontinued operations included in the Consolidated
Statement of Operations is as follows:
1993
----
($000's omitted)
Operating loss before income
tax benefit $ 2,677
Income tax benefit (922)
-------
Net loss 1,755
Less fiscal year 1993
provision for additional
operating losses through
date of disposal, net of
income tax benefit of $249 (492)
-------
Loss from discontinued
operations $ 1,263
=======
4. Income Taxes
Income tax expense (benefit) is included in the financial statements as
follows:
Liability Method Deferred Method
---------------- ---------------
1995 1994 1993
---- ---- ----
Continuing operations $ 2,352,000 $ 2,051,000 $ 1,794,000
Discontinued operations -- -- (673,000)
----------- ----------- -----------
$ 2,352,000 $ 2,051,000 $ 1,121,000
=========== =========== ===========
The provision for income taxes consists of the following:
Liability Method Deferred Method
---------------- ---------------
1995 1994 1993
---- ---- ----
Current:
Federal $ 2,245,000 $ 1,838,000 $ 1,201,000
State 135,000 43,000 --
----------- ----------- -----------
2,380,000 1,881,000 1,201,000
----------- ----------- -----------
Deferred:
Federal (30,000) 176,000 (80,000)
State 2,000 (6,000) --
----------- ----------- -----------
(28,000) 170,000 (80,000)
----------- ----------- -----------
$ 2,352,000 $ 2,051,000 $ 1,121,000
=========== =========== ===========
F-16
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
The components of the deferred tax provision, including the related tax
effects of timing differences, are as follows:
Deferred Method
1993
----
Depreciation $ 22,000
Inventory reserves (58,000)
Benefit plans (32,000)
Bad debt expense (13,000)
Charitable contributions 21,000
Capital leases (13,000)
Vacation (7,000)
--------
$(80,000)
4. Income Taxes (continued)
Income tax expense differs from the amount computed by applying the federal
tax rate to income before income taxes are as follows:
<TABLE>
<CAPTION>
Liability Method Deferred Method
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to
income from continuing opera-
tions before income taxes $ 2,272,000 $ 2,014,000 $ 1,740,000
State taxes, net of federal
benefit 90,000 28,000 41,000
Other (10,000) 9,000 13,000
----------- ----------- -----------
2,352,000 2,051,000 1,794,000
----------- ----------- -----------
Income tax benefit of
discontinued operations -- -- (673,000)
----------- ----------- -----------
$ 2,352,000 $ 2,051,000 $ 1,121,000
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets, as of December 2, 1995 and
December 3, 1994 are as follows:
1995 1994
---- ----
Deferred Tax Assets:
Benefit plans $156,000 $121,000
Inventory reserves 75,000 88,000
Bad debt expense 92,000 68,000
Vacation 15,000 27,000
-------- --------
Total deferred tax assets $338,000 $304,000
-------- --------
Deferred Tax Liabilities:
Depreciation $290,000 $244,000
Charitable contributions -- 40,000
-------- --------
Total deferred tax liabilities 290,000 284,000
-------- -------
Net deferred tax asset $ 48,000 $ 20,000
======== ========
F-17
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
5. Retirement Plans
The Company has a defined benefit pension plan (the Plan) covering
substantially all of its employees subject to certain age and service
requirements. Scott Mills' employee participation in the pension plan terminated
on December 31, 1993, resulting in a $23,000 gain. Normal costs and past service
costs are amortized over thirty years. The Company contributions to the Plan are
made in accordance with applicable E.R.I.S.A. and tax regulations. Assets of the
Plan are invested in equity, corporate and government bonds and short-term
instruments.
Pension costs for fiscal years 1995, 1994 and 1993 are as follows:
1995 1994 1993
---- ---- ----
Benefits earned during the period $ 289,688 $ 271,405 $ 275,657
Interest cost on benefits earned
in prior years 231,054 209,540 182,751
Net investment (income) loss (475,375) 88,677 (213,693)
Net amortization and deferral 207,339 (317,020) 10,696
--------- --------- ---------
$ 252,706 $ 252,602 $ 255,411
========= ========= =========
F-18
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
5. Retirement Plans (continued)
The projected benefit obligation below is based on the following
assumptions:
1995 1994 1993
---- ---- ----
Discount rate 7.0% 7.75% 7.25%
Weighted average expected
long-term rate of return 8.75% 7.75% 7.25%
Annual rate of increased
compensation 4.0% 5.0% 5.0%
The following is a reconciliation of the Plan's assets and liabilities to
amounts recorded in the Company's financial statements:
1995 1994
---- ----
Present value of future benefit
payments based on service
to date and present pay levels:
Vested.............................. $3,295,523 $2,506,847
Non-vested.......................... 88,664 56,531
---------- ----------
Accumulated benefit obligation ........ 3,384,187 2,563,378
Projected pay increases................ 472,967 389,001
---------- ----------
Projected benefit obligation (PBO).. 3,857,154 2,952,379
Fair value of plan assets
available for benefits................. 3,494,944 2,916,825
---------- ----------
Assets (Liabilities) in excess of PBO... (362,210) (35,554)
Items not yet recognized in the Company's balance sheet:
Unamortized transition asset........ (130,646) (149,309)
Unamortized prior service cost...... 27,707 38,318
Unrecognized net actuarial and
investment losses................. 560,099 247,952
---------- ----------
Prepaid pension cost $ 94,950 $ 101,407
========== ==========
F-19
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
5. Retirement Plans (continued)
Participants' benefits are fully vested after five years, and future
benefit accruals are 0.8% of each year's compensation.
The Company has supplemental retirement agreements with certain key
employees. The cost of these benefits, which are funded with life insurance
contracts, are expensed over the employees' service lives and amounted to
$104,000, $58,000, and $94,000 in fiscal years 1995, 1994, and 1993,
respectively.
6. Property, Plant and Equipment and Lease Commitments
Property, plant and equipment at December 2, 1995 and December 3, 1994
includes equipment under capital leases with a cost of $988,000 and a net book
value of $341,000 and $440,000 respectively. There are no future minimum lease
payments remaining to be paid at December 2, 1995.
Depreciation expense was $661,000, $659,000 and $680,000 for fiscal years
1995, 1994 and 1993 respectively.
F-20
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
6. Property, Plant and Equipment and Lease Commitments (continued)
Rent expense under operating leases was $1,350,000, $1,094,000 and
$1,207,000 in fiscal years 1995, 1994 and 1993, respectively. Minimum rentals
for operating leases (principally office space, machinery and equipment) that
have initial or remaining noncancelable lease terms in excess of one year as of
December 2, 1995 are as follows:
Fiscal Year Amount
----------- ------
1996 - $ 853,000
1997 - 722,000
1998 - 597,000
1999 - 535,000
2000 - 434,000
----------
Total $3,141,000
==========
The Company sold its non-operating property in June 1994 for $500,000 and
accepted a 3 year, $350,000 note receivable. The sale of the property resulted
in a small loss.
7. Shareholders' Equity
Pursuant to the Company's plan to spin-off its Scott Mills Division, the
Board of Directors unanimously voted on November
F-21
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
7. Shareholders' Equity (continued)
16, 1993 to distribute one share of common stock of Scott Mills, Inc., a
Pennsylvania corporation, for each share of the Company's common stock, held by
shareholders of record at November 27, 1993. Accordingly, a dividend payable for
the net assets of the discontinued operation plus $1,300,000 was accrued at
November 27, 1993. On March 15, 1994 the Company distributed the Scott Mills,
Inc. common stock.
The Company's stock option plan (The Plan) authorizes the issuance of
500,000 shares of common stock to officers, directors and key employees.
F-22
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
7. Shareholders' Equity (continued)
The information with respect to these incentive stock option plans is as
follows:
Fiscal Year Ended
-----------------
12/2/95 12/3/94 11/27/93
------- ------- --------
Options outstanding beginning
of period 190,000 215,000 175,000
Granted under New Plan (1) 10,000 -- 40,000
Exercised -- (8,333) --
Canceled -- (16,667) --
-------- -------- --------
Options outstanding end
of period 200,000 190,000 215,000
======== ======== ========
Exercise price per share $6.90-$18.00 $6.90-$12.50 $6.90-$12.50
Options exercisable end
of period 193,333 185,000 129,997
(1) Options granted during fiscal year 1995 were granted at $18.00. Options
granted during fiscal year 1993 were granted at prices ranging from $8.25
to $12.50 per share.
On June 23, 1992 the Board of Directors granted three outside directors
non-statutory stock options to purchase 25,000 shares each of common stock at
$8.50 per share. In November 1993, one of the options to purchase 25,000 shares
was exercised. The remaining options expire in June 1997.
In May 1991, the Board of Directors granted the Company's Chairman and
Chief Executive Officer (the Chairman) a non-statutory stock option to purchase
375,000 shares of the Company's common stock at $4.60 per share. This option
expires in May 1996.
F-23
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
8. Commitments
The Chairman has an employment agreement which provides for an incentive
bonus if pre-tax income exceeds fiscal year 1989 pre-tax income. Bonuses of
$153,000, $124,000 and $110,000 were earned for fiscal years 1995, 1994 and
1993, respectively. The employment agreement with the Chairman extends through
the end of fiscal year 1997 and provides for an annual incentive bonus of 3.1%
of pre-tax income in excess of fiscal year 1989 pre-tax income.
In addition the Company is funding life insurance contracts on behalf of
the Chairman, whose beneficiaries are designated by the individual. The funded
amounts will be repaid to the Company upon receipt of insurance proceeds,
against which the Company holds collateral assignments. The Company has included
at December 2, 1995, as a non-current asset, $1,265,000 which is equal to the
cash surrender value of the policies.
The Company is party to an agreement with Precision Textile, Inc. (P.T.I.),
a related party, whereby P.T.I. provides low cost contract sewing labor for the
Company's children's apparel division. This agreement offers the Company the
exclusive use of P.T.I.'s low cost sewing labor in exchange for a guarantee by
the Company to purchase 100% of P.T.I.'s capital stock (for no more than
$400,000) if certain production levels are not maintained. Purchases from P.T.I.
included in cost of goods sold
F-24
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
8. Commitments (continued)
were approximately $2,525,000, $2,539,000 and $2,377,000 in fiscal years
1995, 1994 and 1993, respectively. Amounts payable to P.T.I. were $64,000 and
$30,000 at December 2, 1995 and December 3, 1994, respectively. The Company is
presently renewing the existing agreement with P.T.I. on a year-to-year basis.
Kleinert's entered into a two year supply agreement with a major vendor
starting in December 1996. This supply agreement requires among other things for
the Company to purchase its requirements for various fabrics from this vendor at
negotiated prices and requires the same vendor to commission dye and finish
fabric formerly finished by Scott Mills. Additionally, the Company and its
vendor have agreed to commission dye and finish a minimum of 2,500,000 pounds
during the term of the two year agreement.
9. Major Customers
In 1995 two apparel customers individually accounted for 19% and 14% each
of the Company's consolidated net sales while the same two apparel customers
individually accounted for 21% and 15% in 1994 and 20% each of the Company's
consolidated net sales in 1993.
F-25
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
10. Segment Information
The Company's products are principally grouped into two industry segments:
children's apparel and other. Corporate assets include cash, pension assets,
cash surrender value of life insurance, non-trade receivables, general corporate
assets and goodwill.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
12/2/95 12/3/94 11/27/93
------- ------- --------
($000's omitted)
<S> <C> <C> <C>
Net sales to unaffiliated customers:
Children's apparel $74,087 $68,097 $60,248
Other 1,034 1,165 1,180
Operating profit:
Children's apparel $ 9,847 $ 8,033 $ 7,841
Other 191 254 90
------- ------- -------
10,038 8,287 7,931
General corporate expenses (1,704) (961) (1,524)
Interest expense (1,651) (1,403) (1,288)
-------- -------- -------
Income from continuing
operations before taxes $ 6,683 $ 5,923 $ 5,119
======= ======= =======
Identifiable assets*:
Children's apparel $43,082 $35,995 $35,360
Other** 5,140 4,467 3,846
Capital expenditures:
Children's apparel $ 989 $ 603 $ 627
Other 23 15 12
Depreciation and amortization:
Children's apparel $ 635 $ 619 $ 652
Other 41 55 43
</TABLE>
______________
* Does not include net assets from discontinued operations of $2,701 at
November 27, 1993.
** Includes goodwill of $310, $325, and $340, respectively.
F-26
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
11. Stock Repurchase Program
In June 1993 the Board of Directors unanimously approved a plan to
repurchase up to $3,000,000 of the Company's stock. As of December 2, 1995,
under the stock repurchase program, the Company has repurchased 69,500 shares of
its common stock at prices ranging from $11.25 to $12.38 per share.
12. Related Party Transactions
On December 5, 1994 the Company loaned Scott Mills, Inc. ("Scott Mills")
$500,000. Scott Mills, formerly an indirect wholly-owned subsidiary of the
Company, is the successor in interest to the Company's textile division, the
assets of which were transferred to Scott Mills on November 27, 1993. The loan
bears interest, payable annually, at 8 1/2% per annum and the principal is due
in full on December 4, 1997. Scott Mills, which has operated independently of
the Company since November 27, 1993, continues to be a principal supplier of
fabric to the Company. Total fabric purchases from Scott Mills were $6,840,900,
$6,185,000 and $4,720,000 for fiscal years 1995, 1994 and 1993, respectively.
The Company provides certain third party services on behalf of Scott Mills
including data processing and account payable check processing functions and
business management services.
12. Related Party Transactions (continued)
As a consequence, the balance due to Kleinert's, Inc. fluctuates based on
the timing of Scott Mills repayments to Kleinert's for disbursements made on
behalf of Scott Mills. The net receivable due to the Company at December 2, 1995
was $1,561,000 and consisted primarily of the unreimbursed balance of
disbursements made on behalf of Scott Mills. Kleinert's charged Scott Mills
management and service fees of $86,000, $293,000 and $415,000 in the fiscal
years ended 1995, 1994 and 1993, respectively. On December 1, 1995 the Company
executed a working capital agreement with Scott Mills that confirms Scott Mills'
obligations and provides to the Company a first lien and security interest in
substantially all of Scott Mills' assets to secure Scott Mills obligation to
repay to the Company the loan balance due.
In March 1995, the Company subleased knitting machines to Scott Mills for a
forty-five month term to be used to produce certain fabrics on behalf of the
Company.
13. Subsequent Event
On December 19, 1995, Kleinert's, Inc., through its newly formed,
wholly-owned subsidiary, Kleinert's, Inc. of Florida, ("together, the Company"),
consummated a transaction (the "Transaction") pursuant to which the Company
acquired
F-27
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
13. Subsequent Event (continued)
substantially all of the assets of Pixie Playmates, Inc. ("Pixie") and Certified
Sewing Services, Inc. ("Certified") two Florida corporations, and all of the
capital stock of Certified Apparel Services of Honduras, Inc., C.A., a Honduran
corporation ("CASH"). Pixie, Certified and CASH, all of which were affiliated
entities, are engaged in the manufacture and sale of children's apparel.
Concurrent with the Transaction, the Company entered into a three year lease
agreement with the principal shareholder of Pixie for the premises in which
Pixie was conducting business. The Company intends to continue manufacturing
operations as was conducted by Pixie, Certified and CASH prior to the
Transaction.
In consideration for the assets of Pixie and Certified and the shares of
CASH, the Company paid an aggregate purchase price of $4,650,000 in cash, of
which $500,000 has been retained by the Company pending confirmation of
inventory quantities and completion of an audit of CASH. The purchase price was
financed by the Company through an amendment to its existing bank financing
agreement to provide for an additional term debt facility.
F-28
<PAGE>
Historical Unaudited Consolidated Financial Statements of Kleinert's, Inc.
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $11,291 $10,132 $23,011 $17,845
Cost of goods sold 8,598 7,641 17,806 13,316
------- ------- ------- -------
Gross profit 2,693 2,491 5,205 4,529
------- ------- ------- -------
Selling, general and
administrative expenses 1,372 1,227 2,798 2,396
Interest expense, net 424 416 760 685
------- ------- ------- -------
1,796 1,643 3,558 3,081
------- ------- ------- -------
Income before income
taxes 897 848 1,647 1,448
Provision for income taxes 327 308 598 526
------- ------- ------- -------
Net income $ 570 $ 540 $ 1,049 $ 922
------- ------- ------- -------
Earnings per share:
Net income $ .15 $ .14 $ .28 $ .25
------- ------- ------- -------
Weighted average shares
outstanding 3,767 3,761 3,752 3,759
------- ------- ------- -------
</TABLE>
See accompanying notes
F-29
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
ASSETS
June 1, Dec. 2, June 3,
1996 1995 1995
------- ------ ------
Current assets:
Cash $ 44 $ 327 $ 205
Accounts receivable (net) 13,723 21,899 10,429
Inventories:
Raw materials 10,209 4,222 6,112
Work-in-process 5,032 4,321 4,128
Finished goods 20,570 5,987 20,093
------- ------- -------
Total inventories 35,811 14,530 30,333
------- ------- -------
Other current assets 1,343 2,380 1,740
------- ------- -------
Total current assets 50,921 39,136 42,707
------- ------- -------
Property, plant & equipment, at cost 13,697 11,544 10,998
Less: accumulated depreciation and
amortization 6,516 6,051 5,732
------- ------- -------
net property, plant and
equipment 7,181 5,493 5,266
------- ------- -------
Other assets 4,668 3,593 3,278
------- ------- -------
$62,770 $48,222 $51,251
======= ======= =======
See accompanying notes
F-30
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 1, Dec. 2, June 3,
1996 1995 1995
------- ------- -------
Current liabilities
Notes payable and current portion
of long-term debt $20,245 $14,195 $17,955
Accounts payable 6,180 5,024 6,977
Accrued expenses 1,129 1,331 792
Income taxes payable 386 29 606
------- ------- -------
Total current liabilities 27,940 20,579 26,330
------- ------- -------
Deferred income taxes 134 134 123
Long-term debt 7,629 3,429 4,124
------- ------- -------
Total liabilities 35,703 24,142 30,577
------- ------- -------
Shareholders' equity:
Preferred stock-par value $1.00 per
share, 2,000,000 shares authorized,
none issued -- -- --
Common stock par value $1.00 per
share, 10,000,000 shares authorized,
4,198,398, 3,798,398 and 3,798,398
shares issued and outstanding,
respectively 4,198 3,798 3,798
Capital in excess of par value 12,164 10,626 10,626
Retained earnings 13,921 12,872 9,466
------- ------- -------
30,283 27,296 23,890
------- ------- -------
Less:
Treasury stock, at cost, 466,967 (3,216) (3,216) (3,216)
------- ------- ------
Total shareholders' equity 27,067 24,080 20,674
------- ------- -------
$62,770 $48,222 $51,251
======= ======= =======
See accompanying notes
F-31
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's Omitted)
Six Months Ended
June 1, June 3,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 1,049 $ 922
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 472 326
Provision for losses on accounts receivable (14) 2
Change in assets and liabilities:
Decrease in accounts receivable 8,219 7,620
(Increase) in inventory (19,242) (17,636)
(Increase) decrease in other current assets 1,037 (127)
Increase in accounts payable and
accrued expenses 953 2,601
Increase in income taxes payable 358 505
(Increase) decrease in other assets (129) 3
-------- --------
Total adjustments ( 8,346) (6,706)
-------- --------
Net cash used in operating activities ( 7,297) (5,784)
-------- --------
Cash flows from investing activities:
Purchase of assets -- Pixie Acquisition (4,650) -
Capital expenditures (584) (443)
Note receivable related party (Note 2) - (500)
Proceeds from note receivable 60 40
-------- --------
Net cash used in investing activities (5,174) (903)
-------- --------
See accompanying notes
F-32
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's Omitted)
(CONTINUED)
Six Months Ended
June 1, June 3,
1996 1995
-------- --------
Cash flows from financing activities:
Net borrowings under revolving
line-of-credit agreement $ 5,850 $7,260
Principal payments of debt (250) (500)
Proceeds from long-term debt 4,650 --
Exercise of stock options 1,938 --
------- ------
Net cash provided by financing
activities 12,188 6,760
------- ------
Net increase (decrease) in cash (283) 73
Cash at beginning of period 327 132
------- ------
Cash at end of period $ 44 $ 205
------- ------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 505 $ 612
Income taxes $ 240 $ 75
See accompanying notes
F-33
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 1, 1996 and June 3, 1995
(1) Basis of presentation:
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
information furnished reflects all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the results for the
interim periods. Operating results for the six months ended June 1, 1996 are
not necessarily indicative of the results that may be expected for the year
ended November 30, 1996. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures presented are
adequate for a fair presentation of the financial statements. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 2, 1995.
(2) Acquisition
On December 19, 1995, Kleinert's, Inc., through its newly formed,
wholly-owned subsidiary, Kleinert's, Inc. of Florida, ("together, the Company"),
consummated a transaction (the "Pixie Acquisition") pursuant to which the
Company acquired substantially all of the assets of Pixie Playmates, Inc.
("Pixie") and Certified Sewing Services, Inc. ("Certified") two Florida
corporations, and all of the capital stock of Certified Apparel Services of
Honduras, Inc., S.A., a Honduran corporation ("CASH"). Pixie, Certified and
CASH, all of which were affiliated entities, are engaged in the manufacture and
sale of children's apparel. Concurrent with the Pixie Acquisition, the Company
entered into a three year lease agreement with the principal shareholder of
Pixie for the premises in which Pixie was conducting business. To date the
Company has continued manufacturing operations as was conducted by Pixie,
Certified and CASH prior to the Pixie Acquisition.
In consideration for the assets of Pixie and Certified and the shares of
CASH, the Company paid an aggregate purchase price of $4,650,000 in cash.
The purchase price was financed by the Company through an amendment to its
existing bank financing agreement to provide for an additional term debt
facility.
The acquisition has been accounted for using the purchase method, and
accordingly, the results of operations are included in the Company's results
from the date of acquisition, December 19, 1995.
F-34
<PAGE>
The proforma unaudited results of operations for the six months ended June
1, 1996 and June 3, 1995, assuming consummation of the purchase and amendment of
the term debt as of December 4, 1994 are as follows:
Three Months Ended Six Months Ended
------------------------------------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
------- ------- ------- -------
Net sales $11,291 $12,245 $23,082 $22,841
Net income 570 391 1,049 688
Net income per common share: .15 .10 .28 .18
(3) Refinancing of Term Loan
On February 28, 1996 the Company refinanced its existing term loan and
provided for an additional term debt facility of $4,650,000 to finance the
Pixie Acquisition. The term loan is in the form of an amended and restated
term loan note with the same bank as the original term loan. Total borrowing at
June 1, 1996 was $8,049,000. The interest rate is indexed by LIBOR rates plus a
spread of 1.12%.
Simultaneously, the Company entered into an interest rate swap to convert
its floating-rate to a fixed-rate of 5.88% which effectivley fixes the rate at
7.0%. This reduces the Company's risk of incurring higher interest costs due to
rising interest rates. At June 1, 1996, the interest rate swap agreement had a
notional amount of $8,049,000 which decreases by $300,000 quarterly through the
September 2002 termination date. The fair value of this agreement at June 1,
1996 was $166,007
(4) Related Party Transactions
On December 5, 1994 the Company loaned Scott Mills, Inc. ("Scott Mills")
$500,000. Scott Mills, formerly an indirect wholly-owned subsidiary of the
Company, is a knitting and textile manufacturer and the successor in interest to
the Company's textile division, the assets of which were transferred to Scott
Mills on November 27, 1993. The loan bears interest, payable annually, at 8 1/2%
per annum and the principal is due in full on December 4, 1997. Scott Mills,
which has operated independently of the Company since November 27, 1993,
continues to be a principal supplier of fabric to the Company.
The Company provides certain third party services on behalf of Scott Mills,
including data processing and account payable check processing functions and
business management services for which Scott Mills reimburses the Company. As
a consequence, the balance due the Company fluctuates based on the timing
of Scott Mills repayments to the Company for disbursements made on behalf of
Scott Mills. On December 1, 1995 the Company executed a working capital
agreement with Scott Mills that confirms Scott Mills' obligations to the Company
and provides to the Company a first lien and security interest in substantially
all of Scott Mills' assets to secure Scott Mills' obligation to repay to the
Company the loan balance due of $2,488,000 as of June 1, 1996.
In March 1995, the Company subleased knitting machines to Scott Mills for a
forty-five month term to be used to produce certain fabrics on behalf of the
Company. The terms of the sublease were reached at an arms length basis.
F-35
<PAGE>
(5) Subsequent Events
Acquisition
On June 10, 1996, Kleinert's, Inc., Kleinert's, Inc. of Alabama, a wholly-
owned subsidiary of Kleinert's, Inc., and Scott Mills, Inc. entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Scott
Mills, Inc. shall be merged with and into Kleinert's, Inc. of Alabama (the
"Merger"). In the Merger, each share of Common Stock of Scott Mills, Inc.
which is issued and outstanding on the effective date of the Merger shall be
converted into the right to receive $0.03 in cash and such fraction of a share
of Kleinert's, Inc. Common Stock as shall have a value of $0.27, based upon
the average closing price of the Kleinert's Common Stock for the five trading
days immediately preceding the Merger. Cash will be paid in lieu of fractional
shares of Kleinert's, Inc. Common Stock otherwise issuable in the Merger.
Based upon approximately 3,368,000 issued and outstanding shares of Common
Stock of Scott Mills, Inc., it is expected that Kleinert's, Inc., will issue
approximately 56,000 shares of its Common Stock in the Merger. The consummation
of the Merger is subject to a number of conditions, including approval of the
Merger by the stockholders of Scott Mills, Inc.
Kleinert's is the largest customer of Scott Mills. Scott Mills' sales for
the six months ended June 1, 1996 were $4,118,000 of which $3,685,000 were sales
to Kleinert's. The proposed merger of Scott Mills with Kleinert's is expected to
permit Kleinert's to maintain its flexibility in servicing its retail customers
in its sleepwear and activewear products.
Stock Repurchase Program
On June 21, 1996, the Company announced the commencement of a common stock
repurchase program. Purchases under the program will occur in the public
market and in negotiated private transactions. Total purchases under the
repurchase program will not exceed $5,000,000.
F-36
<PAGE>
Historical Audited Consolidated Financial Statements of Scott Mills, Inc.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
of Scott Mills, Inc.
We have audited the accompanying consolidated balance sheets of Scott Mills,
Inc. as of December 2, 1995 and December 3, 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended December 2, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Scott Mills, Inc.
at December 2, 1995 and December 3, 1994, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 2, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's recurring
losses from operations, negative operating cash flows and accumulated deficit
raise substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are also described in Note 2. The 1995
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 15, 1996
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
of Scott Mills, Inc.
In our opinion, the accompanying consolidated statements of operations, of
shareholders' equity/parent investment and of cash flows of Scott Mills, Inc.
(formerly a division of Kleinert's, Inc. of Alabama) and its subsidiary present
fairly, in all material respects, the results of their operations and their cash
flows for the year ended November 27, 1993, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company'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 generally accepted auditing
standards 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company has suffered recurring losses form operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Scott Mills, Inc. is a member of a group of affiliated companies and, as
disclosed in Note 7 to the financial statements, has extensive transactions and
relationships with members of the group.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
March 8, 1994
F-38
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
December 2, 1995 and December 3, 1994
($000's omitted)
ASSETS 1995 1994
------ ---- ----
Current assets:
Cash and cash balances at factor $ 211 $ 525
Accounts receivable (net of allowances
for doubtful accounts of $26,000 and $0
in 1995 and 1994) 180 251
Due from factor 17 1,387
Inventories:
Raw materials 177 438
Work-in-process 587 391
Finished goods 45 124
------ ------
Total inventories 809 953
------ ------
Other current assets 104 411
------ ------
Total current assets 1,321 3,527
------ ------
Property, plant and equipment, at cost:
Leasehold improvements 295 1,036
Machinery and equipment 1,987 7,803
Furniture and fixtures 105 135
------ ------
2,387 8,974
------ ------
Less accumulated depreciation 1,350 3,244
------ ------
Net property, plant and equipment 1,037 5,730
Other assets 22 83
Non-operating dyeing and finishing assets 520 --
------ ------
$2,900 $9,340
====== ======
See notes to consolidated financial statements
F-39
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
(continued)
December 2, 1995 and December 3, 1994
($000's omitted)
LIABILITIES and SHAREHOLDERS' EQUITY (DEFICIT) 1995 1994
---------------------------------------------- ---- ----
Current liabilities:
Current portion of
long-term debt and capital lease
obligations $ 103 $ 1,018
Accounts payable 2,911 2,938
Accrued expenses 417 386
Due to Kleinert's, Inc. of Alabama 1,564 94
------- -------
Total current liabilities 4,995 4,436
------- -------
Subordinated convertible term debt 500 500
Long term debt and capital lease obligations, net of
current portion 210 2,851
Subordinated term debt due to Kleinert's, Inc.
of Delaware 500 --
------- -------
Total liabilities 6,205 7,787
------- -------
Commitments
Shareholders' equity (deficit):
Common stock - par value $1.00 per share,
10,000,000 shares authorized,
3,367,598 shares issued, and
outstanding 3,368 3,368
Capital in excess of par value 873 873
Accumulated (deficit) (7,546) (2,688)
------- -------
Total shareholders' equity (deficit) (3,305) 1,553
------- -------
$ 2,900 $ 9,340
======= =======
See notes to consolidated financial statements
F-40
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 2, 1995, December 3, 1994 and
November 27, 1993
($000's omitted, except per share amount)
1995 1994 1993
------- -------- -------
Net sales - non affiliates $ 7,955 $ 11,170 $ 9,578
Net sales - related party 6,841 6,185 4,720
-------- -------- --------
Total 14,796 17,355 14,298
Cost of goods sold 15,987 18,344 15,840
-------- -------- --------
Gross profit (loss) (1,191) (989) (1,542)
Provision for dyehouse closing 2,044 -- --
Selling, general and administrative
expenses 919 1,338 1,297
-------- -------- --------
Operating loss (4,154) (2,327) (2,839)
Interest expense 704 397 186
-------- -------- --------
Loss before income tax
benefit (4,858) (2,724) (3,025)
Income tax benefit -- 36 --
-------- -------- --------
Net loss $ (4,858) $ (2,688) $ (3,025)
======== ======== ========
Net loss per share $ (1.44) $ (0.80) $ (.88)(1)
======== ======== ========
Weighted average shares outstanding 3,368 3,368 3,368 (1)
======== ======== ========
- -------------------
(1) Pro-forma loss and shares outstanding (Note 10) (unaudited)
See notes to consolidated financial statements
F-41
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)/PARENT INVESTMENT
Fiscal Years Ended December 2, 1995, December 3, 1994 and
November 27, 1993
($000's omitted except share data)
<TABLE>
<CAPTION>
Total
Number of Capital in Shareholders' Equity
Shares Common Excess of Parent Accumulated (Deficit)/Parent
Outstanding Stock Par Value Investment (Deficit) Investment
----------- ------ ---------- ---------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 28, 1992 -- $ -- $ -- $ 3,573 $ -- $ 3,573
Net loss -- -- -- (3,025) -- (3,025)
Parent contribution -- -- -- 1,817 -- 1,817
Other -- -- -- (36) -- (36)
Capitalization of Scott Mills, Inc.
and parent contribution
of $1,300 3,367,598 3,368 261 (2,329) -- 1,300
--------- --------- --------- --------- --------- ---------
Balance, November 27, 1993 3,367,598 3,368 261 -- -- 3,629
Net assets transferred to Scott Mills -- -- 612 -- -- 612
Net loss -- -- -- -- (2,688) (2,688)
--------- --------- --------- --------- --------- ---------
Balance, December 3, 1994 3,367,598 3,368 873 -- (2,688) 1,553
Net loss -- -- -- -- (4,858) (4,858)
--------- --------- --------- --------- --------- ---------
Balance, December 2, 1995 3,367,598 $ 3,368 $ 873 $ -- $ (7,546) $ (3,305)
========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-42
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 2, 1995, December 3, 1994 and
November 27, 1993
($000's omitted)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net loss $(4,858) $(2,688) $(3,025)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 980 890 615
(Gain) loss on disposal of fixed assets -- (2) 2
Provision for losses on
accounts receivable -- -- 17
Provision for dyehouse closing 2,044 -- --
Change in operating assets and liabilities:
(Increase) decrease in accounts
receivable/factor 1,441 (1,638) 274
(Increase) decrease in inventory 144 (165) 747
(Increase) decrease in other
current assets 307 (52) (10)
(Increase) in other assets -- (74) (38)
Increase (decrease) in accounts
payable and accrued expenses (273) 3,212 68
Increase (decrease) in deferred income
tax payable -- (36) 36
Other 61 (45) --
------- ------- -------
Total adjustments 4,704 2,090 1,711
------- ------- -------
Net cash (used in)
operating activities (154) (598) (1,314)
------- ------- -------
Cash flows from investing activities:
Capital expenditures (1,064) (3,356) (84)
Proceeds from sale of fixed assets 2,760 7 --
------- ------- -------
Net cash provided by (used in)
investing activities 1,696 (3,349) (84)
------- ------- -------
See notes to consolidated financial statements
F-43
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 2, 1995,
December 3, 1994 And November 27, 1993
($000'S Omitted)
1995 1994 1993
---- ---- ----
Cash flows from financing activities:
Debt payments $(2,911) $ (489) $ --
Principal payments on capital leases (915) (342) (380)
Parent contribution -- 1,300 1,781
Proceeds from term debt -- 3,900 --
Increase in due to Kleinert's Inc. 1,470 94 --
Proceeds from subordinated debt 500 -- --
------- ------- -------
Net cash provided from
financing activities (1,856) 4,463 1,401
Net increase (decrease) in cash (314) 516 3
Cash at beginning of period 525 9 6
------- ------- -------
Cash at end of period $ 211 $ 525 $ 9
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for
interest (including interest allocated
by parent in 1993) $ 562 $ 405 $ 189
Equipment purchased under capital
leases $ 269 $ -- $ 140
Due from Kleinert's, Inc. $ -- $ -- $ 1,300
Equipment deposits financed by parent $ -- $ -- $ 594
See notes to consolidated financial statements
F-44
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Years Ended December 2, 1995, December 3, 1994 and
November 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies
Basis of Presentation -
Scott Mills, Inc. and its wholly-owned subsidiary, Scott Mills, Inc. of
North Carolina, (collectively, Scott Mills or the Company) were formed in August
1993. Scott Mills, Inc. was a wholly-owned subsidiary of Kleinert's, Inc. of
Alabama, which was a wholly-owned subsidiary of Kleinert's, Inc. (collectively,
Kleinert's). On November 27, 1993, certain assets and liabilities of Scott
Mills, a division of Kleinert's Inc. of Alabama, were transferred to Scott
Mills, Inc. The accompanying financial statements reflect the financial position
and results of operations of the Scott Mills division through November 27, 1993.
All references herein to the Company and Scott Mills refer to the Scott Mills
division or to Scott Mills, Inc., as applicable.
On September 12, 1995, the Company announced that in light of poor
operating results and as part of its ongoing effort to control operating costs,
it had decided to concentrate its business solely on its knitting operations and
subcontract all of its dyeing and finishing operations. In connection with the
closing of its dyeing and finishing facility, the Company has reduced its
work-force and has either sold or is currently seeking buyers for its dyeing
F-45
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
and finishing equipment. The Company has provided a charge of $2,044,000 in
fiscal year 1995 for the write-down to estimated net realizable value of assets
and for other costs associated with the cessation of dyeing and finishing
operations. The provision of $2,044,000 included $1,640,000 for the write-down
of equipment and other assets to their net realizable value, the write-off of
certain inventory of $166,000, severance for terminated employees of $119,000
and non-cancelable lease costs and certain other costs of $119,000. During the
fiscal quarter ended December 2, 1995, the Company consummated the sale of a
significant portion of the dyeing and finishing assets. At December 2, 1995,
accrued liabilities relating to the dyehouse closing totaled $277,000.
Scott Mills knits fabric for the children's and women's apparel markets.
The Company's principal customer is Kleinert's while the remaining customers are
primarily other children's and women's apparel companies.
Distribution -
On November 15, 1993 the Board of Directors of Kleinert's declared a
distribution (the Distribution) of one share of Scott Mills common stock for
every one share of Kleinert's common stock distributable to the holders of
record of Kleinert's common stock, par value $1.00 per share, at the close of
business on the record date, November 27, 1993. The Distribution which occurred
F-46
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
on March 15, 1994, resulted in 100% of the outstanding shares of Scott Mills
Common Stock being distributed to holders of Kleinert's Common Stock on a
proportionate basis.
Fiscal Year - The Company utilizes a 52-53 week fiscal year ending on the
Saturday nearest November 30. The fiscal year ending December 2, 1995 is a fifty
two week year. The fiscal year ended December 3, 1994 was a fifty three week
year. Fiscal year ended November 27, 1993 was a fifty two week year.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventories - Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis. The cost of products produced
include raw materials, direct labor, operating overhead and corporate general
and administrative charges. There was no corporate general and administrative
charge to product costs in fiscal year 1995. Such charges amounted to $208,000
and $300,000 for the fiscal years ended 1994 and 1993. Such costs
F-47
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
remaining in inventory at December 3, 1994 were insignificant.
Revenue Recognition - The Company records sale of product upon shipment,
net of provision for returns, allowances and discounts.
Property, Plant and Equipment - The Company depreciates property, plant and
equipment over their estimated useful lives, principally on a straight-line
basis.
Useful Lives
------------
Leasehold improvements Term of lease
Machinery and equipment 3 - 10 years
Furniture and fixtures 3 - 5 years
Income Taxes - The operating results of the Company prior to March 15, 1994
have been included in the consolidated income tax returns of Kleinert's. The
financial statements reflect the application of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") for all
years presented. SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements.
Loss Per Share - Loss per share has been computed based on the weighted
average number of common shares outstanding and common stock equivalent shares
deemed outstanding during each period presented. The 1993 pro-forma loss per
share (unaudited) is based on the number
F-48
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
of common shares outstanding at November 27, 1993, the date the division assets
and liabilities were transferred to Scott Mills, Inc.
Financial Statement Presentation - The Company has prepared the financial
statements on the basis of a going concern entity (See Note 2).
Stock Based Compensation - The Company accounts for stock options according
to the provisions of Accounting Principles Board Opinion 25 (APB 25), Accounting
for Stock Issued to Employees. In October 1995, the Financial Accounting
Standards Board issued FASB Statement No. 123, Accounting for Stock-Based
Compensation. The new standard prescribes new accounting and reporting standards
which reflect the standards' "fair value method" to estimate expense associated
with stock based compensations plans. Companies may elect to continue to use
existing accounting rules or adopt the "fair value method" for expense
recognition. Companies that elect to continue to use existing accounting rules
will be required to provide pro-forma disclosures of what net income and
earnings per share would have been had the new "fair value method" been used.
The Company will elect to continue to use existing accounting rules. The new
statement is
F-49
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
effective for fiscal years beginning after December 15, 1995. Accordingly, the
new standards pro-forma disclosure provisions will be required for the Company
for its fiscal year ending November 29, 1997.
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
In March 1995, the FASB issued Statement No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The statement is effective for
fiscal years beginning after December 15, 1995 and accordingly will not be
required until fiscal year 1997. The Company expects the impact of adoption in
1997 will be insignificant.
2. Going Concern
The Company has experienced severe financial difficulty and has incurred
significant operating losses of $4,858,000 (including the $2,044,000 provision
for closing the dyeing and finishing operation) in fiscal year 1995 and net
losses of $2,688,000 in fiscal year 1994. Additionally, the Company's cash from
operations were insufficient to meet the Company's working capital requirements.
As a result of
F-50
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
2. Going Concern (continued)
these recurring losses, and insufficient cash flows, in September 1995 the
Company closed its dyeing and finishing facility. Funds were provided during the
year primarily by the proceeds of a subordinated note payable to Kleinert's of
$500,000 working capital provided by Kleinert's of $1,470,000 and the sale of
certain dyehouse assets for $2,760,000. These funds were primarily used to repay
debt and purchase certain capital equipment during the year. In late 1995, the
Company has attempted to control operating costs by reducing personnel, and
adjusting production levels. In addition, the Company also is negotiating with
its vendors to defer payment of amounts it currently owes until the Company has
the cash resources with which to satisfy its obligations in an orderly fashion.
The Company believes that all of these efforts will result in increased
operating efficiencies and assist the Company in meeting its future financial
obligations as they become due. In the event these efforts prove unsuccessful,
the Company will be required to seek additional financing to meet its
obligations. There can be no assurance, however, that the Company will be
successful in its efforts to satisfy its obligations as they become due, thereby
enabling the Company to continue as a going concern. The 1995 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-51
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
3. Financing Arrangements
In fiscal year 1994, investors lent $500,000 to the Company pursuant to
subordinated five year term notes bearing interest at 8.5% per annum which are
convertible into common stock at a price of $.50 per share.
In fiscal year 1995, the Company obtained a $500,000 subordinated three
year loan from Kleinert's which bears interest at 8.5% per annum. As previously
discussed in Note 2, the Company completed the sale of a substantial portion of
its dyeing and finishing equipment assets in November, 1995. The proceeds
enabled the Company to satisfy the major portion of term debt and capital lease
obligations secured by these and other assets.
Aggregate principal maturities of the capital leases and term debt after
December 2, 1995 are as follows:
1996 - $102,700; 1997 - $118,100; 1998 - $578,900; 1999 - $513,500; 2000 - 0;
thereafter - none.
Financing arrangements consist of the following:
1995 1994
--------------------- --------------------
Current Long Term Current Long Term
------- --------- ------- ---------
($000's omitted)
Capital Leases $ 103 $ 210 $ 334 $ 624
Term Debt -- -- 684 2,227
Subordinated
convertible notes -- 500 -- 500
Due to Kleinert's
Inc. of Delaware -- 500 -- --
------ ------ ------ ------
$ 103 $1,210 $1,018 $3,351
====== ====== ====== ======
F-52
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
4. Property, Plant and Equipment and Lease Commitments
Property, plant and equipment includes equipment under capital leases with
a gross book value of $1,191,000 and $2,440,000 and a net book value of $549,000
and $1,520,000 at December 2, 1995 and December 3, 1994, respectively.
Depreciation expense on equipment under capital leases was $296,000, $310,000
and $292,000 in 1995, 1994 and 1993, respectively.
Future minimum lease payments under capital leases as of December 2, 1995
are as follows:
1996................................. $ 131,600
1997................................. 136,200
1998................................. 86,000
1999................................. 13,900
2000................................. --
---------
Total minimum lease payments......... $ 367,700
Less amount representing interest
(interest rate ranging from 9.1% - 11.5%) 54,300
---------
Present value of minimum lease payments $ 313,400
=========
Rent expense under operating leases was $383,000, $293,000 and $245,000 in
1995, 1994 and 1993, respectively. Repairs and maintenance expense was $340,000,
$383,000 and $232,000 in fiscal years 1995, 1994 and 1993, respectively. Minimum
rentals for operating leases (principally production facilities, office space,
machinery and equipment) that have initial or remaining noncancelable lease
terms in excess of one year as of December 2, 1995 are as follows: 1996 -
$306,000; 1997 - $201,000; 1998 - $154,000; 1999 - $11,000; thereafter - $0.
F-53
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
5. Income Taxes
Income tax benefit differs from the amount computed by applying the federal
tax rate to income before income taxes as follows:
Fiscal Years Ended
-------------------------------------------
Dec. 2, Dec. 3, Nov. 27,
1995 1994 1993
----------- ----------- -----------
Statutory U.S. income tax
rate applied to loss
before income tax benefit $(1,651,000) $ (926,000) $(1,029,000)
State income tax benefit
net of Federal income tax
benefit -- -- (151,000)
Operating loss not utilized 1,651,000 890,000 1,180,000
----------- ----------- -----------
$ -- $ (36,000) $ --
=========== =========== ===========
The net deferred income tax balances relate to the following cumulative
temporary differences:
Dec. 2, Dec. 3,
1995 1994
----------- -----------
Accounts receivable reserve $ 10,000 $ --
Inventory reserves 32,000 4,000
Vacation reserve 9,000 29,000
Insurance -- 2,000
Leases 58,000 46,000
Reserves dyehouse closing 448,000 --
Net operating loss carryforward 2,531,000 893,000
Valuation allowance (2,490,000) (650,000)
----------- -----------
Deferred tax asset 598,000 324,000
----------- -----------
Benefit plan 7,000 7,000
Depreciation 591,000 317,000
----------- -----------
Deferred tax liability 598,000 324,000
----------- -----------
Deferred tax liability, net $ -- $ --
=========== ===========
F-54
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
5. Income Taxes (continued)
During fiscal year 1994 tax benefits of $240,000 relating to losses
incurred through March 15, 1994 were utilized in the Kleinert's consolidated tax
return. Kleinert's agreed to make an additional capital contribution equal to
this benefit to the Company. Such amount has been reflected as a reduction in
the Company's balance due to Kleinert's at December 3, 1994.
The Company has a net operating loss carryforward of $6,453,000 for federal
tax purposes to offset future taxable income available through 2010. Tax losses
incurred for periods up to March 15, 1994 were utilized in the Kleinert's
consolidated tax return and no tax loss benefit was carried forward into fiscal
year 1994.
F-55
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
6. Retirement Plans
The Company adopted a defined contribution plan in December 1993 covering
substantially all full-time employees. These expenses were $15,000 in fiscal
year 1995 and $34,000 in fiscal year 1994.
7. Related Party Transactions
The Company, a former subsidiary of Kleinert's, Inc., (a children's apparel
manufacturer) was spun off to Kleinert's, Inc. Shareholders, and has operated
independently since November 27, 1993. Kleinert's, Inc., continues to be a
significant customer of the Company, providing $6,841,000 of the Company's net
sales during the fiscal year ended December 2, 1995, $6,185,000 during fiscal
year ended December 3, 1994 and $4,720,000 during fiscal year ended November 27,
1993.
Kleinert's, Inc. provides certain third party services on behalf of the
Company, including data processing, treasury, accounts payable, check processing
and management functions. Funds disbursed on behalf of the Company are
subsequently reimbursed to Kleinert's, Inc. As a consequence, the balance due to
Kleinert's, Inc. fluctuates based on the timing of disbursements on behalf of
the Company and reimbursement by the Company. The balance payable to Kleinert's,
Inc. at December 2, 1995 was $1,564,000 and consisted primarily of the
unreimbursed balance of these disbursements, and management expense and interest
allocations. This unreimbursed balance due Kleinert's is secured by all assets
of the Company. Advances under this agreement are made at Kleinert's discretion.
F-56
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
7. Related Party Transactions (continued)
Kleinert's charged Scott Mills management fees of $85,000, $293,000 and
$415,000 in the fiscal years ended 1995, 1994 and 1993, respectively, for
services performed by Kleinert's on behalf of Scott Mills including, financial,
legal, accounting, credit and collection, taxes, risk management and human
resources and general management. Such charges were primarily allocated based on
Kleinert's estimate of the percentage of time or usage attributable to such
services. Management believes the allocation method was reasonable and the cost
of these services would have been comparable on a stand-alone basis. Kleinert's
will continue to assist Scott Mills in the administration of certain of these
activities and Scott Mills will reimburse Kleinert's, until such time that the
Company is able to perform these services independently. For the three fiscal
years ended 1995, 1994 and 1993, Kleinert's was the Company's largest customer
and individually accounting for 46%, 36% and 33%, respectively, of the Company's
consolidated net sales. Prior to November 28, 1993, Scott Mills products were
sold to Kleinert's at prices which approximated Scott Mills standard cost. Sales
to Kleinert's after November 27, 1993 are at prices approximating market.
On December 5, 1994, the Company borrowed $500,000 from Kleinert's, Inc. Of
Delaware in the form of a subordinated three year note. Under the terms of the
promissory note, interest is payable annually at eight and one-half percent.
Principal is due in full on December 4, 1997.
F-57
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
8. Shareholders' Equity
In December 1993 the Board of Directors of the Company instituted the 1993
Stock Option Plan (the "Plan"). The Plan authorizes the grant of options to
purchase 1,000,000 shares of common stock to directors, officers and key
employees of the Company and its subsidiary at the fair market value of the
shares on the date of grant.
The information with respect to this stock option plan is as follows:
Fiscal Year Ended
---------------------------
Dec. 2, Dec. 3,
1995 1994
-------- -------
Options outstanding at beginning of period 730,000 --
Granted (1) 50,000 790,000
Exercised -- --
Canceled (390,000) (60,000)
-------- -------
Options outstanding at end of period 390,000 730,000
Options exercisable at end of period 390,000 430,000
Exercise price per share $.75-$2.00
- -----------------
(1) Options were granted in 1995 at an exercise price of $.75. Options were
granted in 1994 at exercise prices that ranged from $.75 to $2.00.
9. Legal Proceedings
The Company is a defendant in a complaint filed on September 13, 1995 by
its former President and chief operating officer. The complaint alleges among
other things, that the Company breached its obligations under the President's
employment agreement by wrongfully terminating his employment. The
F-58
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
9. Legal Proceedings (continued)
complaint seeks damages in the amount of approximately $722,000. The Company has
filed an answer to the complaint in which it denies all allegations. The Company
intends to vigorously defend against the allegations.
10. Pro-Forma Financial Statements (unaudited)
The following represents the consolidated pro-forma statement of operations
for the fiscal year ended November 27, 1993 and the consolidated condensed
pro-forma balance sheet at November 27, 1993 as if the consummation of the
Distribution had occurred on November 29, 1992. These pro-forma financial
statements do not necessarily reflect the future earnings and financial position
or what the earnings or financial position would have been, had Scott Mills'
business operated as a separate, stand-alone Company.
Unaudited Pro-Forma Consolidated Statement of Operations
Fiscal Year Ended November 27, 1993
($000's, except per share amount)
<TABLE>
<CAPTION>
Actual Adjustments Pro-Forma
------ ----------- ---------
<S> <C> <C> <C>
Net sales - non affiliates $ 9,578 $ -- $ 9,578
Net sales - related party 4,720 -- 4,720
------- ------- --------
Total 14,298 -- 14,298
Cost of goods sold 15,840 (415)(E) 15,425
------- ------- --------
Gross profit (loss) (1,542) (415) (1,127)
------- ------- --------
Selling, general and
administrative expenses 1,297 (198)(A) 1,594
-- (B)
243 (F)
252 (G)
Interest expense 186 138 (C)
-- (66)(D) 258
------- ------- --------
1,483 369 1,852
------- ------- --------
Loss before income tax
benefit (3,025) (46) (2,979)
------- ------- --------
Benefit from income taxes -- -- --
------- ------- --------
Net loss $(3,025) $ (46) $ (2,979)
======= ======= ========
Pro-forma loss, per share (0.88)
=========
Shares outstanding used in
computation of pro-forma per
share 3,368
========
</TABLE>
F-59
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Fiscal Year Ended December 2, 1995, December 3, 1994 and
November 27, 1993
10. Pro-Forma Financial Statements (unaudited) (continued)
Unaudited Pro-Forma Consolidated Statement of Operations
Fiscal Year Ended November 27, 1993
($000's, except per share amount)
Notes:
(A) Elimination of royalty paid to Kleinert's, Inc.
(B) The transactions costs incurred by Scott Mills as a result of the
Distribution including legal and accounting fees were approximately
$220,000. These nonrecurring costs directly attributable to the
Distribution were not included in this pro-forma statements of operations.
These costs, which were incurred subsequent to November 27, 1993, were
included in the statement of operations for Scott Mills in fiscal year
1994.
(C) Represented the working capital interest expense and factoring charge
Scott Mills would have incurred under the factoring agreement had the
Distribution occurred at the beginning of the period.
(D) Represented the working capital interest expense allocated to Scott Mills
by Kleinert's.
(E) Represented the corporate allocation charged to Scott Mills by Kleinert's.
(F) Represented the fee Scott Mills would have paid to Kleinert's in
consideration for services provided including financial reporting,
insurance, accounting systems, shareholder relations, legal and corporate
office rent.
(G) Represented the estimated net additional administrative expenses Scott
Mills would have incurred as a result of operating as a publicly-owned
company including audit fees and salaries for Scott Mills' corporate
staff, including a chief operating officer and a chief financial officer.
F-60
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($000's omitted, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -------------------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net Sales - other customers $ 291 $ 3,076 $ 433 $ 5,777
Net Sales - Kleinert's, Inc. 2,164 2,042 3,685 4,108
------ -------- ------ --------
Total 2,455 5,118 4,118 9,885
Cost of goods sold 2,465 5,769 3,994 10,151
------ -------- ------ --------
Gross profit (10) (651) 124 (266)
------ -------- ------ --------
Provision - closing dyeing
and finishing facility 138 -- 138 --
Selling, general and
administrative expenses 31 332 28 613
Interest expense 69 183 145 338
------ -------- ------ --------
Loss before income taxes (248) (1,166) (187) (1,217)
------ -------- ------ --------
Provision for income taxes -- -- -- --
------ -------- ------ --------
Net loss $ (248) $ (1,166) $ (187) $ (1,217)
====== ======== ====== ========
Loss per share:
Net loss $ (.07) $ (.35) $ (.06) $ (.36)
====== ======== ====== ========
Weighted average shares
outstanding 3,368 3,368 3,368 3,368
====== ======== ====== ========
</TABLE>
See accompanying notes
F-61
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
($000's Omitted)
ASSETS
<TABLE>
<CAPTION>
June 1, Dec. 2, June 3,
1996 1995 1995
------ ------- ------
<S> <C> <C> <C>
Current assets:
Cash $ 45 $ 211 $ 69
Accounts receivable (net) 9 180 295
Due from factor -- 17 1,575
Inventories:
Raw materials 234 177 535
Work-in-process 882 587 467
Finished goods 67 45 377
------ ------ ------
Total inventories 1,183 809 1,379
Other current assets 144 104 399
------ ------ ------
Total current assets 1,381 1,321 3,717
------ ------ ------
Property, plant & equipment, at cost 2,390 2,387 9,334
Less: accumulated depreciation
and amortization 1,345 1,350 3,709
------ ------ ------
Net property, plant and
equipment 1,045 1,037 5,625
Other assets 18 22 121
Non-operating dyeing and finishing
assets 325 520 --
------ ------ ------
$2,769 $2,900 $9,463
====== ====== ======
</TABLE>
See accompanying notes
F-62
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
($000's Omitted)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 1, Dec. 2, June 3,
1996 1995 1995
------ ------ ------
<S> <C> <C> <C>
Current liabilities:
Notes payable and current portion
of long-term debt and capital
lease obligations $ 50 $ 103 $ 1,100
Accounts payable 2,308 2,911 3,331
Due to related party 2,488 1,564 736
Accrued expenses 384 417 400
------- ------- -------
Total current liabilities 5,230 4,995 5,567
------- ------- -------
Deferred income taxes -- -- --
Long-term debt and capital lease
obligation net of current portion 31 210 2,560
Subordinated term debt 500 500 500
Subordinated convertible term debt 500 500 500
------- ------- -------
Total liabilities 6,261 6,205 9,127
------- ------- -------
Shareholders' equity:
Common stock par value $1.00 per
share, 10,000,000 shares
authorized 3,367,598 shares
issued and outstanding 3,368 3,368 3,368
Capital in excess of par value 873 873 873
Accumulated deficit (7,733) (7,546) (3,905)
------- ------- -------
Total shareholders' equity (3,492) (3,305) 336
------- ------- -------
$(2,769) $ 2,900 $ 9,463
======= ======= =======
</TABLE>
See accompanying notes
F-63
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's Omitted)
Six Months Ended
-------------------------
June 1, June 3,
1996 1995
-------- --------
Cash flows from operating activities:
Net loss $ (187) $(1,217)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 121 500
Provision for dyehouse closing 138 --
Change in assets and liabilities:
(Increase) decrease in accounts
receivable, net 171 (45)
(Increase) decrease in due from factor 17 (188)
Increase in inventory (374) (426)
(Increase) decrease in other current
assets (40) 12
(Increase) decrease in other assets 4 (38)
Increase (decrease) in accounts
payable, and accrued expenses (886) 408
------- -------
(849) 223
Net cash used in operating activities (1,036) (994)
------- -------
Cash flows from investing activities:
Capital expenditures (3) (395)
Net proceeds from sale of equipment 181 --
------- -------
Net cash used in investing activities $ 178 $ (395)
------- -------
F-64
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's Omitted)
(continued)
Six Months Ended
-------------------------
June 1, June 3,
1996 1995
------- -------
Cash flows from financing activities:
Proceeds from subordinated note $ -- $ 500
Principal payments on long term debt (232) (504)
Increase is due to related party 924 642
Proceeds from term debt and capital lease
obligations -- 295
------- ------
Net cash provided by financing
activities 692 933
------- ------
Net decrease in cash (166) (456)
Cash at beginning period 211 525
------- ------
Cash at end of period $ 45 $ 69
======= ======
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 34 $ 294
See accompanying notes
F-65
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 1, 1996 and June 3, 1995
(1) Basis of Presentation
The condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
information furnished reflects all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the results for the
interim periods. Operating results for the six months ended June 1, 1996 are not
necessarily indicative of the results that may be expected for the year ended
November 30, 1996. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures presented are adequate
for a fair presentation of the financial statements. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
on Form 10-K.
The cost of products produced include raw materials, direct labor,
operating overhead and corporate general and administrative charges. Selling and
administrative expenses consist primarily of marketing related administrative
costs. The Company did not maintain a marketing department during the first
quarter of 1996 but hired a sales executive during the second quarter of 1996.
Due to the reduced scale of operations in 1996, selling expenses are
significantly reduced in comparison to the comparable periods of 1995.
(2) Related Party Transaction
The Company, a former subsidiary of Kleinert's, Inc. (a children's
apparel manufacturer) was spun off to Kleinert's, Inc. shareholders, and has
operated independently since November 27, 1993. Kleinert's, Inc. continues to be
a significant customer of the Company, contributing $3,685,000 or 89% to the
Company's net sales during the first six months of fiscal year 1996.
On December 5, 1994, the Company borrowed $500,000 from Kleinert's,
Inc. of Delaware in the form of a subordinated three year note. Under the terms
of the promissory note, interest is payable annually at eight and one-half
percent. Principal is due in full on December 4, 1997.
Kleinert's, Inc. provides certain third party services on behalf of the
Company, including data processing, treasury, accounts payable, check processing
and management functions. Funds disbursed on behalf of the Company are
subsequently reimbursed to Kleinert's, Inc. As a consequence, the balance due to
Kleinert's, Inc. fluctuates based on the timing of disbursements on behalf of
the Company and reimbursement by the Company. The balance payable to Kleinert's,
Inc. at June 1, 1996 was $2,488,000 and consisted primarily of the unreimbursed
balance of these disbursements, and management and interest expenses. This
unreimbursed balance due Kleinert's, Inc. is secured by all assets of the
Company. On December 1, 1995 the Company executed a working capital agreement
with Kleinert's, Inc. that confirms Scott Mills' obligations to Kleinert's, Inc.
and provides to Kleinert's, Inc. a first lien and security interest in
substantially all of Scott Mills' assets to secure Scott Mills' obligation to
repay to Kleinert's, Inc. the loan balance due. Advances under this agreement
are made at Kleinert's discretion.
The Company and Kleinert's, Inc. have announced the signing of a
definitive merger agreement which is discussed more fully at Note 4, Subsequent
Events.
F-66
<PAGE>
(3) Going Concern
The Company generated a net loss of $187,000 in the first six months of
1996 compared to a loss of $1,217,000 in the first six months of 1995.
The Company has experienced severe financial difficulty and has
incurred significant operating losses of $4,858,000 (including a $2,044,000
provision for closing the dyeing and finishing operation) in fiscal year 1995
and net losses of $2,688,000 in fiscal year 1994. Additionally, the Company's
cash from operations was insufficient to meet the Company's working capital
requirements. As a result of these recurring losses, and insufficient cash
flows, in September 1995 the Company closed its dyeing and finishing facility.
Funds were provided during the year primarily by the proceeds of a subordinated
note payable to Kleinert's of $500,000, working capital provided by Kleinert's
of $1,470,000 and the sale of certain dyehouse assets for $2,760,000. These
funds were primarily used to repay debt and purchase certain capital equipment
during the year. In late 1995, the Company attempted to control operating costs
by reducing personnel, and adjusting production levels. In addition, the Company
also is negotiating with its vendors to pay amounts it currently owes in an
orderly fashion. The Company believes that all of these efforts will result in
increased operating efficiencies and assist the Company in meeting its future
financial obligations as they become due. In the event these efforts prove
unsuccessful, the Company will be required to seek additional external financing
to meet its obligations. There can be no assurance, however, that the Company
will be successful in its efforts to satisfy its obligations as they become due,
thereby enabling the Company to continue as a going concern.
The Company and Kleinert's, Inc. have announced the signing of a
definitive merger agreement which is discussed more fully at Note 4, Subsequent
Events.
(4) Subsequent Events
Disposition
On June 11, 1996, the Company and Kleinert's Inc. announced the signing
of a definitive merger agreement under which Kleinert's will acquire Scott
Mills, Inc. and will pay Scott Mills shareholders $.30 per share with $.03 paid
in cash and $.27 paid in Kleinert's common stock. The number of shares of
Kleinert's stock will be determined by using the average closing price of
Kleinert's common stock for the five consecutive trading days immediately
preceding the closing. Scott Mills has approximately 3,368,000 shares
outstanding and, upon completion of the acquisition, Kleinert's will issue,
based on the current closing price of Kleinert's stock, approximately 56,000
shares of its common stock or less than 2% of its outstanding shares.
The transaction is subject to the approval of the Company's
shareholders at its annual meeting to be held this summer.
Kleinert's is the Company's largest customer. Scott Mills' sales for
the six months ended June 1, 1996 were $4,118,000 of which $3,685,000 were sales
to Kleinert's. The acquisition will permit Kleinert's to maintain its
flexibility in servicing its retail customers in its sleepwear and activewear
products.
F-67
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
OF KLEINERT'S, INC. AND SCOTT MILLS, INC.
The following Unaudited Pro Forma Combined Condensed Balance Sheet at
June 1, 1996, and the Unaudited Pro Forma Combined Condensed Statements of
Operations for the year ended December 2, 1995 and the six months ended June
1, 1996, combine information for Kleinert's and Scott Mills and include
unaudited pro forma adjustments as described in the accompanying notes. The pro
forma combined condensed statements of operations give effect to the Merger as
if it had occurred at December 4, 1994. The Unaudited Pro Forma Combined
Condensed Balance Sheet gives effect to the Merger as if it had occurred at
June 1, 1996. The Unaudited Pro Forma Combined Condensed Financial Statements
are based on historical financial statements of Kleinert's and Scott Mills,
giving effect to the Merger applying the purchase method of accounting and the
assumptions and adjustments as discussed in the accompanying notes to the Pro
Forma Combined Condensed Financial Statements. These Unaudited Pro Forma
Combined Condensed Financial Statements are based upon the audited consolidated
financial statements as of December 2, 1995 and for the fiscal year then ended
and the unaudited consolidated financial statements as of June 1, 1996 and for
the six months then ended. These statements are based upon, and should be read
in conjunction with, the historical financial statements of Kleinert's and Scott
Mills which are incorporated by reference or included elsewhere herein. The
unaudited pro forma adjustments described in the accompanying notes are based
upon preliminary estimates and certain assumptions that the management of
Kleinert's and Scott Mills believe are reasonable in such circumstances. The pro
forma data are presented for information purposes only and are not necessarily
indicative of the operating results or financial position that would have
occurred had the Merger been consummated at the dates indicated, nor are they
necessarily indicative of future operating results or financial position.
F-68
<PAGE>
Kleinert's Inc. and Scott Mills, Inc.
Unaudited Pro Forma Combined Condensed Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
Historical
----------------------------------- Pro Forma Pro Forma
Kleinert's, Inc. Scott Mills, Inc. Adjustments Combined
6/1/96 6/1/96 6/1/96 6/1/96
---------------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Cash $ 44 $ 45 $ -- $ 89
Accounts receivable, net 13,723 9 (2,488)(G) 11,244
Inventories 35,811 1,183 (16)(E) 36,978
Other current assets 1,343 144 -- 1,487
Deferred income taxes - current -- -- 1,400 (C) 1,400
------- ------- ------- -------
Current assets 50,921 1,381 (1,104) 51,198
Property, plant and equipment,
net 7,181 1,045 180(I) 8,406
Goodwill -- -- 1,806 (A) 1,806
(F)
Other assets 4,668 18 (500)(H) 4,186
Non operating assets -- 325 -- 325
Deferred income taxes - non current -- -- 1,162(C) 1,162
------- ------- ------ -------
Total assets $62,770 $ 2,769 $ 1,544 $67,083
======= ======= ======= =======
</TABLE>
F-69
<PAGE>
Kleinert's, Inc. and Scott Mills, Inc.
Unaudited Pro Forma Combined Condensed Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
Historical
------------------------------------ Pro Forma Pro Forma
Kleinert's, Inc. Scott Mills, Inc. Adjustments Combined
At 6/1/96 At 6/1/96 At 6/1/96 At 6/1/96
---------------- ----------------- -------------- -----------
<S> <C> <C> <C> <C>
Notes payable & current portion
long-term debt $ 20,245 $ 50 $ 101 (A) $ 20,396
Accounts payable and accrued
expenses 7,695 2,692 149 (D)(F) 10,536
Due to Kleinert's -- 2,488 (2,488)(G) --
-------- -------- -------- --------
Total current liabilities 27,940 5,230 (2,238) 30,932
Deferred income taxes 134 -- -- 134
Subordinated convertible long-term debt,
long-term debt & capital leases, net 7,629 531 -- 8,160
Subordinated term debt due Kleinert's -- 500 (500)(H) --
-------- -------- -------- --------
Total liabilities 35,703 6,261 (2,738) 39,226
Preferred stock -- -- -- --
Common stock 4,198 3,368 (3,368)(B) 4,198
-- -- 56 (A) 56
-------- -------- -------- --------
Total common stock 4,198 3,368 (3,312) 4,254
Capital in excess of par value 12,164 873 (873)(B) 12,164
-- -- 734 (A)(F) 734
-------- -------- -------- --------
Total capital in excess of par value 12,164 873 (139) 12,898
Retained earnings/accumulated
deficit 13,921 (7,733) 7,733 (B) 13,921
Treasury stock (3,216) -- -- (3,216)
-------- -------- -------- --------
Total Shareholder's Equity 27,067 (3,492) 4,282 27,857
-------- -------- -------- --------
Total Liabilities and Equity $ 62,770 $ 2,769 $ 1,544 $ 67,083
======== ======== ======== ========
</TABLE>
F-70
<PAGE>
Kleinert's, Inc. and Scott Mills, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
For the six months ended For the fiscal year ended
---------------------------------- ----------------------------------------
Historical Historical
---------- ----------
Kleinert's Scott Pro Forma Pro Forma Kleinert's, Scott Pro Forma Pro Forma
Inc. Mills, Inc. Adjustments Combined Inc. Mills, Inc. Adjustments Combined
6/1/96 6/1/96 6/1/96 6/1/96 12/2/95 12/2/95 12/2/95 12/2/95
---------- -------- ----------- --------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales--non-affiliates $ 23,011 $ 433 $ -- $ 23,444 $ 75,121 $ 7,955 $ -- $ 83,076
Net sales--related party -- 3,685 (3,685)(J) -- -- 6,841 (6,841)(J) --
-------- -------- -------- -------- -------- -------- -------- --------
Net sales total 23,011 4,118 (3,685) 23,444 75,121 14,796 (6,841) 83,076
Cost of goods sold 17,806 3,994 (3,669)(J) 18,131 61,636 15,987 (6,841)(J) 70,782
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit 5,205 124 (16) 5,313 13,485 (1,191) -- 12,294
Provision for dyehouse
closing -- 138 -- -- -- 2,044 -- 2,044
Selling, general and 2,798 28 (8)(K) 2,818 5,151 919 (28)(K) 6,042
administrative expenses -- -- 38 (L) 38 -- -- 76 (L) 76
-------- -------- -------- -------- -------- -------- -------- --------
Total selling, general
and administrative
expenses 2,798 28 30 2,856 5,151 919 48 6,118
Interest expense 760 145 -- 905 1,651 704 -- 2,355
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 1,647 (187) (46) 1,414 6,683 (4,858) (48) 1,777
Provision for income
taxes (benefit) 598 -- (79)(N) 519 2,352 -- (1,840)(M) 512
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 1,049 $ (187) $ 33 $ 895(O) $ 4,331 $ (4,858) $ 1,792 $ 1,265
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss)
per share $ 0.28 $ (0.06) $ 0.24(O) $ 1.15 $ (1.44) $ 0.33
======== ======== ======== ======== ======== ========
Weighted average shares
outstanding 3,752 3,368 3,808 3,750 3,368 3,806
======== ======== ======== ======== ======== ========
</TABLE>
F-71
<PAGE>
Kleinert's, Inc. and Scott Mills, Inc.
Footnotes to Unaudited Pro Forma Combined Condensed Financial Statements
A) To record the purchase of all of the outstanding stock of Scott Mills by
Kleinert's for cash (reflected as an increase in line of credit borrowing),
Kleinert's Common Stock and the assumption of Scott Mills' net liabilities,
and to reflect the excess of purchase price over the fair value of net
assets purchased.
B) To record the elimination of Scott Mills' shareholders' equity accounts.
C) To eliminate Scott Mills' deferred income tax asset valuation reserve due
to ability of Surviving Corporation to utilize Scott Mills' net operating
loss carryforward deduction.
D) To record accrued liability for Scott Mills' merger costs.
E) To adjust Kleinert's inventory at June 1, 1996 to eliminate the
intercompany profit.
F) To accrue Kleinert's' estimated stock offering costs.
G) To eliminate Kleinert's receivable against Scott Mills' payable.
H) To eliminate Kleinert's subordinated note receivable against Scott Mills'
note payable to Kleinert's.
I) Adjust Scott's property, plant and equipment to estimated fair value.
J) To eliminate intercompany sales and cost of goods sold.
K) To eliminate the incremental expenses of operating Scott Mills as a
separate publicly traded company.
L) To reflect amortization of goodwill over 25 years.
M) To record the tax benefit of the deductibility of Scott Mills' net
operating losses.
N) To record the provision for income taxes for the six months ended June
1, 1996 on a pro forma basis.
O) On December 19, 1995, Kleinert's, Inc. acquired substantially all of the
assets of Pixie Playmate, Inc. and Certified Sewing Services, Inc. and the
shares of Certified Apparel Services of Honduras, SA for $4,650,000. The
unaudited pro forma combined net income and net income per share for the
year ended December 2, 1995, assuming that the acquisition had occurred
on December 4, 1994 would have been $902,000 and $.24, respectively and
for the six months ended June 1, 1996. The impact of the acquisition
reflects activity between December 3, 1995 and December 19, 1995 and was
insignificant.
F-72
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of June 10, 1996,
among KLEINERT'S, INC., a Pennsylvania corporation ("Kleinert's"), KLEINERT'S,
INC. OF ALABAMA, an Alabama corporation and a wholly-owned subsidiary of
Kleinert's ("Kleinert's Alabama"), and SCOTT MILLS, INC., a Pennsylvania
corporation ("Scott Mills").
WHEREAS, the respective Boards of Directors of Kleinert's, Kleinert's
Alabama and Scott Mills have approved the merger of Scott Mills with and into
Kleinert's Alabama in accordance with the Pennsylvania Business Corporation Law
of 1988, as amended (the "Pennsylvania Law"), the Alabama Business Corporation
Act (the "Alabama Law") and the provisions of this Agreement (the "Merger").
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, Kleinert's,
Kleinert's Alabama and Scott Mills hereby agree as follows:
1. The Merger
1.1 The Merger. At the Effective Time (as defined in Section
1.3 hereof) and subject to the terms and conditions of this Agreement, the
Alabama Law and the Pennsylvania Law, Scott Mills shall be merged with and into
Kleinert's Alabama, the separate corporate existence of Scott Mills shall
thereupon cease, and Kleinert's Alabama shall be the surviving corporation in
the Merger. Kleinert's Alabama is hereinafter sometimes referred to as the
"Surviving Corporation."
1.2 Surviving Corporation. At the Effective Time, the Surviving
Corporation shall continue its corporate existence under the Alabama Law and
shall thereupon and thereafter possess all the rights, privileges, powers and
franchises of a public as well as of a private nature, of Kleinert's Alabama and
Scott Mills (together the "Constituent Corporations"); and be subject to all the
restrictions, disabilities and duties of each of the Constituent Corporations;
and all the property, real, personal and mixed, and franchises of each of the
Constituent Corporations, and all debts due to each of the Constituent
Corporations on whatever account, including subscriptions to shares and other
choses in action belonging to each of the Constituent Corporations and all and
every other interest shall be vested in the Surviving Corporation; and all
rights of creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired; and all debts, liabilities and
duties of each of the Constituent Corporations shall thenceforth attach to the
Surviving Corporation and may be enforced against it to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it; and
all other effects of the Merger specified in the Alabama Law shall result
therefrom. The name of the Surviving Corporation shall be "Kleinert's, Inc. of
Alabama."
1.3 Effective Time of the Merger. The Merger shall be effective as
of the date and time of filing of the Articles of Merger (the "Articles of
Merger") with the Department of State of the State of Alabama in accordance with
the provisions of the Alabama Law, which filing the parties hereto shall cause
to occur as soon as practicable after the satisfaction or waiver of the
conditions hereinafter set forth and after all filings incident to the Merger as
required by the Pennsylvania Law have been made. The term "Effective Time" shall
mean the date and time of the filing of the Articles of Merger with the
Department of State of the State of Alabama.
1.4 Articles of Incorporation. As a result of the Merger, the
Articles of Incorporation of Kleinert's Alabama, as in effect immediately prior
to the Effective Time, shall be immediately after the Effective Time the
Articles of Incorporation of the Surviving Corporation, until thereafter amended
as provided therein and under the Alabama Law.
1.5 By-laws; Directors and Officers. The By-laws of Kleinert's
Alabama, as in effect immediately prior to the Effective Time, shall be
immediately after the Effective Time the By-laws of the Surviving Corporation,
until thereafter amended as provided therein and under the Alabama Law. The
directors and officers of Kleinert's Alabama immediately prior to the Effective
Time shall, after the Effective Time, be the directors and officers,
respectively, of the Surviving Corporation until, as to the directors, their
successors are elected and qualified in accordance with the Articles of
Incorporation and By-laws of the Surviving Corporation and, as to the officers,
until their earlier death, resignation or removal.
2. Status and Conversion of Securities
2.1 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of Kleinert's, Kleinert's Alabama,
Scott Mills or the holders of any of the following securities:
(a) Each share of Common Stock, $1.00 par value, of Scott Mills
(individually, a "Scott Mills Share" and collectively, "Scott Mills Shares")
issued and outstanding immediately prior to the Effective Time (other than Scott
Mills Shares to be cancelled pursuant to subsection 2.1(b) hereof)
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<PAGE>
shall be cancelled and extinguished and be converted into the right to receive:
(i) $0.03 in cash and (ii) such number or fractional portion of a share of
Common Stock, par value $1.00, of Kleinert's (individually, a "Kleinert's Share"
and collectively, "Kleinert's Shares") which shall have an Average Price of
$0.27 (the cash payment and Kleinert's Shares to be issued in respect of each
Scott Mills Share being the "Per Share Merger Consideration," and the cash
payments and Kleinert's Shares to be issued in the Merger being the "Merger
Consideration"). If, after the Effective Time, certificates previously
representing Scott Mills Shares are presented to the Surviving Corporation, they
shall be cancelled and exchanged for the Merger Consideration into which they
would have been converted at the Effective Time pursuant to this subsection
2.1(a) if such certificates had been delivered at or prior to the Effective
Time. The term "Average Price" shall mean the average closing price per share of
the Kleinert's Shares as reported on the Nasdaq National Market System for the
ten (10) consecutive trading days immediately preceding the date on which occurs
the Effective Time. No fractional Kleinert's Shares shall be issued in the
Merger and each holder of Scott Mills Shares entitled to receive as part of the
Merger Consideration fractional shares shall in lieu thereof receive cash in an
amount based upon the Average Price.
(b) Each Scott Mills Share which is held in the treasury of
Scott Mills immediately prior to the Effective Time shall be cancelled and
retired and no consideration shall be paid or given with respect thereto.
(c) All notes and other debt instruments of Scott Mills which
are outstanding at the Effective Time shall continue to be outstanding
subsequent to the Effective Time as notes and other debt instruments of the
Surviving Corporation, subject to their respective terms and provisions.
2.2 Scott Mills Stock Options and Related Matters. Each option,
warrant or similar instrument exercisable to purchase Scott Mills Shares (a
"Scott Mills Option") which is outstanding at the Effective Time shall be
cancelled and extinguished and converted into the right to receive the Per Share
Merger Consideration for each Scott Mills Share into which such Scott Mills
Option is exercisable, less the exercise price per Scott Mills Share.
2.3 Exchange of Certificates.
(a) Exchange Agent. At or prior to the Effective Time,
Kleinert's shall deposit, or shall cause to be deposited, with a bank or trust
company designated by Kleinert's with a capital and surplus of in excess of
$100,000,000 (the
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<PAGE>
"Exchange Agent"), for the benefit of holders of Scott Mills Shares, for
exchange in accordance with this Agreement, certificates evidencing such number
of Kleinert's Shares and cash as shall comprise the aggregate Merger
Consideration (such certificates for Kleinert's Shares, together with any
dividends or distributions with respect thereto, and cash being the "Exchange
Fund"). The Exchange Agent shall deliver, pursuant to irrevocable instructions,
the Kleinert's Shares and cash contemplated to be issued pursuant to subsection
2.1(a) out of the Exchange Fund. The Exchange Fund shall not be used for any
other purpose.
(b) Exchange Procedures. Promptly after the Effective Time,
Kleinert's will cause the Exchange Agent to mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
evidenced Scott Mills Shares (other than Dissenting Shares) (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates shall pass, only upon proper delivery of the
certificates to the Exchange Agent and shall be in such form and have such other
provisions as Kleinert's may reasonably specify) and (ii) instructions for use
in effecting the surrender of the certificates in exchange for the Merger
Consideration. Each holder of a certificate formerly representing Scott Mills
Shares (a "Certificate") who surrenders or has surrendered such Certificate (or
an affidavit pursuant to Section 2.6), together with duly executed transmittal
materials shall be entitled to receive, upon acceptance thereof (which
Kleinert's shall cause to occur promptly), in exchange therefor (A) certificates
evidencing that number of whole Kleinert's Shares and cash (including cash in
lieu of fractional Kleinert's Shares) which such holder has the right to receive
in respect of the Scott Mills Shares pursuant to subsection 2.1(a) and (B) any
dividends or other distributions to which such holder is entitled pursuant to
subsection 2.3(d), and the Certificate so surrendered shall forthwith be
cancelled. In the event of a transfer of ownership of Scott Mills Shares which
is not registered in the transfer records of Scott Mills, a certificate
evidencing the proper number of Kleinert's Shares and/or cash may be issued
and/or paid in accordance with this Agreement to a transferee if the Certificate
evidencing such Scott Mills Shares is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.3, each Certificate shall be
deemed at any time after the Effective Time to evidence only the right to
receive upon such surrender the Merger Consideration.
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(c) Distributions with Respect to Unexchanged Kleinert's Shares.
No dividends or other distributions declared or made after the Effective Time
with respect to Kleinert's Shares with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate with respect to the
Kleinert's Shares evidenced thereby and no other part of the Merger
Consideration shall be paid to any such holder, until the holder of such
Certificate shall surrender such Certificate (or an affidavit pursuant to
Section 2.6). Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the holder of the certificates evidencing
whole Kleinert's Shares issued in exchange therefor, without interest, (i)
promptly, the amount of any cash payable with respect to a fractional Kleinert's
Share to which such holder is entitled pursuant to subsection 2.1(a) and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole Kleinert's Shares,
and (ii) at the appropriate payment date, the amount of dividends or other
distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole Kleinert's Shares. No interest shall be paid on the Merger
Consideration.
(d) No Further Rights in Scott Mills Shares. All Kleinert's
Shares issued and cash paid upon conversion of the Scott Mills Shares in
accordance with the terms hereof shall be deemed to have been issued or paid in
full satisfaction of all rights pertaining to such Scott Mills Shares.
(e) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the holders of Scott Mills Shares for six
(6) months after the Effective Time shall be delivered to Kleinert's, upon
demand, and any holders of Scott Mills Shares who have not theretofore complied
with this Section 2.3 shall thereafter look only to Kleinert's for the Merger
Consideration to which they are entitled.
(f) No Liability. Notwithstanding anything to the contrary in
this Section 2.3, no party hereto shall be liable to any holder of Scott Mills
Shares for any Kleinert's Shares (or dividends of distributions with respect
thereto) or cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
2.4 Stock Transfer Books. At the Effective Time, the stock transfer
books of Scott Mills shall be closed and there shall be no further registration
of transfers of Scott Mills Shares thereafter on the records of Scott Mills. On
or after the Effective Time, any certificates presented to the Exchange Agent
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<PAGE>
or Kleinert's for any reason shall be converted into the Merger
Consideration.
2.5 Dissenting Shares.
(a) Notwithstanding any other provision of this Agreement to the
contrary, Scott Mills Shares that are outstanding immediately prior to the
Effective Time and which are held by shareholders who shall have not voted in
favor of the Merger or consented thereto in writing and who shall have demanded
properly in writing appraisal for such shares in accordance with the
Pennsylvania Law (collectively, the "Dissenting Shares") shall not be converted
into or represent the right to receive the Merger Consideration. Such
shareholders shall be entitled to receive payment of the appraised value of such
Scott Mills Shares held by them in accordance with the applicable provisions of
the Pennsylvania Law, except that all Dissenting Shares held by shareholders who
shall have failed to perfect or who effectively shall have withdrawn or lost
their rights to appraisal of such Scott Mills Shares under the Pennsylvania Law
shall thereupon be deemed to have been converted into and to have become
exchangeable, as of the Effective Time, for the right to receive, without any
interest thereon, the Merger Consideration, upon surrender, in the manner
provided in subsection 2.3, of the Certificate or Certificates that formerly
evidenced such Scott Mills Shares.
(b) Scott Mills shall give Kleinert's: (i) prompt notice of any
written demands for appraisal of any Scott Mills Shares, withdrawals of such
demands, and any other instruments served pursuant to the Pennsylvania Law and
received by Scott Mills which relate to any such demand for appraisal; and (ii)
the opportunity to participate in all negotiations and proceedings which take
place prior to the Effective Time with respect to demands for appraisal. Scott
Mills shall not, except with the prior written consent of Kleinert's,
voluntarily make any payment with respect to any demands for appraisal of
Kleinert's Shares or offer to settle or settle any such demands.
2.6 Lost, Stolen or Destroyed Certificates. Notwithstanding any
provision herein to the contrary, in the event any Certificates evidencing Scott
Mills Shares shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such Merger
Consideration as may be required pursuant to subsection 2.1(a); provided,
however, that Kleinert's in its discretion and as a condition precedent to the
issuance thereof, may require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum and for such period as it may
reasonably direct (but no more than shall be customary in
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<PAGE>
similar circumstances) as indemnity against any claim that may be made against
Kleinert's or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
2.7 Additional Rights; Taking of Necessary Action; Further Action.
Kleinert's and Scott Mills each shall use its best efforts to take all such
action as may be necessary or appropriate to effectuate the Merger under the
Alabama Law and the Pennsylvania Law as promptly as possible, including, without
limitation, the adoption and filing under the Alabama Law of the Articles of
Merger consistent with the terms of this Agreement. If at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest in the Surviving Corporation full right,
title and possession to all assets, property, rights, privileges, powers and
franchises of Scott Mills, the officers of Scott Mills are fully authorized in
the name of Scott Mills or otherwise to take, and shall take, all such lawful
and necessary action.
3. Representations and Warranties of Scott Mills. As a material
inducement to Kleinert's and Kleinert's Alabama to enter into this Agreement and
to consummate the transactions contemplated hereby, Scott Mills makes the
following representations and warranties to Kleinert's and Kleinert's Alabama.
3.1 Organization and Qualification. Scott Mills is a corporation
duly organized and validly existing under the laws of the Commonwealth of
Pennsylvania. Scott Mills, Inc. of North Carolina, the only subsidiary
(wholly-owned or otherwise) of Scott Mills (the "Subsidiary"), is a corporation
duly organized, validly existing and in good standing under the laws of the
State of North Carolina. Each of Scott Mills and its Subsidiary has the power
and authority to own, lease and operate its respective properties and carry on
its respective business as it is now being conducted, and is duly qualified,
licensed and authorized as a foreign corporation to do business, and is in good
standing, in each jurisdiction in which the nature or character of its
respective business or the ownership or leasing of its respective properties and
assets makes such qualification, license and authorization necessary, except
where the failure to be so qualified and licensed would not have a material
adverse effect on Scott Mills and its Subsidiary taken as a whole. True, correct
and complete copies of the Articles of Incorporation and By-laws of Scott Mills
and its Subsidiary, as each is amended to date, have been delivered to
Kleinert's prior to the date hereof. Other than its Subsidiary, Scott Mills does
not directly or indirectly own any interest in any other corporation,
partnership, joint venture or other business association or entity.
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3.2 Capitalization.
(a) The authorized capital stock of Scott Mills consists of
10,000,000 Scott Mills Shares of which, as of the date hereof, there were
3,367,598 Scott Mills Shares issued and outstanding and no Scott Mills Shares
held in Scott Mills' treasury. All issued and outstanding Scott Mills Shares are
duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. Except as set forth on Schedule 3.2 or in the Scott Mills
Securities Filings (as defined herein), no equity securities of Scott Mills are
or may become required to be issued by reason of any options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
shares of any capital stock of Scott Mills, and there are no contracts,
commitments, understandings or arrangements by which Scott Mills is bound to
issue additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or securities
convertible into or exchangeable for such shares.
(b) Except for the securities owned by Scott Mills, there are no
other securities of its Subsidiary outstanding and no equity securities of its
Subsidiary are or may become required to be issued by reason of any options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any capital stock of the Subsidiary, and there are no contracts,
commitments, understandings or arrangements by which the Subsidiary is bound to
issue additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or securities
convertible into or exchangeable for such shares.
3.3 Authority Relative to Agreement.
(a) Scott Mills has all requisite power and authority to enter
into this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Scott Mills and the consummation by Scott Mills of the Merger and the other
transactions contemplated hereby have been duly authorized by the Board of
Directors of Scott Mills and no other corporate proceedings on the part of Scott
Mills is necessary to authorize this Agreement, the Merger or the consummation
of the other transactions contemplated hereby, other than the approval of
shareholders as contemplated by Section 9.2 hereof. This Agreement has been duly
executed and delivered by Scott Mills and constitutes its valid and binding
obligation, enforceable against it in accordance with its terms, except as
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<PAGE>
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought.
(b) None of the execution and delivery of this Agreement by
Scott Mills, the consummation of the transactions contemplated hereby or
compliance by Scott Mills with any of the provisions hereof will: (i) violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of Scott Mills or its Subsidiary under any
of the terms, conditions or provisions of (x) the Articles of Incorporation or
By-Laws of Scott Mills or (y) any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which
Scott Mills or its Subsidiary is a party or to which it or any of its respective
properties or assets may be subject, or (ii) violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to Scott
Mills or its Subsidiary or any of its respective properties or assets.
(c) Other than in connection with or in compliance with the
provisions of the Pennsylvania Law, the Alabama Law and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no notice to, filing with, or
authorization, consent or approval of, any domestic public body or authority is
necessary for the consummation by Scott Mills of the transactions contemplated
by this Agreement.
3.4 Financial Statements. The consolidated balance sheets of Scott
Mills at December 2, 1995 and December 3, 1994 and the related consolidated
statements of income, changes in equity accounts and cash flows for the years
ended December 2, 1995 and December 3, 1994, and all related schedules and notes
to the foregoing, set forth in Scott Mills' Annual Report on Form 10-K for the
fiscal year ended December 2, 1995 as delivered to Kleinert's (the "Scott Mills
1995 Form 10-K"), were prepared and audited by Ernst & Young LLP, independent
certified public accountants, in accordance with generally accepted accounting
principles consistently applied throughout the periods reported upon and with
past practices, and fairly and accurately present the consolidated financial
position of Scott Mills as of the dates of such balance sheets and the
consolidated results of operations for Scott Mills for the periods reported
upon. The unaudited consolidated balance sheet of Scott Mills at March 2,
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1996 (the "Scott Mills Warranted Balance Sheet") and the related consolidated
statement of income, changes in equity accounts and cash flow for the three
months ended March 2, 1996, set forth in Scott Mills' Quarterly Report on Form
10-Q for the fiscal quarter ended March 2, 1996 (the "Scott Mills Form 10-Q")
were prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC") and fairly and accurately present the
consolidated financial position of Scott Mills as of the date of such balance
sheet and the consolidated results of operations for Scott Mills for the period
reported upon subject to normal year-end adjustments.
3.5 Securities Laws Filings. Scott Mills has filed all forms,
reports and documents required to be filed by it with the SEC, and Scott Mills
previously has delivered to Kleinert's the Scott Mills 1995 Form 10-K, Scott
Mills' Annual Report on Form 10-K for the fiscal year ended December 3, 1994
(the "Scott Mills 1994 Form 10-K") and the Scott Mills Form 10-Q (as each is
amended to date, collectively called the "Scott Mills Securities Filings"). As
of their respective filing dates with the SEC, the Scott Mills Securities
Filings complied in all material respects with the applicable requirements of
the Exchange Act and the rules and regulations promulgated thereunder, and did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. No
event has occurred since the filing of the Scott Mills Form 10-Q which is
required to be disclosed in a report filed by Scott Mills pursuant to Section 13
or 15(d) of the Exchange Act which has not been disclosed.
3.6 Real Estate. Neither Scott Mills nor its Subsidiary owns any
real estate. All of the leasehold estates (the "Leaseholds") to which either
Scott Mills or its Subsidiary is a party as tenant are disclosed in the Scott
Mills Securities Filings. No party may terminate any Leasehold prior to the end
of the then current Leasehold lease except as set forth in the Leasehold leases
previously delivered to Kleinert's, and there are no outstanding agreements with
any party to acquire the Leasehold premises or any portion thereof or any
interest therein.
3.7 Personal Property. Except as shown on Schedule 3.7: (i) each of
Scott Mills and its Subsidiary has good, valid and marketable title to all of
its respective personal property, tangible and intangible, free and clear of all
liens, mortgages, pledges, security interests, restrictions, prior assignments,
encumbrances and claims of every kind; (ii) Scott Mills or its Subsidiary is the
owner of all material personal property now located in or upon the Leaseholds
and of
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all personal property which is used, directly or indirectly, in the operation of
its respective business; (iii) all material equipment, furniture and fixtures
and other material tangible personal property are in operating condition and
repair, normal wear and tear excepted; and (iv) all inventory as reflected on
the books of either Scott Mills or its Subsidiary is usable in the ordinary
course of business.
3.8 Insurance. Scott Mills maintains insurance with respect to
amounts, coverage, deductibles and premiums as would be maintained by an entity
of comparable size and within the same line of business as that of Scott Mills
and its Subsidiary. All of the policies are in full force and effect, all
premiums payable under such policies have been paid in full and the insured is
not in default of any material provision thereof. There is no claim by Scott
Mills or its Subsidiary pending under any of such policies as to which coverage
has been questioned, denied or disputed by the insurer. Neither Scott Mills nor
its Subsidiary has received notice from any issuer of any such policies of its
intention to cancel or refusal to renew any policy issued by it or of its
intention to renew any such policy based on an increase in premium rates other
than in the ordinary course of business. None of such policies is subject to
cancellation as a result of the Merger or the other transactions contemplated by
this Agreement, including without limitation, the transfers of the policies to
the Surviving Corporation in the Merger.
3.9 Liabilities. At the Effective Date, Scott Mills and its
Subsidiary shall have no material liabilities, whether related to tax or non-tax
matters, known or unknown, due or not yet due, liquidated or unliquidated, fixed
or contingent, determined or determinable in amount or otherwise, except: (i) as
and to the extent reflected on the Scott Mills Warranted Balance Sheet, this
Agreement or in any Schedule or Exhibit thereto and (ii) liabilities incurred in
the ordinary course of business from and after the date of the Warranted Balance
Sheet and fully reflected on the books of Scott Mills.
3.10 Contracts, Leases, Agreements and Other Commitments. Neither
Scott Mills nor its Subsidiary is a party to or bound by any oral, written or
implied contracts, agreements, leases, powers of attorney, guaranties, surety
arrangements or other commitments, except for the following (which are
hereinafter collectively called the "Corporation Agreements"):
(a) The leases and agreements described on Schedule 3.11;
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(b) Agreements involving a maximum possible liability or
obligation on the part of Scott Mills and its Subsidiary, taken as a whole, of
less than Fifty Thousand Dollars ($50,000) each or less than One Hundred Fifty
Thousand Dollars ($150,000) in the aggregate;
(c) Agreements to which Kleinert's or any of its Subsidiaries is
also a party; and
(d) The agreements listed on Schedule 3.10.
True, correct and complete copies of each Corporation Agreement
described and listed under subsections 3.10(a) or 3.10(d) have previously been
made available to Kleinert's. All of the Corporation Agreements are valid,
binding and enforceable against the respective parties thereto in accordance
with their respective terms, subject to bankruptcy, insolvency, moratorium and
similar laws and general equitable principles. Scott Mills has performed in all
material respects and, to the knowledge of Scott Mills, all other parties to all
of the Corporation Agreements have performed in all material respects, all
obligations required to be performed to date under such Corporation Agreements,
and neither Scott Mills nor, to the knowledge of Scott Mills, any other party is
in material default or in arrears under the terms thereof, and no condition
exists or event has occurred which, with the giving of notice or lapse of time
or both, would constitute a material default thereunder. The consummation of
this Agreement and the Merger will not result in an impairment or termination of
any of the material rights of Scott Mills or its Subsidiary under any
Corporation Agreement. None of the terms or provisions of any Corporation
Agreement materially adversely affects the business, prospects, financial
condition or results of operations of Scott Mills and its Subsidiary taken as a
whole.
Schedule 3.10 also contains a listing of all outstanding written and
oral proposals, bids, offers or guarantees made by Scott Mills or the Subsidiary
which, if accepted, would or could impose any material debts, obligations or
liabilities upon Scott Mills or the Surviving Corporation.
3.11 Labor Relations; Employees.
(a) Except as set forth on Schedule 3.11, neither Scott Mills
nor its Subsidiary is a party to any collective bargaining agreements or other
agreements requiring arbitration of employment disputes, or subject to any
arbitration awards decided under any such agreements, or oral assurances or
modifications, past practices, and/or arrangements made in relation thereto, or
to any employment agreements or severance agreements which have not been fully
performed.
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(b) There is no union representing or purporting to represent
any of the employees of Scott Mills or its Subsidiary, and neither is subject to
or currently negotiating any collective bargaining agreements with any union
representing or purporting to represent its respective employees.
(c) (i) There are no strikes, slow downs or other work
stoppages, grievance proceedings, arbitrations, labor disputes or representation
questions pending or, to the knowledge of Scott Mills, threatened; (ii) neither
Scott Mills nor its Subsidiary is (A) liable for any arrearages of wages or any
taxes or penalties for failure to comply with any of the foregoing or (B)
delinquent in the payment of any severance, salary, bonus, commission or other
direct or indirect compensation for services performed by any employee to the
date hereof, or any amount required to be reimbursed to any employee or former
employee; and (iii) there are no charges, suits, actions, administrative
proceedings, investigations and/or claims pending or, to the knowledge of Scott
Mills, threatened against Scott Mills or its Subsidiary, before any court,
governmental agency, department, board or instrumentality, or before any
arbitrator (collectively "Actions"), concerning or in any way relating to its
employees or employment practices, including, without limitation, Actions
involving unfair labor practices, wrongful discharge and/or any other
restrictions on the right of Scott Mills or its Subsidiary to terminate its
respective employees, employment discrimination, occupational safety and health,
and workers' compensation, which liability in clause (A), delinquency in clause
(B) or Action in clause (C) would have a material adverse effect on the
business, prospects, financial condition or results of operation of Scott Mills
and its Subsidiary taken as a whole.
(d) There are no express or implied agreements, policies,
practices, or procedures, whether written or oral, pursuant to which any
employee of Scott Mills or the Subsidiary is not terminable at will.
3.12 Employee Pensions and ERISA. Other than as disclosed in the
Scott Mills Securities Filings, neither Scott Mills nor any ERISA Affiliate (as
hereinafter defined) maintains, sponsors, contributes to or has any liability
under any material agreement, plan or program, whether written or oral, which
either constitutes an "employee benefit plan" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or which
provides for stock option, stock appreciation rights or stock purchase benefits,
or for any other kind of benefit (whether or not a payroll practice) for
employees, former employees, retirees, directors, other service providers or
their beneficiaries (individually referred to as an "Employee Benefit Plan" and
collectively referred to as "Employee Benefit Plans"). No employee or former
employee or any
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beneficiary thereof participates in or has any rights to benefits with respect
to employment with Scott Mills under any material agreement, plan or program not
disclosed in the Scott Mills Securities Filings, other than a multi-employer
plan. No person who is not a current or former employee (or a beneficiary
thereof) or director of Scott Mills participates in or is entitled to any
benefits under any Employee Benefit Plan. For purposes of this Agreement, "ERISA
Affiliate" means each person, company and trade or business which together with
Scott Mills, respectively, are treated as a single employer under Section
414(b), (c), (m), (n) and (o) of the Internal Revenue of 1986, as amended
("Code").
Each Employee Benefit Plan has materially complied and currently
materially complies in form, operation and administration with all applicable
provisions of applicable law, including the Code and ERISA and any contractual
obligation. Scott Mills has previously delivered to Kleinert's with respect to
each Employee Benefit Plan subject to ERISA true and correct copies of: (i) the
annual return/report (Form 5500 Series) with attached schedules and a financial
statement for the three most recent fiscal years; (ii) the summary plan
descriptions and all material written announcements or disclosures to
participants; (iii) the most recent Internal Revenue Service ("IRS")
determination letter; and (iv) each written description intended to describe any
Employee Benefit Plan.
Each Employee Benefit Plan intended to be tax qualified
under Section 401(a) of the Code has been determined by the IRS to be so
qualified and each trust created thereunder has been determined to be exempt
from tax and, to the knowledge of Scott Mills, nothing has occurred which would
cause the loss of such qualification or tax-exempt status.
With respect to each Employee Benefit Plan that is subject to
Section 412 of the Code or Title IV of ERISA (collectively, "Pension Plan")
there has been no failure to make any contribution or pay any amount due as
required by Section 412 of the Code, Section 302 of ERISA or the terms of any
such Pension Plan, and no request or receipt of any funding waiver has been
requested or received from the IRS. The present value of the benefit liabilities
(as defined in Section 4001(a)(16) of ERISA) of each Pension Plan that is
subject to Title IV of ERISA, as of any determination date, is less than the
fair market value of the assets of such Pension Plan, all determined using the
actuarial assumptions that would be used by PBGC in the event of a termination
of the Pension Plan on such determination date.
Within the past three (3) years, neither Scott Mills nor any ERISA
Affiliate has transferred any assets or liabilities of a Pension Plan subject to
Section 412 of the Code
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which had, at the date of such transfer, accrued benefits in excess of the fair
market value of its assets as of any determination date, determined using the
actuarial assumptions that would be used by PBGC in the event of a termination
of the Pension Plan on such determination date or has engaged in a transaction
which may reasonably be subject to Section 4212(c) or 4069 of ERISA.
There has been no reportable event (as defined in Section 4043 of
ERISA) within the last three (3) years.
With respect to the Employee Benefit Plans subject to Title I Part 4
of ERISA or Section 4975 of the Code, neither Scott Mills nor any other person
has (i) engaged in a "prohibited transaction" within the meaning of Section 4975
of the Code or Section 406 of ERISA which would subject Kleinert's, Kleinert's
Alabama or Scott Mills to liability for a tax or penalty imposed by Section 4975
of the Code or Section 502 of ERISA, or (ii) committed a breach of its fiduciary
duties (as defined in Section 404 of ERISA) which could subject Kleinert's,
Kleinert's Alabama or Scott Mills to any liability.
No Employee Benefit Plan provides for post-employment medical,
health or life insurance benefits for present or future retirees or present or
future terminated employees, except for continuation coverage provided pursuant
to the requirements of Section 4980B of the Code or Sections 601-608 of ERISA or
a similar state law, or continued coverage under an insurance policy for a
period not to exceed sixty days (60) following termination of employment. Scott
Mills and its ERISA Affiliates have complied in all respects with the notice and
contribution requirements of Section 4980(B) of the Code and Sections 601-608 of
ERISA. Any contribution or payment required to be made by Scott Mills to or on
behalf of any Employee Benefit Plan has been made on or before its due date.
Adequate accruals for all contributions or payments required to be made by Scott
Mills to or on behalf of any Employee Benefit Plan and multi-employer pension
plan to which Scott Mills and/or any ERISA Affiliate makes contributions to or
has any liabilities with respect thereto ("MEPPA Plan") for all periods ending
on or prior to the date hereof have been made on the Warranted Balance Sheet.
With respect to the Employee Benefit Plans, no actions, suits or
claims: (i) with respect to the assets or liabilities thereof (other than
routine claims for benefits); (ii) against Scott Mills or an ERISA Affiliate; or
(iii) against any fiduciary with respect to any Employee Benefit Plan are
pending or threatened. Neither Scott Mills nor any ERISA Affiliate: (i) has
incurred a complete or partial withdrawal, as those terms are defined in Section
4203 or 4205, respectively, of ERISA; (ii) has engaged or intends to engage in a
transaction or
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course of conduct which could result in liability under Title IV of ERISA to a
"multi-employer plan" as defined in Section 4001(a)(3) of ERISA; (iii) has any
outstanding liability under Title IV of ERISA, contingent or otherwise; or (iv)
will incur any liability with respect to any Employee Benefit Plan or MEPPA Plan
solely as a result of undertaking the transactions contemplated by this
Agreement.
Except as set forth on Schedule 3.13, during the last two years
there have been no amendments nor establishment of any Employee Benefit Plan,
which resulted in a material increase in the accrued or promised benefits of any
current or former employee of Scott Mills.
3.13 Litigation. Except as disclosed in the Scott Mills 1995 Form
10-K, neither Scott Mills nor its Subsidiary is a party to or, to the knowledge
of Scott Mills, threatened with any suit, action, arbitration, administrative or
other proceeding or governmental investigation which could materially adversely
affect the results of operations or financial condition of Scott Mills and its
Subsidiary taken as a whole; there are no judgments, decrees, awards or orders
outstanding against Scott Mills or its Subsidiary which could materially
adversely affect the results of operations or financial condition of Scott Mills
and its Subsidiary taken as a whole; and Scott Mills is not contemplating the
institution of any suit, action, arbitration, administrative or other
proceeding.
3.14 Compliance With Laws and Regulations. Scott Mills and its
Subsidiary are in compliance with their respective charters and by-laws and all
material requirements of law, Federal, state and local, and all requirements of
all governmental bodies or agencies having jurisdiction over them, the conduct
of their respective business, the use of their respective properties and assets,
and all premises occupied by them. Without limiting the generality of the
foregoing, all material licenses, permits, certificates and authorizations
needed or required for the conduct by their respective business as presently
conducted and for the use of their respective properties and premises occupied
by them have been obtained and will not expire within 90 days from the Effective
Time. Scott Mills and its Subsidiary have properly filed all reports and other
documents required to be filed with any Federal, state and local government or
subdivision or agency thereof, except where the failure to file would have a
material adverse effect on the business, prospects, financial condition or
results of operations of Scott Mills and the Subsidiary taken as a whole.
Neither Scott Mills nor its Subsidiary has received any written notice, not
heretofore complied with, from any Federal, state or municipal authority or any
insurance or inspection body that any
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of its respective properties, facilities, equipment or business procedures or
practices fails to comply in any material respect with any applicable law,
ordinance, regulation, building or zoning law, or requirement of any public body
or authority.
3.15 Environmental Provisions. Neither Scott Mills nor its
Subsidiary has been notified by any governmental authority, agency or third
party of any violation by either of any Environmental Statute (as defined
below). To the knowledge of Scott Mills, all registrations, licenses or permits
of Scott Mills and its Subsidiary are in full force and effect. The term
"Environmental Statutes" means all statutes, ordinances, regulations and orders
concerning the protection of the environment, including those relating to
discharges to the air, soil, surface water or ground water and the treatment,
storage, transportation, disposal or remediation of any waste or any Hazardous
Substance (as defined below). Hazardous Substance means "hazardous substances,
contaminants or pollutants," as defined pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.9601-9657,
as amended, "regulated substances" within the meaning of Subtitle I of the
Resource Conservation and Recovery Act, 42 U.S.C. ss.6991-6991(i), as amended
("RCRA"), and any substances covered under any state laws dealing with hazardous
or toxic materials, substances or wastes or petroleum or petroleum products. To
the knowledge of Scott Mills, no Contamination (as defined below) is present at
or arising from any Leasehold. "Contamination" means the presence of Hazardous
Substances which requires remediation under any Environmental Statute.
To the knowledge of Scott Mills, the generation, treatment, storage,
transportation or disposal of any Hazardous Substances by Scott Mills and its
Subsidiary was and is in material compliance with all applicable laws,
ordinances and regulations of Federal, state or municipal governments or their
agencies applicable at the time of generation. Neither Scott Mills nor the
Subsidiary has received from any governmental body, agency or third party any
written request for information, notice of claim, demand or other notification
that it may be potentially responsible with respect to any investigation or
remediation of any threatened or actual release of Hazardous Substances at or
from any property now or previously owned or leased by Scott Mills or the
Subsidiary or any facility at which Hazardous Substances were or are treated,
stored or disposed by Scott Mills. To the knowledge of Scott Mills, all
hazardous waste, as defined in RCRA, 42 U.S.C. ss. 6901 et seq., has been
treated, stored, transported and disposed of in material conformity with all
requirements applicable to such hazardous waste.
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<PAGE>
3.16 Taxes and Other Governmental Charges.
(a) For purposes of this Agreement: (i) "Tax" or "Taxes" shall
mean any Federal, state, local, foreign or other income, gross receipts,
profits, franchise, license, transfer, sales, use, ad valorem, customs, payroll,
withholding, employment, occupation, property (real or personal), excise or
other taxes, fees, duties, assessments, withholdings or governmental charges of
any nature (including interest, penalties or additions to such taxes or
charges); (ii) "Pre-Merger Periods" shall mean all tax periods ending on or
before the Effective Time and, with respect to any Tax period that includes but
does not end on the Effective Time, the portion of such period that ends on and
includes the Effective Time; and (iii) "Returns" shall mean all returns,
reports, estimates, information returns and statements of any nature regarding
Taxes for any Pre-Merger Period required to be filed by Scott Mills or any
affiliate and relating to its income, properties or operations.
(b) Except as set forth on Schedule 3.16: (i) all Returns have
been or will be filed when due in timely fashion; (ii) all Taxes shown on the
Returns have been or will be paid when due in timely fashion; (iii) to the
extent required by applicable law, the Returns reflected the facts regarding the
income, properties, operations and status of any entity required to be shown
thereon; (iv) the charges, accruals and reserves for Taxes due, or accrued but
not yet due, relating to the income, properties or operations of Scott Mills and
its affiliates for each Pre-Merger Period as reflected on the books of Scott
Mills (including, without limitation, the Scott Mills Warranted Balance Sheet)
are adequate to cover such Taxes; (v) there is no action, suit, proceeding,
audit or claim now pending or, to the knowledge of Scott Mills, threatened,
regarding any Taxes relating to the income, properties or operations of Scott
Mills or any affiliate for any Pre-Merger Period; (vi) there are no agreements
for the extension of the time for assessment of any Taxes relating to the
income, properties or operations of Scott Mills or any affiliate for any
Pre-Merger Period; (vii) all Taxes which Scott Mills and its affiliates are
required by law to withhold and collect have been duly withheld and collected,
and have been timely paid over to the proper authorities to the extent due and
payable; (viii) there are no liens for any Tax on the assets of Scott Mills or
any affiliate; and (ix) there are no tax sharing agreements to which Scott Mills
or any affiliate is now or ever has been a party.
3.17 Actions Since Balance Sheet Date. Except as set forth on
Schedule 3.17, since March 2, 1996, Scott Mills has not taken any action or
failed to take any action, which, if taken (or if failed to have been taken)
after the date hereof, would cause a violation of Section 3 of this Agreement.
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<PAGE>
3.18 Absence of Certain Changes or Events. Except as and to the
extent set forth in the Scott Mills Securities Filings, as contemplated by this
Agreement or on Schedule 3.18, since March 2, 1996, there has not been: (a) any
material adverse change in the business, assets, properties, results of
operations, financial condition or prospects of Scott Mills and its Subsidiary
taken as a whole; (b) any entry by Scott Mills or its Subsidiary into any
commitment or transaction material to its respective business which is not in
the ordinary course of business; (c) any change by Scott Mills in accounting
principles or methods except insofar as may be required by a change in generally
accepted accounting principles; (d) any agreement by Scott Mills or its
Subsidiary, whether in writing or otherwise, to take any action which, if taken
prior to the date of this Agreement, would have made any representation or
warranty in this Section 3 untrue or incorrect; (f) any issuance, grant, sale or
pledge or agreement to issue, grant, sell or pledge by Scott Mills or its
Subsidiary of any shares of its respective capital stock, or securities
convertible into or exchangeable or exercisable for, or otherwise evidencing a
right to acquire, shares of its respective capital stock; or (g) any acquisition
of the assets of Scott Mills or its Subsidiary, other than in the ordinary
course of business and consistent with past practice.
3.19 Statements and Other Documents Not Misleading. Neither this
Agreement, including all Exhibits and Schedules and other closing documents, nor
any other financial statement, document or other instrument heretofore or
hereafter furnished by Scott Mills to Kleinert's in connection with the
transactions contemplated hereby contains or will contain any untrue statement
of any material fact, or omits or will omit to state any material fact required
to be stated in order to make such statement, information, document or other
instruments, in light of the circumstances in which they are made, not
misleading.
4. Representations and Warranties of Kleinert's and Kleinert's
Alabama. As a material inducement to Scott Mills to enter into this Agreement
and consummate the transactions contemplated hereby, Kleinert's and Kleinert's
Alabama, jointly and not severally, make the following representations and
warranties to Scott Mills.
4.1 Organization and Qualification. Kleinert's is a corporation duly
organized and validly subsisting under the laws of the Commonwealth of
Pennsylvania. Kleinert's has the power to own, lease and operate its properties
and carry on its business as now conducted. Kleinert's is duly qualified,
licensed and authorized as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the nature or character of its business or
the ownership or leasing of its
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<PAGE>
properties and assets makes such qualification necessary, except where the
failure to be so qualified and licensed would not have a material adverse effect
on Kleinert's and its Subsidiaries (as defined herein) taken as a whole. True,
correct and complete copies of the Articles of Incorporation and By-laws of
Kleinert's, as amended to date, have been previously delivered to Scott Mills.
4.2 Subsidiaries. The only subsidiaries of Kleinert's are listed in
an exhibit to the Kleinert's 1995 Form 10-K (as defined herein) (collectively,
the "Subsidiaries"). Except for Kleinert's investments in marketable securities,
and except with respect to the Subsidiaries, all of which are directly or
indirectly wholly-owned by Kleinert's, Kleinert's does not directly or
indirectly own any interest in any other corporation, partnership, joint venture
or other business association or entity. Each of the Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation. Each of the Subsidiaries is duly
qualified, licensed and authorized as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the nature or character of its
business or the ownership or leasing of its properties and assets makes such
qualification necessary, except where the failure to be so qualified and
licensed would not have a material adverse effect on Kleinert's and its
Subsidiaries taken as a whole.
4.3 Capitalization. The authorized capital stock of Kleinert's
consists of (i) 10,000,000 Kleinert's Shares of which, as of the date hereof,
there were 4,198,398 Kleinert's Shares issued and outstanding and 466,967
Kleinert's Shares held in its treasury and (ii) 2,000,000 shares of Preferred
Stock, $1.00 par value, none of which is outstanding. All issued and outstanding
Kleinert's Shares are duly authorized, validly issued, fully paid, nonassessable
and free of preemptive rights. Except as set forth in Schedule 4.3 or in the
Kleinert's Securities Filings (defined below), there are not now and, at the
Effective Time, there will not be, any existing options, warrants, calls,
subscriptions, convertible securities or other rights or other agreements or
commitments of any character whatsoever obligating Kleinert's or Kleinert's
Alabama to issue, transfer or sell any shares of capital stock or any securities
convertible into or exchangeable or exercisable for, or otherwise evidencing a
right to acquire any shares of capital stock or other securities of any kind of
Kleinert's. Except as set forth on Schedule 4.3, since March 2, 1996, no shares
of Kleinert's capital stock have been issued or, in the case of treasury shares,
reissued. The Kleinert's Shares to be issued in the Merger as part of the Merger
Consideration will be duly authorized and, when issued in accordance with the
terms of this Agreement, will be validly issued, fully paid and non-assessable.
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<PAGE>
4.4 Authority Relative to this Agreement.
(a) Kleinert's and Kleinert's Alabama have all requisite power
and authority to enter into this Agreement, to perform their respective
obligations hereunder and to consummate the transactions contemplated thereby.
The execution and delivery of this Agreement by Kleinert's and Kleinert's
Alabama and the consummation by Kleinert's and Kleinert's Alabama of the Merger
and the other transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Kleinert's and Kleinert's Alabama, and
no other corporate proceedings on the part of Kleinert's and Kleinert's Alabama
are necessary to authorize this Agreement, the Merger or the consummation of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Kleinert's and Kleinert's Alabama and constitutes a valid and
binding obligation of each, enforceable against each in accordance with its
terms except as enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and except
that the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought.
(b) None of the execution and delivery of this Agreement by
Kleinert's and Kleinert's Alabama, the consummation of the transactions
contemplated hereby, or compliance by Kleinert's and Kleinert's Alabama with any
of the provisions hereof will: (i) violate, conflict with, or result in a breach
of any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Kleinert's or its Subsidiaries under, any of the terms, conditions or provisions
of (x) the organizational documents of Kleinert's or its Subsidiaries or (y) any
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Kleinert's or any of its Subsidiaries is
a party, or to which any of them, or any of their respective properties or
assets, may be subject, or (ii) violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to Kleinert's or any
of its Subsidiaries or any of their respective properties or assets.
(c) Other than in connection with or in compliance with the
provisions of the Pennsylvania Law, the Alabama Law, the Exchange Act and the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state
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<PAGE>
securities laws, no notice to, filing with, or authorization, consent or
approval of, any domestic public body or authority is necessary for the
consummation by Kleinert's or Kleinert's Alabama of the transactions
contemplated by this Agreement.
4.5 Financial Statements. The consolidated balance sheets of
Kleinert's at December 2, 1995 and December 3, 1994, and the related
consolidated statements of income, changes in equity accounts and cash flows for
the years ended December 3, 1995 and December 3, 1994, and all related schedules
and notes to the foregoing, set forth in Kleinert's Annual Report on Form 10-K
for the fiscal year ended December 2, 1995 as delivered to Scott Mills (the
"Kleinert's 1995 Form 10-K"), were prepared and audited by Ernst & Young, LLP,
independent certified public accountants, in accordance with generally accepted
accounting principles consistently applied throughout the periods reported upon
and with past practices, and fairly and accurately present the consolidated
financial position of Kleinert's as of the dates of such balance sheets and the
results of operations for the respective entities for the periods reported upon.
The unaudited consolidated balance sheet of Kleinert's at March 2, 1996 (the
"Kleinert's Warranted Balance Sheet"), and the related consolidated statements
of operations and cash flows for the three months ended March 2, 1996 set forth
in Kleinert's Quarterly Report on Form 10-Q for the fiscal quarter ended March
2, 1996 (the "Kleinert's Form 10-Q") were prepared in accordance with the rules
and regulations of the SEC, and fairly and accurately present the consolidated
financial position of Kleinert's as of the date of such balance sheet and the
consolidated results of operations of Kleinert's for the period reported upon
subject to normal year-end adjustments.
4.6 Securities Laws Filings. Kleinert's has filed all forms, reports
and documents required to be filed by it with the SEC, and Kleinert's previously
has delivered to Scott Mills the Kleinert's 1995 Form 10-K, Kleinert's Annual
Report on Form 10-K for the fiscal year ended December 3, 1994 (the "Kleinert's
1994 Form 10-K"), the Kleinert's Form 10-Q and Kleinert's definitive proxy
statement for its 1996 Annual Meeting of Shareholders (as each is amended to
date, collectively called the "Kleinert's Securities Filings"). As of their
respective filing dates with the SEC, the Kleinert's Securities Filings complied
in all material respects with the applicable requirements of the Exchange Act
and the rules and regulations promulgated thereunder, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. No event has occurred
since the filing of the Kleinert's Form 10-Q which is required to be disclosed
in a
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report filed by Kleinert's pursuant to Section 13 or 15(d) of the Exchange Act
which has not been so disclosed.
4.7 Liabilities. At the Effective Date, Kleinert's and its
Subsidiaries shall have no material liabilities, whether related to tax or
non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or contingent, determined or determinable in amount or
otherwise, except: (i) as and to the extent reflected on the Kleinert's
Warranted Balance Sheet, this Agreement or in any Schedule or Exhibit thereto;
or (ii) liabilities incurred in the ordinary course of business from and after
the date of the Kleinert's Warranted Balance Sheet and fully reflected on the
books of Kleinert's or its Subsidiaries.
4.8 Contracts, Leases, Agreements and Other Commitments. Neither
Kleinert's nor any of its Subsidiaries has breached, or received in writing any
claim or threat that it has breached, any of the material terms or conditions of
any material agreement, contract or commitment that is required to be filed as
an exhibit to the Kleinert's Securities Filings in such a manner as would permit
another party to cancel or terminate the same or would permit any other party to
seek material damages from Kleinert's or its Subsidiaries thereunder. Each of
the agreements, contracts and commitments referred to in the first sentence of
this Section 4.8 is in full force and effect and, except as otherwise disclosed,
is not subject to any material default thereunder of which Kleinert's is aware
by any party obligated to Kleinert's pursuant thereto.
4.9 Labor Relations; Employees. Except as set forth on Schedule 4.9:
(a) there are no strikes, slow downs or other work stoppages, grievance
proceedings, arbitrations, labor disputes or representation questions pending
or, to the knowledge of Kleinert's, threatened; (b) neither Kleinert's nor the
Subsidiaries is (i) liable for any arrearages of wages or any taxes or penalties
for failure to comply with any of the foregoing or (ii) delinquent in the
payment of any severance, salary, bonus, commission or other direct or indirect
compensation for services performed by any employee to the date hereof, or any
amount required to be reimbursed to any employee or former employee; and (iii)
there are no charges, suits, actions, administrative proceedings, investigations
and/or claims pending or, to the knowledge of Kleinert's, threatened against
Kleinert's or any of its Subsidiaries, before any court, governmental agency,
department, board or instrumentality, or before any arbitrator (collectively
"Actions"), concerning or in any way relating to its employees or employment
practices, including, without limitation, Actions involving unfair labor
practices, wrongful discharge and/or any other restrictions on the right of
Kleinert's or any of its Subsidiaries to terminate
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<PAGE>
their respective employees, employment discrimination, occupational safety and
health, and workers' compensation.
4.10 Litigation. Except as disclosed in the Kleinert's 1995 Form
10-K (as defined herein), neither Kleinert's nor any of its Subsidiaries is a
party to, or to the knowledge of Kleinert's, threatened with any suit, action,
arbitration, administrative or other proceeding or governmental investigation
which could materially adversely affect the results of operations or financial
condition of Kleinert's and its Subsidiaries taken as a whole; there are no
judgments, decrees, awards or orders outstanding against Kleinert's or any of
its Subsidiaries which could materially adversely affect the results of
operations or financial condition of Kleinert's and its Subsidiaries taken as a
whole; and neither Kleinert's nor any of its Subsidiaries is contemplating the
institution of any suit, action, arbitration, administrative or other
proceeding.
4.11 Compliance with Laws and Regulations. Kleinert's and its
Subsidiaries are in compliance with their respective charters and by-laws and
all material requirements of law, Federal, state and local, and all requirements
of all governmental bodies or agencies having jurisdiction over them, the
conduct of their respective businesses, the use of their respective properties
and assets, and all premises occupied by them. Without limiting the generality
of the foregoing, all material licenses, permits, certificates and
authorizations needed or required for the conduct of their respective businesses
as presently conducted and for the use of their respective properties and
premises occupied by them have been obtained. Kleinert's and its Subsidiaries
have properly filed all reports and other documents required to be filed with
any Federal, state and local government or subdivision or agency thereof, except
where the failure to file would not have a material adverse effect on the
business, prospects, financial condition or results of operation of Kleinert's
and its Subsidiaries taken as a whole. Neither Kleinert's nor any of its
Subsidiaries has received any notice, not heretofore complied with, from any
Federal, state or municipal authority or any insurance or inspection body that
any of its respective properties, facilities, equipment or business procedures
or practices fails to comply with any applicable law, ordinance, regulation,
building or zoning law, or requirement of any public body or authority.
4.12 Actions Since Balance Sheet Date. Except as set forth on
Schedule 4.12, since March 2, 1996, Kleinert's has not taken any action or
failed to take any action, which, if taken (or if failed to have been taken)
after the date hereof, would cause a violation of Section 4 of this Agreement.
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<PAGE>
4.13 Absence of Certain Changes or Events. Except as and to the
extent set forth in the Kleinert's Securities Filings, as contemplated by this
Agreement or as set forth on Schedule 4.13, since March 2, 1996 there has not
been: (a) any material adverse change in the business, assets, properties,
results of operations, financial condition or prospects of Kleinert's and its
Subsidiaries taken as a whole; (b) any entry by Kleinert's or any of its
Subsidiaries into any commitment or transaction material to the Kleinert's and
its Subsidiaries taken as a whole which is not in the ordinary course of
business; (c) any change by Kleinert's in accounting principles or methods
except insofar as may be required by a change in generally accepted accounting
principles; (d) any agreement by Kleinert's or any of its Subsidiaries, whether
in writing or otherwise, to take any action which, if taken prior to the date of
this Agreement, would have made any representation or warranty in this Section 4
untrue or incorrect; (e) any issuance, grant, sale or pledge or agreement to
issue, grant, sell or pledge by Kleinert's of any shares of capital stock of
Kleinert's, or securities convertible into or exchangeable or exercisable for,
or otherwise evidencing a right to acquire, shares of capital stock of
Kleinert's; or (f) any acquisition of the assets of Kleinert's or any of its
Subsidiaries, other than in the ordinary course of business and consistent with
past practice.
4.14 Statements and Other Documents Not Misleading. Neither this
Agreement, including all Exhibits and Schedules and other closing documents, nor
any other financial statement, document or other instrument heretofore or
hereafter furnished by Kleinert's or Kleinert's Alabama to Scott Mills in
connection with the transactions contemplated hereby, when taken together as a
whole, contains or will contain any untrue statement of any material fact, or
omits or will omit to state any material fact required to be stated in order to
make such statement, information, document or other instruments, in light of the
circumstances in which they are made, not misleading.
5. Continuation and Survival of Representation and Warranties.
5.1 Continuation and Survival of Representations and Warranties. All
representations and warranties made in this Agreement shall continue to be true
and correct at and as of the Effective Time and at all times between the date of
execution of this Agreement and the Effective Time as if made at each such
times. All representations and warranties contained herein shall terminate on
the Effective Time, and no action on account of any breach thereof may be
brought thereafter.
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6. Access to Information; Confidentiality.
6.1 Access to Information; Confidentiality.
(a) Each party to this Agreement shall, and shall cause their
representatives, officers, directors, employees, auditors and other agents, to
afford to the other party to this Agreement and to the officers, employees and
agents of such other party, complete and unimpeded access at all reasonable
times to, from the date of this Agreement until the Effective Time, their
officers, employees, agents, properties, books, records and contracts, and shall
furnish such other party all financial, operating and other data and information
as such party, through its officers, employees or agents, may request.
(b) In the event the Merger is not consummated, no party may
disclose, use or otherwise employ the confidential information of another party
in its business or otherwise unless the party disclosing, using or otherwise
employing such information (the "Disclosing Party") can establish either that
the information: (i) came into the possession of the Disclosing Party on a
nonconfidential basis from a source other than the party asserting the
confidentiality of such information or another third party which is not known by
the Disclosing Party to be bound by a confidentiality or other obligation of
secrecy to the party asserting the confidentiality of the information or (ii)
has become generally available to the public other than as a result of a breach
by the Disclosing Party of its obligations hereunder. In addition to the
foregoing, a Disclosing Party may disclose confidential information of another
party if required by law; provided, however, that the Disclosing Party shall (x)
give as much notice to the other party as is practicable prior to making such
disclosure, (y) cooperate with the other party at the other party's cost and
expense to obtain an appropriate protective order or other reliable assurance to
prevent or limit the disclosure of the confidential information and (z) disclose
only that portion of the confidential information as is necessary to comply with
applicable law.
7. Public Announcements.
7.1 Public Announcements. Kleinert's and Scott Mills will consult
with each other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by law.
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8. Conduct of Business Pending the Merger.
8.1 Conduct of Business Pending the Merger. Scott Mills covenants
and agrees that, from the date of this Agreement until the Effective Time,
unless Kleinert's shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement:
(a) Each of Scott Mills and its Subsidiary shall not, directly
or indirectly, do any of the following: (i) pledge or encumber any assets
(including, without limitation, any indebtedness owed to it or any claims held
by it) except in the ordinary course of business and in no event with a book or
fair market value in each case in excess of $10,000 and, in the aggregate, in
excess of $30,000; (ii) dispose of any asset (other than inventory in the
ordinary course of business) with a book or fair market value in each case in
excess of $10,000 and in the aggregate in excess of $500,000, except for
dyehouse assets which are sold at fair market value as determined in good faith
by the Board of Directors of Scott Mills; (iii) whether or not in the ordinary
course of business, voluntarily permit any assets to become subject to any lien;
(iv) amend or propose to amend its charter or by-laws or similar organizational
documents; (v) split, combine or reclassify any shares of capital stock of Scott
Mills; (vi) declare, set aside or pay any dividend or distribution, payable in
cash, stock, property or otherwise, with respect to any of its capital stock;
(vii) redeem, purchase or otherwise acquire or offer to redeem, purchase or
otherwise acquire any shares of its capital stock; or (viii) authorize or
propose any of the foregoing, or enter into any contract, agreement, commitment
or arrangement to do any of the foregoing;
(b) Except directly in connection with the Merger, neither Scott
Mills nor its Subsidiary shall, directly or indirectly: (i) issue, sell, pledge
or dispose of, or authorize, propose or agree to the issuance, sale, pledge or
disposition of, any shares of, or any options, warrants or rights of any kind to
acquire any shares of, or any securities convertible into or exchangeable for
any shares of, its capital stock of any class, or any other securities in
respect of, in lieu of, or in substitution for its shares of capital stock
outstanding on the date hereof; (ii) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other business
organization or division thereof, or make any investment, whether by purchase of
stock or securities, contributions to capital, property transfer, or, except in
the ordinary course, purchase of any property or assets of any other individual
or entity; (iii) incur any indebtedness for borrowed money or issue any debt
securities, except short-term indebtedness incurred in the ordinary course of
business and
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consistent with past practice and which in the aggregate does not exceed
$10,000; (iv) voluntarily incur any other material liability or obligation
(absolute, accrued, contingent or otherwise) except in the ordinary course of
business and consistent with past practice and which in aggregate does not
exceed $10,000; (v) authorize or effect any change in its capitalization or any
release or relinquishment of any material contract right; (vi) waive, release,
grant or transfer any rights of material value or modify or change in any
material respect any agreement or arrangement, other than in the ordinary course
of business and consistent with past practice; or (vii) authorize or commit to
any of the actions prohibited in this subsection (b), or enter into or modify
any contract, agreement, commitment or arrangement to do any of the actions
prohibited in this subsection (b);
(c) Scott Mills shall not adopt or amend any Employee Benefit
Plan or increase in any manner the compensation or fringe benefits of any
employee of the Business, or pay any benefit not required by any existing plan
or arrangement;
(d) Scott Mills shall not make any material Tax election or
settle or compromise any material Federal, state, local or foreign Tax
liability; and
(e) Scott Mills shall: (i) continue to maintain all of its usual
business books and records in accordance with past practices and not change its
method of accounting; (ii) use its best efforts to keep available the services
of its employees and to preserve the existing relationship with its clients,
suppliers and others with whom it has dealt in connection with its business;
(iii) keep the premises occupied by it and all of the equipment and other
tangible personal property in good order and repair and perform all necessary
repairs and maintenance; (iv) comply with and not amend, modify or terminate any
Corporation Agreements and comply with all applicable laws, rules and
regulations; and (v) maintain in full force and effect all of the insurance
policies currently in force regarding its business and make no diminution of any
insurance coverage.
9. Additional Agreements.
9.1 Proxy Statement/Prospectus; Listing on Nasdaq National Market.
As promptly as reasonably practicable after execution of this Agreement, Scott
Mills and Kleinert's shall prepare and file with the Commission under the
Securities Act and Exchange Act, and shall use their best efforts to have
declared effective by the SEC, a Registration Statement on Form S-4 registering
the Kleinert's Shares to be issued in the Merger, and in which a proxy statement
with respect to the meeting of Scott Mills' shareholders referred to in Section
9.2 hereof shall be
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included as the prospectus (the "Proxy Statement/Prospectus"). The Proxy
Statement/Prospectus shall comply as to form in all material respects with the
rules and regulations of the Commission applicable to a Form S-4 Registration
Statement. Each of Kleinert's and Scott Mills agrees that the information
provided by each for inclusion in the Proxy Statement/Prospectus shall not, when
the Proxy Statement/Prospectus is first mailed to Scott Mills' shareholders and
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated in order to make such
information, in light of the circumstances in which it is made, not misleading.
Each party shall notify the other as promptly as reasonably practicable of the
receipt of any comments of the SEC and of any request by the SEC for amendments
or supplements to the Proxy Statement/Prospectus, and will supply the other
party with copies of all correspondence between such party and/or its
representatives, on the one hand, and the SEC or the members of its staff or any
other appropriate government official, on the other hand, with respect to the
Proxy Statement/Prospectus. Each party shall use its best efforts to obtain and
furnish the information required to be included in the Proxy
Statement/Prospectus; shall use commercially reasonable efforts to respond
promptly to any comments made by the SEC with respect to the Proxy
Statement/Prospectus, form of proxy, and any preliminary version thereof, and
Scott Mills shall cause the Proxy Statement/Prospectus and related form of proxy
to be mailed to its shareholders at the earliest practicable time. The parties
agree to correct, as promptly as practicable and, in any event, prior to the
date of the meeting of Scott Mills' shareholders referred to in Section 9.2
hereof, any such information provided by them for use in the Proxy
Statement/Prospectus which shall have become false or misleading. Kleinert's
covenants and agrees that on the Effective Time the Kleinert's Shares to be
issued in the Merger shall be subject to an effective registration statement
under the Securities Act and applicable Blue Sky laws and shall be listed on the
Nasdaq National Market or on such other exchange as the Kleinert's Shares shall
generally be listed at the Effective Time.
9.2 Meeting of Shareholders of Scott Mills. Scott Mills shall take
all action necessary, in accordance with the Pennsylvania Law and its Articles
of Incorporation and By-Laws, to duly call, give notice of, convene and hold a
meeting of its shareholders, as promptly as practicable to consider and vote
upon the adoption of this Agreement and the Merger. The Proxy Statement shall
contain the determinations and recommendation of the Board of Directors as to
the Merger set forth in Section 3.20 hereof.
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9.3 Fees and Expenses.
(a) Whether or not the Merger is consummated, and except as
provided in Section 11.2, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
(b) Each of Kleinert's and Scott Mills represents, as to itself,
its Subsidiaries, affiliates and assigns, that no agent, broker, investment
banker, management consultant or other firm or person is or will be entitled to
any broker's or finder's fee or any other commission or similar fee in
connection with the transactions contemplated by this Agreement.
9.4 Additional Agreements. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
cooperate with each other in connection with the foregoing, including (a) using
reasonable efforts to obtain all necessary or advisable waivers, consents and
approvals from other parties to loan agreements, leases and other contracts and
instruments, (b) using reasonable efforts to obtain all necessary consents,
approvals and authorizations as are required to be obtained under any federal or
state law or regulations, to defend all lawsuits or other legal proceedings
challenging this Agreement, the Merger or the consummation of the transactions
contemplated hereby or thereby, to lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby, and to effect all necessary
registrations and filings, if any, and submissions of information requested by
governmental authorities, and (c) refraining from taking any action which
reasonably could be expected to have a material adverse affect on its business,
financial condition, results of operations, prospects, properties or assets.
9.5 Notification of Certain Matters. Scott Mills shall give prompt
written notice to Kleinert's, and Kleinert's shall give prompt written notice to
Scott Mills of: (a) the obtaining by it of actual knowledge of any fact; or (b)
the occurrence, or failure to occur, of any event (of which such party has
actual knowledge) which fact would cause, or which occurrence or failure to
occur would be likely to cause, (i) any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect or (ii) any
material failure of Scott Mills or Kleinert's, as the case may be, or
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officer, director, employer or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder.
10. Conditions of Merger
10.1 Conditions to Obligation of Each Party to Effect the Merger.
The respective obligations of each party to effect the Merger shall be subject
to the following conditions:
(a) This Agreement and the Merger shall have been approved and
adopted by the shareholders of Scott Mills as required by the Pennsylvania Law.
(b) No preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, nor any
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority, shall be in effect which would prevent the consummation
of the Merger.
10.2 Additional Conditions to the Obligations of Scott Mills. The
obligation of Scott Mills to effect the Merger is also subject to each of the
following conditions, any of which may be waived by Scott Mills in its sole
discretion:
(a) Kleinert's and Kleinert's Alabama shall have performed each
covenant, agreement, obligation and condition to be performed by them hereunder
on or prior to the Effective Time.
(b) The representations and warranties of Kleinert's and
Kleinert's Alabama set forth in this Agreement shall be true and correct in all
material respects at and as of the Effective Time as if made at and as of such
time, except as affected by transactions contemplated or permitted by this
Agreement and except to the extent that any such representation or warranty is
made as of a specified date, in which case if such representation or warranty
shall have been true and correct as of such date.
(c) The Registration Statement referred to in Section 9.1 shall
have been declared effective by the SEC and shall remain effective at the
Effective Time.
(d) Scott Mills shall have received evidence, in form and
substance reasonably satisfactory to its counsel, that such licenses, permits,
consents, approvals, waivers, authorizations, qualifications and orders of
domestic governmental authorities and parties to contracts and leases
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associated with Kleinert's business, including, but not limited to the
Corporation Agreements, as are necessary in connection with the consummation of
the transactions contemplated hereby have been obtained.
(e) No order of any court or any governmental, regulatory or
administrative agency or commission shall be in effect which restrains,
prohibits or adversely affects the transactions contemplated hereby, and there
shall not have been threatened, nor shall there be pending, any action or
proceeding (i) by or before any court or governmental agency or other regulatory
or administrative agency or commission challenging any of the transactions
contemplated by this Agreement or seeking monetary relief by reason of the
consummation of such transactions or (ii) by any present or former owner of any
capital stock or equity interested in Kleinert's (whether through a derivative
action or otherwise) against Scott Mills, Kleinert's, Kleinert's Alabama, any of
their respective subsidiaries or any of their respective officers, directors or
stockholders.
The foregoing conditions are for the sole benefit of Scott
Mills and may be asserted by Scott Mills in its sole discretion regardless of
the circumstances giving rise to any such conditions or may be waived by Scott
Mills in whole or in part.
10.3 Additional Conditions to the Obligations of Kleinert's and
Kleinert's Alabama. The obligations of Kleinert's and Kleinert's Alabama to
effect the Merger also are subject to each of the following conditions, any of
which may be waived by Kleinert's and Kleinert's Alabama in their sole
discretion:
(a) Scott Mills shall have performed each covenant, agreement,
obligation and condition to be performed by it hereunder on or prior to the
Effective Time.
(b) The representations and warranties of Scott Mills set forth
in this Agreement shall be true and correct in all material respects at and as
of the Effective Time as if made at and as of such time, except as affected by
transactions contemplated or permitted by this Agreement and except to the
extent that any such representations or warranty is made as of a specified date,
in which case such representation or warranty shall have been true and correct
as of such date.
(c) Kleinert's shall have received evidence, in form and
substance reasonably satisfactory to its counsel, that such licenses, permits,
consents, approvals, waivers, authorizations, qualifications and orders of
domestic governmental authorities and parties to contracts and leases
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associated with Scott Mills' business, including, but not limited to the
Corporation Agreements, as are necessary in connection with the consummation of
the transactions contemplated hereby have been obtained.
(d) No order of any court or any governmental, regulatory or
administrative agency or commission shall be in effect which restrains,
prohibits or adversely affects the transactions contemplated hereby, and there
shall not have been threatened, nor shall there be pending, any action or
proceeding (i) by or before any court or governmental agency or other regulatory
or administrative agency or commission challenging any of the transactions
contemplated by this Agreement or seeking monetary relief by reason of the
consummation of such transactions or (ii) by any present or former owner of any
capital stock or equity interested in Scott Mills (whether through a derivative
action or otherwise) against Scott Mills, Kleinert's, Kleinert's Alabama, any of
their respective subsidiaries or any of their respective officers, directors or
stockholders.
(e) All of the directors of Scott Mills other than Wesley
Edwards shall vote the Scott Mills Shares owned by them in favor of the Merger
at the meeting of shareholders of Scott Mills.
The foregoing conditions are for the sole benefit of Kleinert's and
may be asserted by Kleinert's in its sole discretion regardless of the
circumstances giving rise to any such conditions or may be waived by Kleinert's
in whole or in part.
11. Termination, Amendment and Waiver.
11.1 Termination. This Agreement may be terminated, and the Merger
contemplated hereby may be abandoned, by written notice promptly given to the
other parties hereto, at any time prior to the Effective Time, whether prior to
or after approval by the shareholders of Scott Mills:
(a) By mutual written consent of the Boards of Directors of
Kleinert's and Scott Mills; or
(b) By either Kleinert's or Scott Mills, if a court of
competent jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or shall have taken any
other action, in each case permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable; or
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<PAGE>
(c) By either Kleinert's or Scott Mills, if the Effective Time
shall not have occurred on or before December 10, 1996, unless the absence of
such occurrence shall be due to the failure of the party seeking to terminate
this Agreement to perform in all material respects each of its obligations under
this Agreement required to be performed by it prior to the Effective Time; or
(d) By either Scott Mills or Kleinert's, if at the shareholders'
meeting referred to in Section 9.2 hereof (including any adjournment thereof),
this Agreement and the Merger shall fail to be approved and adopted by the
requisite vote of shareholders of Scott Mills; or
(e) By Kleinert's, if Scott Mills fails to perform in all
material respects its obligations under this Agreement or if there has been a
material breach of a warranty or a material misrepresentation of Scott Mills
given hereunder; or
(f) By Scott Mills, if Kleinert's or Kleinert's Alabama fails to
perform in all material respects their respective obligations under this
Agreement or if there has been a material breach of a warranty or a material
misrepresentation of Kleinert's or Kleinert's Alabama given hereunder.
(g) By Kleinert's, if there shall have occurred a material
adverse change in the business, assets, properties, results of operations,
financial condition or prospects of Scott Mills and its Subsidiary taken as a
whole between March 2, 1996 and the date of termination of this Agreement.
(h) By Scott Mills, if there shall have occurred a material
adverse change in the business, assets, properties, results of operations,
financial condition or prospects of Kleinert's and its Subsidiaries taken as a
whole between March 2, 1996 and the date of termination of this Agreement.
The aforementioned terminations may occur notwithstanding approval
of this Agreement and the Merger by the shareholders of all or any parties
hereto.
11.2 Effect of Termination. In the event of a termination of this
Agreement and abandonment of the Merger as provided in Section 11.1, this
Agreement shall forthwith become void and there shall be no liability on the
part of Kleinert's, Kleinert's Alabama or Scott Mills, or any of their
respective officers, directors, employees, agents or shareholders, regardless of
whether such termination and abandonment arose out
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of a breach of this Agreement by any party or for any other reason.
12. Indemnification of Directors and Officers.
(a) The Articles of Incorporation and By-Laws of Kleinert's
Alabama shall contain the provisions with respect to indemnification set forth
in the Articles of Incorporation and By-Laws of Scott Mills on the date of this
Agreement (to the extent not inconsistent with the requirements and limitations
imposed by the Alabama Law), which provisions shall not be amended, repealed, or
otherwise modified for a period of six years after the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who at
any time prior to the Effective Time were directors or officers of Scott Mills
in respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement), unless such modification is required by law.
(b) From and after the Effective Time, Kleinert's and Kleinert's
Alabama (together, the "Indemnitors") shall jointly and severally indemnify,
defend and hold harmless the present and former officers and directors of Scott
Mills (collectively, the "Indemnified Parties") against all losses, expenses,
claims, damages, liabilities or amounts that are paid in settlement or` with the
approval of Kleinert's (which approval shall not unreasonably be withheld), or
otherwise in connection with any claim, action, suit, proceeding or
investigation (a "Claim"), based in whole or in part on the fact that such
person is or was a director, officer, employee or agent of Scott Mills and
arising out of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement), in each case to the full extent permitted under the Alabama Law (and
shall pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the fullest extent permitted under the
Alabama Law, upon receipt from the Indemnified Party to whom expenses are
advanced of the undertaking to repay such advances in the event that it shall be
finally judicially determined that indemnification and the payment of such
advances is not permissible under applicable law.
(c) Without limiting the foregoing, in the event any Claim is
brought against any Indemnified Party (whether arising before or after the
Effective Time) after the Effective Time: (i) the Indemnified Parties may retain
Scott Mills' regularly engaged independent legal counsel, or other independent
legal counsel satisfactory to them provided that such other counsel shall be
reasonably acceptable to the Indemnitors; (ii) the Indemnitors shall pay all
reasonable fees and expenses
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of such counsel for the Indemnified Parties promptly as statements therefor are
received; and (iii) the Indemnitors will use their reasonable best efforts to
assist in the vigorous defense of any such matter, provided that neither
Indemnitor shall be liable for any settlement of any Claim effected without its
written consent, which consent shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section 12, upon
learning of any such Claim, shall notify the Kleinert's (although the failure so
to notify Kleinert's shall not relieve the Indemnitors from any liability which
they may have under this Section 12 except to the extent such failure prejudices
an Indemnitor), and shall deliver to each Indemnitor the undertaking
contemplated by the Alabama Law. The Indemnified Parties as a group may retain
one law firm (in addition to local counsel) to represent them with respect to
each such matter unless there is, under applicable standards of professional
conduct (as determined by counsel to the Indemnified Parties), a conflict on any
significant issue between the positions of any two or more Indemnified Parties
in which event, such additional counsel as may be required may be retained by
the Indemnified Parties.
(d) Kleinert's shall use its reasonable best efforts to cause to
be maintained in effect for not less than two (2) years after the Effective Time
the current policies of directors' and officers' liability insurance maintained
by Scott Mills with respect to matters occurring prior to the Effective Time;
provided, however, that Kleinert's may substitute therefor policies of
substantially similar coverage containing substantially similar terms and
conditions to the extent reasonably available and Kleinert's shall not be
required to pay an annual premium for such insurance in excess of 200% of the
last annual premium paid prior to the date of this Agreement, but in such case
shall purchase as much coverage as possible for such amount.
(e) This Section 12 is intended to be for the benefit of, and
shall be enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on Kleinert's and the Surviving Corporation
and their respective successors and assigns.
13. Miscellaneous.
13.1 Indulgences, Etc. Neither the failure nor any delay on the
part of either party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or
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privilege with respect to any occurrence be construed as a waiver of such right,
remedy, power or privilege with respect to any other occurrence.
13.2 Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania
notwithstanding choice-of-laws provisions to the contrary and without the aid of
any canon, custom or rule of law requiring construction against the drafting
party.
13.3 Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received only when
delivered (personally, by courier service such as Federal Express, or by other
messenger) or when deposited in the United States mails, registered or certified
mail, postage prepaid, return receipt requested, addressed as set forth below:
(i) If to Kleinert's:
120 West Germantown Pike
Suite 100
Plymouth Meeting, PA 19462
Attention: Chairman
with a copy, given in the manner
prescribed above, to:
Steven N. Haas, Esquire
Cozen and O'Connor
1900 Market Street
Philadelphia, PA 19103
(ii) If to Scott Mills, Inc.:
120 West Germantown Pike
Suite 100
Plymouth Meeting, PA 19462
Attention: Chairman
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with a copy, given in the manner
prescribed above, to:
Michael M. Sherman, Esquire
Wolf, Block Schorr and Solis-Cohen
Packard Building
SE Corner 15th & Chestnut Sts.
Philadelphia, PA 19102
In addition, notice by mail shall be by air mail if posted
outside of the continental United States.
Any party may alter the address to which communications or
copies are to be sent by giving notice of such change of address in conformity
with the provisions of this paragraph for the giving of notice.
13.4 Exhibits and Schedules. All Exhibits and Schedules
attached hereto are hereby incorporated by reference into, and made a part of,
this Agreement.
13.5 Parties in Interest. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto and their respective
successors and permitted assigns and nothing in this Agreement, express or
implied, is intended to confer upon any other person any right or remedies of
any nature whatsoever under or by reason of this Agreement.
13.6 Assignment. This Agreement (including the other
documents and instruments referred to herein) may not be assigned, except that
Kleinert's Alabama may assign its rights hereunder in whole or in part to
Kleinert's or merge with and into Kleinert's, Kleinert's may assign its rights
hereunder in whole or in part to Kleinert's Alabama or merge with or into
Kleinert's Alabama, Kleinert's Alabama may assign its rights hereunder in whole
or in part to a wholly-owned subsidiary of Kleinert's, or Kleinert's may assign
its rights hereunder in whole or in part to one or more direct or indirect
subsidiaries or affiliates of Kleinert's which, in written instruments
reasonably satisfactory to Scott Mills, shall agree to collectively assume all
of such party's obligations hereunder and be bound by all of the terms and
conditions of this Agreement.
13.7 Execution in Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original as against any party whose signature appears thereon, and all of which
shall together constitute one and the same instrument. This Agreement shall
become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatories.
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13.8 Provisions Separable. The provisions of this Agreement
are independent of and separable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be invalid or unenforceable in whole or
in part.
13.9 Entire Agreement; Amendment. This Agreement contains
the entire understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. This Agreement may not be modified or amended other
than by an agreement in writing signed by each of the parties named on the first
page of this Agreement.
13.10 Section Headings. The section headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
13.11 Gender, Etc. Words used herein, regardless of the
number and gender specifically used, shall be deemed and construed to include
any other number, singular or plural, and any other gender, masculine, feminine
or neuter, as the context indicates is appropriate.
13.12 Number of Days. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday on which federal banks are or may
elect to be closed, then the final day shall be deemed to be the next day which
is not a Saturday, Sunday or such holiday.
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IN WITNESS WHEREOF, the parties have caused this duly
authorized Agreement to be executed and delivered as of the date first above
written.
Attest: SCOTT MILLS, INC.
By: /s/ E. Gerald Riesenbach By: /s/ Jack Brier
--------------------------- ----------------------
Secretary Chairman
(Corporate Seal)
Attest: KLEINERT'S, INC.
By: /s/ E. Gerald Riesenbach By: /s/ Joseph J. Connors
-------------------------- ------------------------
Secretary Executive Vice President
(Corporate Seal)
Attest: KLEINERT'S, INC. OF ALABAMA
By: /s/ E. Gerald Riesenbach By: /s/ Jay B. Andrews
--------------------------- -------------------------
Secretary President
(Corporate Seal)
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ANNEX B
STATUTORY PROVISIONS CONCERNING DISSENTERS
RIGHTS OF SCOTT MILLS SHAREHOLDERS
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988
SUBCHAPTER D. DISSENTERS RIGHTS
(S) 1571. APPLICATION AND EFFECT OF SUBCHAPTER
A. GENERAL RULE -- Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any
corporation action, or to otherwise obtain fair value for his shares, where this
part expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2506(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
B. EXCEPTIONS --
(1) Except as otherwise provided in paragraph (2), the holders
of the shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting at
which a plan specified in any section 1930, 1931(d), 1932(c) or 1952(d) is to be
voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under these subchapters.
(2) Paragraph (1) shall not apply to and dissenters rights
shall be available without regard to the exception provided in that paragraph in
the case of:
(i) Shares converted by a plan if the shares are not
converted solely into shares of the acquiring, surviving, new or other
corporation or solely into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless
the articles, the plan or the terms of the transaction entitle all shareholders
of the class to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of the votes
cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under
section 1906(c) (relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by
purchase, lease, exchange or other disposition all or substantially all of the
shares, property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the other
corporation and with or without the intervention of another corporation or other
person, shall not be entitled to the rights and remedies of dissenting
shareholders provided in this subchapter regardless of the fact, if it be the
case, that the acquisition was accomplished by the issuance of voting shares of
the corporation to be outstanding immediately after the acquisition sufficient
to elect a majority or more of the directors of the corporation.
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C. GRANT OF OPTIONAL DISSENTERS RIGHTS. -- The bylaws or a resolution
of the board of directors may direct that all or a part of the shareholders
shall have dissenters rights in connection with any corporation action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
D. NOTICE OF DISSENTERS RIGHTS. -- Unless otherwise provided by
statute, if a proposed corporate action that would give rise to dissenters
rights under this subpart is submitted to a vote at a meeting of shareholders,
there shall be included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that
the shareholders have a right to dissent and obtain payment of the fair value of
their shares by complying with the terms of this subchapters; and
(2) a copy of this subchapter.
E. OTHER STATUTES. -- The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
F. CERTAIN PROVISIONS OF ARTICLES INEFFECTIVE. -- This subchapter may
not be relaxed by any provision of the articles.
G. CROSS REFERENCES. -- See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
(S) 1572. DEFINITIONS
The following words and phrases when used in this subchapter shall have
the meaning given to them in this section unless the context clearly indicates
otherwise:
"CORPORATION." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purpose of
this subchapter. The successor corporation in a division shall have sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
"DISSENTER." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this
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subchapter and who has performed every act required up to the time involved for
the assertion of those rights.
"FAIR VALUE." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects, taking into
account all relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporation action.
"INTEREST." Interest from the effective date of the corporation action
until the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors, including the average
rate currently paid by the corporation on its principal bank loans.
(S) 1573. RECORD AND BENEFICIAL HOLDERS AND OWNERS
A. RECORD HOLDER OF SHARES. -- A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
B. BENEFICIAL OWNERS OF SHARES. -- A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
(S) 1574. NOTICE OF INTENTION TO DISSENT
If the proposed corporation action is submitted to a vote at a meeting
of shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his
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shares under this subchapter. Neither a proxy nor a vote against the proposed
corporation action shall constitute the written notice required by this section.
(S) 1575. NOTICE TO DEMAND PAYMENT
A. GENERAL RULE. -- If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporation action
is to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
these shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent
transfer of shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a
request for certification of the date on which the shareholder, or the person on
whose behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
B. TIME FOR RECEIPT OF DEMAND FOR PAYMENT. -- The time set for receipt
of the demand and deposit of certified shares shall be not less than 20 days
from the mailing of the notice.
(s) 1576. FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC.
A. EFFECT OF FAILURE OF SHAREHOLDER TO ACT. -- A shareholder who fails
to timely demand payment, or fails (in the case of certificated shares) to
timely deposit certificates, as required by a notice pursuant to section 1575
(relating to notice to demand payment) shall not have any right under this
subchapter to receive payment of the fair value of his shares.
B. RESTRICTION ON UNCERTAIN SHARES. -- If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or
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the release of restrictions under the terms of section 1577(a) (relating to
failure to effectuate corporate action).
C. RIGHTS RETAINED BY SHAREHOLDER. -- The dissenter shall retain all
other rights of a shareholder until those rights are modified by effectuation of
the proposed corporate action.
(S) 1577. RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES.
A. FAILURE TO EFFECTUATE CORPORATE ACTION. -- Within 60 days after the
date set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
B. RENEWAL OF NOTICE TO DEMAND PAYMENT. -- When uncertificated shares
have been released from transfer restrictions and deposited certificates have
been returned, the corporation may at any later time send a new notice
conforming to the requirements of section 1575 (relating to notice to demand
payment), with like effect.
C. PAYMENT OF FAIR VALUE OF SHARES. -- Promptly after effectuation of
the proposed corporate action, or upon timely receipt of demand for payment if
the corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the
issuer of the shares held or owned by the dissenter for a fiscal year ending not
more than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the
fair value of the shares.
(3) A notice of the right of the dissenter to demand payment
or supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
D. FAILURE TO MAKE PAYMENT. -- If the corporation does not remit the
amount of its estimate of the fair value of the shares as provided in subsection
(c), it shall return any certificates that have been deposited and release
uncertificated shares from
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any transfer restrictions imposed by reason of the demand for payment. The
corporation may make a notation on any such certificate or on the records of the
corporation relating to any such uncertificated shares that such demand has been
made. If shares with respect to which notation has been so made shall be
transferred, each new certificate issued therefor or the records relating to any
transferred uncertificated shares shall bear a similar notation, together with
the name of the original dissenting holder or owner of such shares. A transferee
of such shares shall not acquire by such transfer any rights in the corporation
other than those that the original dissenter had after making demand for payment
of their fair value.
(S) 1578. ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES
A. GENERAL RULE. -- If the business corporation gives notice of its
estimate of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's shares as
permitted by section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
B. EFFECT OF FAILURE TO FILE ESTIMATE. -- Where the dissenter does not
file his own estimate under subsection (a) within 30 days after the mailing by
the corporation of its remittance or notice, the dissenter shall be entitled to
no more than the amount stated in the notice or remitted to him by the
corporation.
(S) 1579. VALUATION PROCEEDINGS GENERALLY
A. GENERAL RULE. -- Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section
1575 (relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
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B. MANDATORY JOINDER OF DISSENTERS.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa. C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international
procedure)./1/
C. JURISDICTION OF THE COURT.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
D. MEASURE OF RECOVERY.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
E. EFFECT OF CORPORATION'S FAILURE TO FILE APPLICATION.-- If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
(S) 1580. COSTS AND EXPENSES OF VALUATION PROCEEDINGS
A. GENERAL RULE.--The costs and expenses of any proceeding under
section 1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against the business corporation
except that any part of the costs and expenses may be apportioned and assessed
as the court deems appropriate against all or some of the dissenters who are
parties and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
B. ASSESSMENT OF COUNSEL FEES AND EXPERT FEES WHERE LACK OF GOOD FAITH
APPEARS.--Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
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with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
C. AWARD OF FEES FOR BENEFITS TO OTHER DISSENTERS.--If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Officers and Directors
Sections 1741 through 1750 of Subchapter C, Chapter 17, of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for
mandatory and discretionary indemnification of a corporation's directors,
officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with an action or
proceeding, whether civil, criminal, administrative or investigative (other than
derivative actions), to which any of them is a party or is threatened to be made
a party by reason of his being a representative, director or officer of the
corporation or serving at the request of the corporation as a representative of
another corporation, partnership, joint venture, trust or other enterprise, if
he acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful.
Section 1742 permits indemnification in derivative actions if the
appropriate standard of conduct is met, except in respect of any claim, issue or
matter as to which the person has been adjudged to be liable to the corporation
unless and only to the extent that the proper court determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for the
expenses that the court deems proper.
Under Section 1743, indemnification is mandatory to the extent that the
officer or director has been successful on the merits or otherwise in defense of
any action or proceeding referred to in Section 1741 or 1742.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that the representative met the
applicable standard of conduct, and such determination will be made by (i) the
board of directors by a majority vote of a quorum of directors not parties to
the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable
and a majority of disinterested directors so directs, by independent legal
counsel; or (iii) by the shareholders.
Section 1745 provides that expenses incurred by an officer, director,
employee or agent in defending a civil or criminal action or proceeding may be
paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation.
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Section 1746 provides generally that, except in any case where the act
or failure to act giving rise to the claim for indemnification is determined by
a court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter 17C of the
BCL shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding that office.
Section 1747 also grants a corporation the power to purchase and
maintain insurance on behalf of any director or officer against any liability
incurred by him in his capacity as officer or director, whether or not the
corporation would have the power to indemnify him against the liability under
Subchapter 17C of the BCL.
Sections 1748 and 1749 extend the indemnification and advancement of
expenses provisions contained in Subchapter 17C of the BCL to successor
corporations in fundamental changes and to representatives serving as
fiduciaries of employee benefit plans.
Section 1750 provides that the indemnification and advancement of
expenses provided by, or granted pursuant to, Subchapter 17C of the BCL shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs and personal representative of such person.
For information regarding provisions under which a director or officer
of the Company may be insured or indemnified in any manner against any liability
which he may incur in his capacity as such, reference is made to Article VII of
the Company's Bylaws (included as Exhibit 3(b) to this Registration Statement
and incorporated by reference herein).
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
No. Description of Document
--- -----------------------
2 -- Agreement and Plan of Merger, dated as of June 10, 1996, among
Kleinert's Inc., Kleinert's, Inc. of Alabama and Scott Mills,
Inc. (Filed as Annex A to the Proxy Statement-Prospectus forming
a part of this Registration Statement.)
3(a) -- Restated Certificate of Incorporation of the Registrant, as
amended. (Incorporated by reference to the copy thereof filed as
an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 2, 1995).
3(b) -- Bylaws of the Registrant. (Incorporated by reference to the
copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 2, 1995).
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4 -- Specimen certificate representing the Common Stock. (Filed as
Exhibit 4.4 to the Registration Statement on Form S-1,
Registration No. 33-39134, and incorporated herein by this
reference.)
5 -- Opinion of Cozen and O'Connor as to the validity of the
securities.
8+ -- Opinion of Cozen and O'Connor as to tax matters.
10(a) -- Property Lease Agreement dated January 24, 1986 between C/N
Leedon Limited Partnership II and the Registrant, and as
amended. (Incorporated by reference to the copy thereof filed as
an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 3, 1988.)
10(b) -- License Agreement dated May 12, 1989 between Hygienics,
Industries, Inc. and Kleinert's Inc. of Alabama. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 3, 1989.)
10(c) -- Agreement dated as of September 1, 1990 between the Industrial
Development Board of the City of Elba, Alabama and Kleinert's,
Inc. of Alabama. (Incorporated by reference to the copy thereof
filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 1, 1990.)
10(d) -- Guaranty Agreement dated September 26, 1990 between Brown
Brothers Harriman and Co. and Kleinert's, Inc. of Alabama.
(Incorporated by reference to the copy thereof filed as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 1, 1990.)
10(e) -- Guaranty Agreement dated September 26, 1990 between Brown
Brothers Harriman and Co. and Kleinert's, Inc. of Alabama.
(Incorporated by reference to the copy thereof filed as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 1, 1990.)
10(f) -- Letter Agreement dated September 26, 1990 between Philadelphia
National Bank and Kleinert's, Inc. of Alabama. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 1, 1990.)
10(g) -- Agreement dated as of November 9, 1989 between Precision
Textiles, Inc. and Kleinert's, Inc. of Alabama. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 1, 1990.)
10(h) -- Line of Credit Agreement dated October 18, 1990 between Republic
National Bank and Kleinert's, Inc. of Alabama. (Incorporated by
reference to the copy thereof filed as an
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Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 1, 1990.)
10(i) -- Lease Agreement dated December 31, 1990 between General Electric
Capital Corporation and Kleinert's, Inc. of Alabama.
(Incorporated by reference to the copy thereof filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 1, 1990.)
10(j) -- Sublease Agreement between Harco Drug, Inc. and Kleinert's, Inc.
of Alabama dated February 14, 1991. (Incorporated by reference to
the copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 1, 1990.)
10(k) -- Non-Qualified Stock Option Agreement dated May 7, 1991 between
Jack Brier and the Registrant (Incorporated by reference to the
copy thereof filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31,
1991.)*
10(l) -- Addendums to Lease Agreement dated December 31, 1990 between
General Electric Capital Corporation and Kleinert's, Inc. of
Alabama. (Incorporated by reference to the copy thereof filed as
an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1991.)
10(m) -- Property Lease Agreement dated February 15, 1992 between Fortex
and Kleinert's, Inc. of Alabama. (Incorporated by reference to
the copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended November 30, 1991.)
10(n) -- Demand Grid Note dated October 22, 1990 between Republic National
Bank of New York and Kleinert's, Inc. of Alabama and Guaranty of
Kleinert's, Inc. dated October 23, 1990. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended February 29, 1992.)
10(o) -- Consent letter dated October 30, 1990 between Philadelphia
National Bank, incorporated as CoreStates Bank, N.A., Kleinert's,
Inc. of Alabama and the Registrant (Incorporated by reference
to the copy thereof filed as an Exhibit to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
February 29, 1992.)
10(p) -- Kleinert's Inc. 1991 Stock Option Plan. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended February 29, 1992.)*
10(q) -- Unsecured Promissory Note dated February 19, 1992 to Brown
Brothers, Harriman & Co. from Kleinert's, Inc. of Alabama and
Surety Agreement dated February 19, 1992 between Brown Brothers,
Harriman and Co. and the Registrant (Incorporated by
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reference to the copy thereof filed as an Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended February 29, 1992.)
10(r) -- Non-Qualified Stock Option Agreement with Kenneth Brier, a
Director of the Registrant, dated June 23, 1992. (Incorporated
by reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
November 28, 1992.)*
10(s) -- Intentionally omitted.
10(t) -- Line of Credit and Term Loan Agreement dated April 8, 1993
between CoreStates Bank, N.A., Philadelphia National Bank, and
Kleinert's, Inc. of Alabama. (Incorporated by reference to the
copy thereof filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 29, 1993.)
10(u) -- Lease Agreement dated May 27, 1993 between Deutsche Credit
Corporation and Kleinert's, Inc. of Alabama-Scott Mills Division.
(Incorporated by reference to the copy thereof filed as an
Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended May 29, 1993.)
10(v) -- Lease Agreement dated June 6, 1993 between Meridian Leasing, Inc.
and Kleinert's, Inc. of Alabama. (Incorporated by reference to
the copy thereof filed as an Exhibit to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended May
29, 1993.)
10(w) -- Amended and Restated Term Loan Note dated December 10, 1993
between CoreStates Bank, N.A., Philadelphia National Bank and
Kleinert's, Inc. of Alabama. (Incorporated by reference to the
copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended November 27, 1993.)
10(x) -- Letter Amendment dated February 8, 1994 to the Loan Agreement
dated April 8, 1993. (Incorporated by reference to the copy
thereof filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended November 27, 1993.)
10(y) -- Line of credit agreement dated May 16, 1994 between PNC Bank and
Kleinert's, Inc. of Alabama. (Incorporated by reference to the
copy thereof filed as an Exhibit to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 28, 1994.)
10(aa) -- Operating lease agreement dated May 26, 1994 between Meridian
Leasing Inc. and the Registrant (Incorporated by reference to
the copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 2, 1995).
10(ab) -- Property Lease Agreement dated November 8, 1994 between Robert
Clayton Hickman and Kleinert's, Inc. of Alabama. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 3, 1994.)
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10(ac) -- Second amended and restated term loan note dated November 10,
1994 between CoreStates Bank, N.A. and Kleinert's, Inc. of
Alabama. (Incorporated by reference to the copy thereof filed as
an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 3, 1994.)
10(ad) -- Employment agreement dated November 21, 1994 between Jack Brier
and the Registrant (Incorporated by reference to the copy
thereof filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 3, 1994.)*
10(ae) -- Promissory note agreement dated December 5, 1994 between Scott
Mills, Inc. and Kleinert's, Inc. of Delaware. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 3, 1994.)
10(af) -- License agreement extension dated December 22, 1994 between
Hygienics Industries, Inc. and the Registrant (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 3, 1994.)
10(ag) -- Letter amendment dated January 7, 1995 to property lease
agreement dated February 15, 1992 between Fortex and Kleinert's
Inc. of Alabama. (Incorporated by reference to the copy thereof
filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 3, 1994.)
10(ah) -- Operating lease agreement dated December 30, 1994 between
Meridian Leasing, Inc. and Kleinert's, Inc. of Alabama.
(Incorporated by reference to the copy thereof filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 3, 1994.)
10(ai) -- Sublease agreement dated January 23, 1995 between Scott Mills,
Inc. of North Carolina and Kleinert's, Inc. of Alabama.
(Incorporated by reference to the copy thereof filed as an
Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 3, 1994.)
10(aj) -- Lease agreement dated December 5, 1994 between Meridian Leasing
Inc. and the Registrant (Incorporated by reference to the copy
thereof filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 2, 1995.)
10(ak) -- Line of Credit Demand Note dated March 1, 1995 between
Kleinert's, Inc. of Alabama and PNC Bank. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 2, 1995.)
10(al) -- Demand Grid Note dated April 20, 1995 between Republic National
Bank of New York and Kleinert's, Inc. of Alabama and Guaranty of
the Registrant dated April 20, 1995. (Incorporated by reference
to the copy thereof filed as an Exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 2,
1995.)
II-6
<PAGE>
10(am) -- License agreement dated June 21, 1995 between Cadtex Corporation
and Kleinert's Inc. of New York. (Incorporated by reference to
the copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 2, 1995.)
10(an) -- Deferred compensation agreement dated August 15, 1995 between
Jack Brier and the Registrant (Incorporated by reference to the
copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 2, 1995.)*
10(ao) -- Rent agreement dated August 22, 1995 between 112 West 34th Street
Company and Kleinert's, Inc. of New York. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 2, 1995.)
10(ap) -- Guaranty agreement dated November 29, 1995 between Meridian
Leasing Inc. and Kleinert's, Inc. of New York. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 2, 1995.)
10(aq) -- Lease agreement dated November 29, 1995 between Meridian Leasing
Inc. and Kleinert's, Inc. of New York. (Incorporated by reference
to the copy thereof filed as an Exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 2,
1995.)
10(ar) -- Supply agreement dated December 4, 1995 between Dyersburg Fabrics
Inc. and Kleinert's, Inc. of Alabama. (Incorporated by reference
to the copy thereof filed as an Exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 2,
1995.)
10(as) -- Lease agreement dated December 15, 1995 between Jeffrey A.
Lopatin and Kleinert's, Inc. of Florida. (Incorporated by
reference to the copy thereof filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 2, 1995.)
10(at) -- Purchase agreement dated December 15, 1996 between Pixie
Playmates, Inc., Certified Sewing Services, Inc., Certified
Apparel Services of Honduras, Inc. C.A. and Kleinert's, Inc. of
Florida. (Incorporated by reference to the copy thereof filed as
an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 2, 1995.)
11 -- Statement regarding Computation of Per Share Earnings.
(Previously filed).
13 -- Kleinert's Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended March 2, 1996. (Previously filed).
13(a) -- Kleinert's, Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended June 1, 1996.
21 -- Subsidiaries of the Registrant. (Incorporated by reference to
the copy thereof filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 2, 1995.)
II-7
<PAGE>
23(a)+ -- Consent of Cozen and O'Connor (included in Exhibit 5).
23(b) -- Consents of Ernst & Young LLP.
23(c) -- Consent of Price Waterhouse LLP.
(b) Schedules
None.
- ------------------
* Constitutes a compensatory plan or arrangement required to be filed as an
exhibit to this Registration Statement.
+ To be filed by amendment.
Item 22. Undertakings
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Plymouth
Meeting, Commonwealth of Pennsylvania, on August 14, 1996.
KLEINERT'S, INC.
By: /s/ Jack Brier
----------------------------------
Jack Brier, Chairman of the Board;
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No.1 to the Registration Statement has been signed by the following persons in
the capacities indicated on August 14, 1996.
Signature Title
--------- -----
/s/ Jack Brier Chairman of the Board, Chief
- ----------------------------------- Executive Officer and Director
Jack Brier (Principal Executive Officer)
/s/ Gerald E. Monigle Vice President--Finance and Chief
- ----------------------------------- Financial Officer
Gerald E. Monigle (Principal Financial and Accounting
Officer)
* Director
- -----------------------------------
Jay B. Andrews
II-9
<PAGE>
* Director
- -----------------------------------
Marvin Grossman
* Director
- -----------------------------------
Kenneth Brier
* Director
- -----------------------------------
William Forman
* Director
- -----------------------------------
Nathan Greenberg
* Director
- -----------------------------------
E. Gerald Riesenbach
- ------------------------------------
*By Joseph J. Connors, Attorney-in-Fact pursuant to a
power of attorney filed as part of the registration statement
/s/ Joseph J. Connors
- ---------------------
Joseph J. Connors, Attorney-in-Fact
II-10
<PAGE>
EXHIBIT INDEX
The following is an index to the exhibits filed as part of this
Registration Statement which are not incorporated by reference.
Exhibit Page
Number Exhibit Caption Number
- ------- --------------- ------
2 Agreement and Plan of Merger, dated as
of June 10, 1996, among Kleinert's, Inc.,
Kleinert's, Inc. of Alabama and Scott
Mills, Inc.
5 Opinion of Cozen and O'Connor as to the
validity of the securities
13(a) Kleinert's, Inc. Quarterly Report on Form
10-Q for fiscal quarter ended June 1, 1996
23(b) Consents of Ernst & Young LLP
23(c) Consent of Price Waterhouse LLP
[LETTERHEAD COZEN AND O'CONNOR]
August 14, 1996
Kleinert's, Inc.
120 West Germantown Pike
Suite 100
Plymouth Meeting, PA 19462
Re: Securities and Exchange Commission -
Registration Statement on Form S-4
Gentlemen:
As counsel to Kleinert's, Inc. (the "Company"), we have
assisted in the preparation of the Company's Registration Statement on Form S-4
(the "Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, covering 56,000 shares of the
Company's Common Stock, par value $1.00 per share (the "Common Stock"), that may
be issued to holders of Common Stock of Scott Mills, Inc. ("Scott Mills Shares")
and options to purchase Scott Mills Shares in a merger transaction (the
"Merger") pursuant to an Agreement and Plan of Merger dated as of June 10, 1996
among the Company, Scott Mills, Inc. and Kleinert's, Inc. of Alabama (the
"Merger Agreement").
In this connection, we have examined and considered the
original or copies, certified or otherwise identified to our satisfaction, of
the Company's Articles of Incorporation and its Bylaws, as each has been amended
to date, resolutions of its Board of Directors, the Merger Agreement and such
other documents and records relating to the Company and the issuance and sale of
the Common Stock as we have deemed appropriate for the purpose of rendering this
opinion.
EXHIBIT "5"
<PAGE>
Kleinert's, Inc.
August 14, 1996
Page 2
- -------------------------
In our examination of documents, instruments and other papers,
we have assumed the genuineness of all signatures on original and certified
documents and the conformity to original and certified documents of all copies
submitted to us as conformed, photostat or other copies. As to matters of fact
which have not been independently established, we have relied upon
representations of the officers of the Company.
Based upon the foregoing examination, and the information
supplied, it is our opinion that the Common Stock to be issued by the Company in
the Merger pursuant to the Merger Agreement are duly authorized and, when issued
and paid for in accordance with the terms of the Merger Agreement, will be
validly issued, fully paid and non-assessable.
We hereby expressly consent to the inclusion of this opinion
as an exhibit to the Registration Statement.
Very truly yours,
COZEN AND O'CONNOR
SNH:jmdl
EXHIBIT "5"
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 1, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-6454
------
KLEINERT'S, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 13-0921860
- -----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 West Germantown Pike, Suite 100
Plymouth Meeting, Pennsylvania 19462
- -----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(610) 828-7261
- --------------
- -----------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
Class Outstanding at July 11, 1996
- ------------------------------ --------------------------------
Common Stock 3,731,431
Par Value $1.00 per share
<PAGE>
KLEINERT'S, INC.
INDEX
Part I. Financial information PAGE
----
Item 1. Financial statements
Consolidated statements of operations 3
for the three months and six months
ended June 1, 1996 and June 3, 1995
Consolidated balance sheets at 4
June 1, 1996, December 2, 1995 and
June 3, 1995
Consolidated statements of cash flows 6
for the six months ended June 1, 1996
and June 3, 1995
Notes to consolidated financial statements 8
Item 2. Management's discussion and analysis of 11
the financial condition and results of
operations
Part II. Other information
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $11,291 $10,132 $23,011 $17,845
Cost of goods sold 8,598 7,641 17,806 13,316
------- ------- ------- -------
Gross profit 2,693 2,491 5,205 4,529
------- ------- ------- -------
Selling, general and
administrative expenses 1,372 1,227 2,798 2,396
Interest expense, net 424 416 760 685
------- ------- ------- -------
1,796 1,643 3,558 3,081
------- ------- ------- -------
Income before income
taxes 897 848 1,647 1,448
Provision for income taxes 327 308 598 526
------- ------- ------- -------
Net income $ 570 $ 540 $ 1,049 $ 922
------- ------- ------- -------
Earnings per share:
Net income $ .15 $ .14 $ .28 $ .25
------- ------- ------- -------
Weighted average shares
outstanding 3,767 3,761 3,752 3,759
------- ------- ------- -------
</TABLE>
See accompanying notes
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
ASSETS
June 1, Dec. 2, June 3,
1996 1995 1995
------- ------ ------
Current assets:
Cash $ 44 $ 327 $ 205
Accounts receivable (net) 13,723 21,899 10,429
Inventories:
Raw materials 10,209 4,222 6,112
Work-in-process 5,032 4,321 4,128
Finished goods 20,570 5,987 20,093
------- ------- -------
Total inventories 35,811 14,530 30,333
------- ------- -------
Other current assets 1,343 2,380 1,740
------- ------- -------
Total current assets 50,921 39,136 42,707
------- ------- -------
Property, plant & equipment, at cost 13,697 11,544 10,998
Less: accumulated depreciation and
amortization 6,516 6,051 5,732
------- ------- -------
net property, plant and
equipment 7,181 5,493 5,266
------- ------- -------
Other assets 4,668 3,593 3,278
------- ------- -------
$62,770 $48,222 $51,251
======= ======= =======
See accompanying notes
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 1, Dec. 2, June 3,
1996 1995 1995
------- ------- -------
Current liabilities
Notes payable and current portion
of long-term debt $20,245 $14,195 $17,955
Accounts payable 6,180 5,024 6,977
Accrued expenses 1,129 1,331 792
Income taxes payable 386 29 606
------- ------- -------
Total current liabilities 27,940 20,579 26,330
------- ------- -------
Deferred income taxes 134 134 123
Long-term debt 7,629 3,429 4,124
------- ------- -------
Total liabilities 35,703 24,142 30,577
------- ------- -------
Shareholders' equity:
Preferred stock-par value $1.00 per
share, 2,000,000 shares authorized,
none issued -- -- --
Common stock par value $1.00 per
share, 10,000,000 shares authorized,
4,198,398, 3,798,398 and 3,798,398
shares issued and outstanding,
respectively 4,198 3,798 3,798
Capital in excess of par value 12,164 10,626 10,626
Retained earnings 13,921 12,872 9,466
------- ------- -------
30,283 27,296 23,890
------- ------- -------
Less:
Treasury stock, at cost, 466,967 (3,216) (3,216) (3,216)
------- ------- ------
Total shareholders' equity 27,067 24,080 20,674
------- ------- -------
$62,770 $48,222 $51,251
======= ======= =======
See accompanying notes
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's Omitted)
Six Months Ended
June 1, June 3,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 1,049 $ 922
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 472 326
Provision for losses on accounts receivable (14) 2
Change in assets and liabilities:
Decrease in accounts receivable 8,219 7,620
(Increase) in inventory (19,242) (17,636)
(Increase) decrease in other current assets 1,037 (127)
Increase in accounts payable and
accrued expenses 953 2,601
Increase in income taxes payable 358 505
(Increase) decrease in other assets (129) 3
-------- --------
Total adjustments ( 8,346) (6,706)
-------- --------
Net cash used in operating activities ( 7,297) (5,784)
-------- --------
Cash flows from investing activities:
Purchase of assets -- Pixie Acquisition (4,650) -
Capital expenditures (584) (443)
Note receivable related party (Note 2) - (500)
Proceeds from note receivable 60 40
-------- --------
Net cash used in investing activities
activities (5,174) (903)
-------- --------
See accompanying notes
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's Omitted)
(CONTINUED)
Six Months Ended
June 1, June 3,
1996 1995
-------- --------
Cash flows from financing activities:
Net borrowings under revolving
line-of-credit agreement $ 5,850 $7,260
Principal payments of debt (250) (500)
Proceeds from long-term debt 4,650 --
Exercise of stock options 1,938 --
------- ------
Net cash provided by financing
activities 12,188 6,760
------- ------
Net increase (decrease) in cash (283) 73
Cash at beginning of period 327 132
------- ------
Cash at end of period $ 44 $ 205
------- ------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 505 $ 612
Income taxes $ 240 $ 75
See accompanying notes
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 1, 1996 and June 3, 1995
(1) Basis of presentation:
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
information furnished reflects all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the results for the
interim periods. Operating results for the six months ended June 1, 1996 are
not necessarily indicative of the results that may be expected for the year
ended November 30, 1996. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures presented are
adequate for a fair presentation of the financial statements. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 2, 1995.
(2) Acquisition
On December 19, 1995, Kleinert's, Inc., through its newly formed,
wholly-owned subsidiary, Kleinert's, Inc. of Florida, ("together, the Company"),
consummated a transaction (the "Pixie Acquisition") pursuant to which the
Company acquired substantially all of the assets of Pixie Playmates, Inc.
("Pixie") and Certified Sewing Services, Inc. ("Certified") two Florida
corporations, and all of the capital stock of Certified Apparel Services of
Honduras, Inc., S.A., a Honduran corporation ("CASH"). Pixie, Certified and
CASH, all of which were affiliated entities, are engaged in the manufacture and
sale of children's apparel. Concurrent with the Pixie Acquisition, the Company
entered into a three year lease agreement with the principal shareholder of
Pixie for the premises in which Pixie was conducting business. To date the
Company has continued manufacturing operations as was conducted by Pixie,
Certified and CASH prior to the Pixie Acquisition.
In consideration for the assets of Pixie and Certified and the shares of
CASH, the Company paid an aggregate purchase price of $4,650,000 in cash.
The purchase price was financed by the Company through an amendment to its
existing bank financing agreement to provide for an additional term debt
facility.
The acquisition has been accounted for using the purchase method, and
accordingly, the results of operations are included in the Company's results
from the date of acquisition, December 19, 1995.
<PAGE>
The proforma unaudited results of operations for the six months ended June
1, 1996 and June 3, 1995, assuming consummation of the purchase and amendment of
the term debt as of December 4, 1994 are as follows:
Three Months Ended Six Months Ended
------------------------------------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
------- ------- ------- -------
Net sales $11,291 $12,245 $23,082 $22,841
Net income 570 391 1,049 688
Net income per common share: .15 .10 .28 .18
(3) Refinancing of Term Loan
On February 28, 1996 the Company refinanced its existing term loan and
provided for an additional term debt facility of $4,650,000 to finance the
Pixie Acquisition. The term loan is in the form of an amended and restated
term loan note with the same bank as the original term loan. The total
borrowing at June 1, 1996 was $8,049,000 which is payable in quarterly
installments of $300,000 through September, 2002 with a final installment of
$249,000 due December 2002. The interest rate is based on LIBOR but has been
effectively fixed at 7.00% by an interest rate swap agreement with the same
bank.
(4) Related Party Transactions
On December 5, 1994 the Company loaned Scott Mills, Inc. ("Scott Mills")
$500,000. Scott Mills, formerly an indirect wholly-owned subsidiary of the
Company, is a knitting and textile manufacturer and the successor in interest to
the Company's textile division, the assets of which were transferred to Scott
Mills on November 27, 1993. The loan bears interest, payable annually, at 8 1/2%
per annum and the principal is due in full on December 4, 1997. Scott Mills,
which has operated independently of the Company since November 27, 1993,
continues to be a principal supplier of fabric to the Company.
The Company provides certain third party services on behalf of Scott Mills,
including data processing and account payable check processing functions and
business management services for which Scott Mills reimburses the Company. As
a consequence, the balance due the Company fluctuates based on the timing
of Scott Mills repayments to the Company for disbursements made on behalf of
Scott Mills. On December 1, 1995 the Company executed a working capital
agreement with Scott Mills that confirms Scott Mills' obligations to the Company
and provides to the Company a first lien and security interest in substantially
all of Scott Mills' assets to secure Scott Mills' obligation to repay to the
Company the loan balance due of $2,488,000 as of June 1, 1996.
In March 1995, the Company subleased knitting machines to Scott Mills for a
forty-five month term to be used to produce certain fabrics on behalf of the
Company. The terms of the sublease were reached at an arms length basis.
<PAGE>
(5) Subsequent Events
Acquisition
On June 10, 1996, Kleinert's, Inc., Kleinert's, Inc. of Alabama, a wholly-
owned subsidiary of Kleinert's, Inc., and Scott Mills, Inc. entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Scott
Mills, Inc. shall be merged with and into Kleinert's, Inc. of Alabama (the
"Merger"). In the Merger, each share of Common Stock of Scott Mills, Inc.
which is issued and outstanding on the effective date of the Merger shall be
converted into the right to receive $0.03 in cash and such fraction of a share
of Kleinert's, Inc. Common Stock as shall have a value of $0.27, based upon
the average closing price of the Kleinert's Common Stock for the five trading
days immediately preceding the Merger. Cash will be paid in lieu of fractional
shares of Kleinert's, Inc. Common Stock otherwise issuable in the Merger.
Based upon approximately 3,368,000 issued and outstanding shares of Common
Stock of Scott Mills, Inc., it is expected that Kleinert's, Inc., will issue
approximately 56,000 shares of its Common Stock in the Merger. The consummation
of the Merger is subject to a number of conditions, including approval of the
Merger by the stockholders of Scott Mills, Inc.
Kleinert's is the largest customer of Scott Mills. Scott Mills' sales for
the six months ended June 1, 1996 were $4,118,000 of which $3,685,000 were sales
to Kleinert's. The proposed merger of Scott Mills with Kleinert's is expected to
permit Kleinert's to maintain its flexibility in servicing its retail customers
in its sleepwear and activewear products.
Stock Repurchase Program
On June 21, 1996, the Company announced the commencement of a common stock
repurchase program. Purchases under the program will occur in the public
market and in negotiated private transactions. Total purchases under the
repurchase program will not exceed $5,000,000.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's apparel business is highly seasonal. Consequently the sales
and operating results for the six months ended June 1, 1996 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
November 30, 1996.
Three Months Ended Six Months Ended
------------------ ----------------
($000's) ($000's)
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
------- ------- ------- -------
Net Sales $11,291 $10,132 $23,011 $17,845
======= ======= ======= =======
Gross Profit $ 2,693 $ 2,491 $ 5,205 $ 4,529
======= ======= ======= =======
Selling,
general and
administrative
expenses $ 1,372 $ 1,227 $ 2,798 $ 2,396
======= ======= ======== =======
Net sales increased by $5,166,000 or 29% to $23,011,000 from $17,845,000
for the six months ended June 1, 1996 compared to the six months ended June 3,
1995. Sales of products associated with the Pixie business following the
acquisition by Kleinert's of the assets of Pixie Playmates, Inc. ("Pixie") and
Certified Sewing Services, Inc. and of the Stock of Certified Apparel Services
of Honduras, S.A. (the "Pixie Acquisition") accounted for an approximately
19% increase and the remaining 10% increase related to Kleinert's continuing
business. Gross profit increased by $676,000 or 15% primarily as a result of
increased sales volume.
Selling, general and administrative expenses increased 17% or $402,000
primarily reflecting expenses associated with the Pixie business.
Interest expense for the first six months of 1996 was $760,000 compared to
$685,000 in the first six months of 1995 reflecting increased borrowing levels
associated with financing the Pixie acquisition.
Net income increased 14% to $1,049,000 for the first six months of 1996
when compared to $922,000 for the first six months of 1995. Approximately 7% of
the increase was attributable to the basic Kleinert's business, while the Pixie
acquisition accounted for the balance.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities increased from $5,784,000 in the
first six months of fiscal year 1995 to $7,297,000 in the first six months of
fiscal year 1996. This change resulted from increases in inventory levels during
the six months ended June 1, 1996. The higher inventory levels reflect higher
production levels in anticipation of increased sales expected for the entire
year 1996.
In consideration for the assets of Pixie and Certified and the shares of
CASH purchased in the Pixie Acquisition, the Company paid an aggregate purchase
price of $4,650,000 in cash which was financed through an additional term
debt facility through an amendment to the Company's bank financing agreement.
The term loan as amended in connection with the Pixie Acquisition is in the
form of an amended and restated term loan note with the same bank as the
original term loan. The total borrowing at June 1, 1996, was $8,049,000 which is
payable in quarterly installments of $300,000 through September, 2002 with a
final installment of $249,000 due December 2002. The interest rate is based on
LIBOR but has been effectively fixed at 7.00% by an interest rate swap agreement
with the same bank.
It is expected that the Pixie Acquisition will enhance the Company's
earnings and, ultimately, its cash flows; however, due to the seasonality
of the Company's business, additional working capital requirements continue to
be anticipated in periods when production levels exceed future sales.
Traditionally the Company has used its short-term borrowings to build
inventory levels for shipment in the fall season.
The Company believes that cash flow generated by operations, together with
amounts available under its existing credit arrangements, should be sufficient
to fund its working capital needs in fiscal year 1996 and for the foreseeable
future.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Material Contracts
(1) Fourth Amendment to line of credit and Term Loan
Agreement dated February 28, 1996 by and among
Kleinert's, Inc. of Alabama, Kleinert's, Inc. of Florida
and CoreStates Bank, N.A.
(2) Third Amended and Restated Term Loan Note dated
February 28, 1996 between Kleinert's, Inc. of Alabama
and Kleinert's, Inc. of Florida and CoreStates Bank, N.A.
(3) Guaranty dated February 28, 1996 between Kleinert's, Inc.
and CoreStates Bank, N.A.
(4) Certificate of Corporate Resolutions dated February
1996 -- Kleinert's, Inc. of Florida.
(5) Certificate of Corporate Resolutions dated February
1996 -- Kleinert's, Inc. of Alabama.
(6) Schedule to Master Agreement dated February 28, 1996
between Kleinert's, Inc. of Alabama, Kleinert's, Inc.
of Florida and CoreStates Bank, N.A.
(7) International Swap Dealers Association, Inc. Master
Agreement dated February 28, 1996 between Kleinert's,
Inc. of Alabama and Kleinert's, Inc. of Florida and
CoreStates Bank, N.A.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KLEINERT'S, INC.
Date: July 16, 1996 By:/s/Gerald E. Monigle
-----------------------------------
Gerald E. Monigle
Vice President--Finance
(Principal Accounting Officer)
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Kleinert's Inc. for
the registration of 56,000 shares of its common stock and to the use of our
report dated February 9, 1996, with respect to the consolidated financial
statements of Kleinert's Inc. included in its Annual Report (Form 10-K) for the
year ended December 2, 1995, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
-----------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
August 14, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 15, 1996, with respect to the financial
statements of Scott Mills, Inc. included in the Registration Statement (Form
S-4) and related Prospectus of Kleinert's, Inc. for the registration of 56,000
shares of its common stock.
/s/ ERNST & YOUNG LLP
-----------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
August 14, 1996
EXHIBIT 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus/Proxy Statement constituting
part of this Amendment No. 1 to the Registration Statement on Form S-4 of
Kleinert's, Inc. of our report dated March 8, 1994 relating to the financial
statements of Scott Mills, Inc. for the year ended November 27, 1993 and our
report dated February 14, 1994 relating to the financial statements of
Kleinert's Inc. for the year ended November 27, 1993 both of which appear in
such Prospectus/Proxy Statement. We also consent to the reference to us under
the heading "Experts" in such Prospectus/Proxy Statement.
/s/ PRICE WATERHOUSE LLP
- ---------------------------------
Price Waterhouse LLP
Philadelphia, PA
August 13, 1996
STEVEN N. HAAS
DIRECT DIAL (215) 665-4171
August 15, 1996
VIA EDGAR AND HAND-DELIVERY
- ---------------------------
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C 20549
Re: Kleinert's, Inc. - Registration Statement on
Form S-4 (File No. 333-5841); Scott Mills, Inc. -
Preliminary Proxy Statement (File No. 333-5841)
-----------------------------------------------
Ladies and Gentlemen:
On behalf of Kleinert's, Inc. ("Kleinert's") and Scott
Mills, Inc. ("Scott Mills"), being transmitted for filing
pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is Amendment No. 1 to the above-
captioned Registration Statement on Form S-4, together with
exhibits thereto. Amendment No. 1 to the Registration Statement
also constitutes an amended preliminary proxy statement of Scott
Mills.
For the convenience of the Staff in reviewing the filing, we
are also transmitting by hand five additional copies of Amendment No. 1 to the
Registration Statement which have been marked to show changes from the prior
filing and three additional unmarked copies of Amendment No. 1 to the
Registration Statement.
The following are the responses of Kleinert's and Scott Mills
(together, the "Companies") to the Staff's letter of comment dated July 23,
1996. For the convenience of the Staff in reviewing the following, we have
enclosed a copy of the Staff's comment letter, and the Companies' responses
below have been consecutively numbered to correspond to the numbered paragraphs
in the comment letter.
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 2
- -------------------------
1. In response to the Staff's comment, the Prospectus/Proxy
Statement has been revised on page 25 to include a new section under the caption
"The Merger - Merger Consideration," which provides a detailed discussion of the
Per Share Merger Consideration, and includes a tabular disclosure illustrating
adjustments in the percentage interest of a share of Kleinert's Common Stock
which constitutes a portion of the Per Share Merger Consideration, and in the
total number of shares of Kleinert's Common Stock to be issued in the Merger,
depending upon fluctuations in the Average Price of the Kleinert's Common Stock.
The Companies also have disclosed on pages 14 and 25 of the Prospectus/Proxy
Statement that, regardless of fluctuations in the Average Price of the
Kleinert's Common Stock, the fractional interest of Kleinert's Common Stock to
be received by a Scott Mills shareholder for each share of Scott Mills Common
Stock will always have a value of $0.27. The Company also has disclosed the
total amount of shares and the total amount of cash expected to be paid in the
Merger in exchange for the Scott Mills Common Stock and Scott Mills Options.
Additionally, a new sentence has been added on page 14, disclosing the source of
funds to pay the cash portion of the Merger Consideration.
Reference is also made to pages 2, 14, and 25 of the
Prospectus/Proxy Statement, which reflect a revised sentence indicating that the
Per Share Merger Consideration consists, in part, of a fraction of a share of
Kleinert's Common Stock which shall have "a value of $0.27 based upon the
Average Price of the Kleinert's Common Stock." We believe that this revised
disclosure comports with the Staff's request.
The Companies have also disclosed in this new section that
if, as a result of fluctuations in the Average Price between the date of the
Prospectus/Proxy Statement and the Effective Time, the fractional interest of a
Kleinert's share to be issued as part of the Per Share Merger Consideration
would be less than one-half or more than twice the fractional interest of a
share which would be issued based upon the Average Price on the date of the
Prospectus/Proxy Statement, the Companies will amend the proxy materials and
re-solicit proxies in connection with the Merger proposal.
Finally, reference is made to page 22 of the Prospectus/Proxy
Statement under the caption "The Merger Background of the Merger," stating that
the amount of the Merger Consideration was based upon Kleinert's assessment of
the value to Kleinert's of Scott Mills and that the composition of the Per Share
Merger Consideration between cash and Kleinert's Common
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 3
- -------------------------
Stock was determined in the sole discretion of the Kleinert's Board of
Directors.
2-3. In response to the Staff's comments, the Notice of Annual
Meeting has been revised to advise how duly executed but unmarked proxies will
be voted and to disclose the amount of Merger Consideration anticipated to be
received by the Scott Mills shareholders.
4. Reference is made to page 5 of the Prospectus/Proxy
Statement which has been revised to incorporate by reference in the Registration
Statement Kleinert's Current Report on Form 8-K filed with the Commission on
January 4, 1996.
5. Reference is made to page 10 of the Prospectus/Proxy
Statement under the caption "Summary - Interests of Certain Persons in the
Merger," which has been revised to specifically name those directors of
Kleinert's who have made loans to Scott Mills. In lieu of naming Kleinert's
shareholders who made loans to Scott Mills, the Companies have revised the
disclosure to indicate that none of the lending shareholders owns beneficially
in excess 5.0% of the issued and outstanding common stock of either Kleinert's
or Scott Mills. Reference also is made to page 32 of the Prospectus/Proxy
Statement under the caption "Interests of Certain Persons in the Merger," and to
page 72 of the Prospectus/Proxy Statement under the caption "Election of
Directors - Certain Relationships and Related Transactions," which contain
similar amended disclosure regarding the directors and shareholders who have
made loans to Scott Mills.
6. Reference is made to page 14 of the Prospectus/Proxy
Statement under the caption "The Annual Meeting - Introduction; Purpose of
the Meeting," which has been revised in response to the Staff's comment.
7. It is not currently anticipated that any personal
solicitation materials will be used by the directors and parties named in the
Prospectus/Proxy Statement under the caption "The Annual Meeting - Solicitation
of Proxies" pursuant to Rule 14a-6 of the Exchange Act.
8. Reference is made to page 21 of the Prospectus/Proxy
Statement under the caption "The Merger Background of the Merger," which has
been revised to disclose the amount of proceeds received in connection with the
sale of the dyeing and finishing assets, and the portion of those proceeds used
to repay debt. The material terms of the sale also have been disclosed in the
same paragraph (the sale was consummated
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 4
- -------------------------
pursuant to a very "straight forward" purchase agreement), and a cross reference
to the discussion in the MD&A also has been included.
9. In response to the Staff's comment, reference is made to a
new cross reference which has been added to the end of the second paragraph on
page 22 of the Prospectus/Proxy Statement under the caption "The Merger -
Background of the Merger." Additionally, reference is made to page 72 of the
Prospectus/Proxy Statement under the caption "Election of Directors - Certain
Relationships and Related Transactions - Kleinert's Loan and Financing
Transaction," which has been revised to include the material terms of the
indebtedness, including repayment amounts and the most recent amount
outstanding.
10. Cozen and O'Connor and Ernst & Young LLP have advised
Scott Mills and Kleinert's that, upon consummation of the Merger pursuant to the
terms of the Merger Agreement, Kleinert's and its subsidiaries on a consolidated
basis should succeed to the available net operating loss carryover of Scott
Mills for Federal income tax purposes and that the limitations contained in
sections 269 and 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), on the use by an acquiring corporation of the net operating losses of
an acquired corporation should not apply in this case. Cozen and O'Connor's and
Ernst & Young LLP's advice is based upon (i) the existence of certain facts and
the accuracy at the time of the Merger of certain representations made to them
by the parties to the Merger, and (ii) the provisions of the Code and the
Treasury Regulations promulgated thereunder, as enacted and construed at the
time of such advice, and administrative rulings, pronouncements and court
decisions, all of which are subject to change at any time.
11. As previously disclosed in the Prospectus/Proxy Statement,
the Scott Mills Board considered negative factors in connection with the Merger
and Merger Agreement, including the potential and actual conflicts of interest
between the directors and officers of Scott Mills and Kleinert's and the lack of
a fairness opinion from an independent financial advisor. Scott Mills
respectfully submits that these were the only negative factors considered by the
Board, particularly in light of the financial uncertainty which likely will be
faced by Scott Mills in the event the Merger is not consummated. Please note
that both of these negative factors are discussed in detail in the
Prospectus/Proxy Statement, insofar as issues regarding the lack of a fairness
opinion are addressed in the second paragraph on page 24, and the potential
conflicts of interest are disclosed in
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 5
- -------------------------
the Summary on pages 10 and on pages 31 and 32 under the caption "Interests Of
Certain Persons in the Merger." The Companies also have added a new sentence on
pages 31 and 72 to the effect that the consummation of the Merger will result in
the elimination of conflicts of interest and that consequently, no procedures to
address these conflicts of interest would be required.
12. Reference is made to the additional discussion which has
been added to page 25 of the Prospectus/Proxy Statement under the caption "The
Merger Agreement - Merger Consideration," which indicates that the Companies do
not expect any fluctuation in the price of the Kleinert's shares to have a
significant effect on the number of Kleinert's shares to be received by the
Scott Mills shareholders. Reference also is made to page 14 of the
Prospectus/Proxy Statement under the caption "The Annual Meeting - Introduction;
Purpose of the Meeting," which has been revised to include a similar statement.
13. The Companies respectfully advise the Staff that the
second paragraph on page 31 of the Prospectus/Proxy Statement under the caption
"The Merger-Indemnification of Directors and Officers," describing the
Commission's position on indemnification for liabilities arising under the
Securities Act, is derived from Rule 512(h) of Regulation S-K promulgated under
the Exchange Act.
14. The Companies have added an additional sentence to the
third paragraph on page 31 of the Prospectus/Proxy Statement under the caption
"The Merger - Indemnification of Directors and Officers," to indicate the amount
of directors' and officers' liability insurance currently maintained by Scott
Mills and the amount of the annual premium paid therefor.
15-19. Reference is made to the revisions in the
Prospectus/Proxy Statement on pages 31 and 32 under the caption "Interest of
Certain Persons in the Merger," which have been made to respond to the Staff's
comments. Please note, in particular, that as previously described, the Company
has included a sentence to the effect that any conflicts of interest which
currently exist will be eliminated upon consummation of the Merger and,
consequently, no policies or procedures would be required to be implemented to
address them in the future. Further, the Companies acknowledge that in the event
the Merger is not consummated, such conflicts of interests will continue to
exist and will be addressed merely by the exercise by the respective Companies'
boards of directors of their duty of good faith and loyalty to their respective
shareholders. Please also note that the Companies have included a cross
reference to a new section in
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 6
- -------------------------
the Prospectus under the caption "Kleinert's Executive Compensation," which
describes the terms of the employment agreement between Kleinert's and Jack
Brier, constituting the only agreement currently in place to which reference is
made in comment no. 16.
20. Reference is made to page 8 of the Prospectus/Proxy
Statement under the caption "Summary - Effect of the Merger," as well as on page
25 under the caption "The Merger - Merger Consideration," which indicates the
approximate percentage of Kleinert's shares to be issued in the Merger.
21. Reference is made to page 35 of the Prospectus/Proxy
Statement under the caption "Certain Federal Income Tax Consequences," which has
been revised to indicate that the discussion is based upon an opinion of
counsel.
22. Reference is made to the new paragraph which appears on
page 40 of the Prospectus/Proxy Statement under the caption "Kleinert's
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Fiscal Year 1995 Compared to Fiscal Year
1994 and Fiscal Year 1993," which addresses the reasons for Kleinert's increase
in market share.
23. Reference is made to page 40 of the Prospectus/Proxy
Statement under the caption "Kleinert's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Fiscal
Year 1995 Compared to Fiscal Year 1994 and Fiscal Year 1993," which addresses
the impact of an additional week for the year ended December 30, 1994 compared
to the years ended December 2, 1995 and November 27, 1993.
24. Reference is made to the last sentence in the third
paragraph on page 41 of the Prospectus/Proxy Statement under the caption
"Kleinert's Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Fiscal Year 1995 Compared to
Fiscal Year 1994 and Fiscal Year 1993," which has been added to indicate that
Kleinert's expects to continue to maintain its margins at current levels.
25. Prior to the spin-off of Scott Mills on November 27,
1993, Scott Mills operated as a division of Kleinert's, and corporate,
general and administrative services (including, for example, financial,
accounting, data processing, human resources, etc.) were provided primarily by
the internal
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 7
- -------------------------
administrative staff of Kleinert's. The Scott Mills operating division was
allocated a portion of Kleinert's corporate general and administrative costs
based upon Kleinert's good faith estimate of the percentage of time or use
attributable to these services on behalf of Scott Mills. Because the Kleinert's
corporate and general administrative costs previously allocated to Scott Mills
in fiscal year 1993 when it was still a division are primarily fixed staff
costs, no meaningful reduction of Kleinert's corporate, general and
administrative costs to offset the reduced allocation to Scott Mills occurred in
fiscal years 1994 and 1995 when it was an independent company.
26. Reference is made to page 41 of the Prospectus/Proxy
Statement under the caption "Kleinert's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Fiscal
Year 1995 Compared to Fiscal Year 1994 and Fiscal Year 1993," in which an
additional paragraph has been added to address the steps taken by management to
maintain Kleinert's margins in light of the increase in expenses.
27. Reference is made to the addition of a new paragraph on
page 40 of the Prospectus/Prosy Statement under the caption "Kleinert's
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Fiscal Year 1995 Compared to Fiscal Year
1994 and Fiscal Year 1993," which addresses the seasonality of Kleinert's
business on a quarter by quarter basis.
28. Reference is made to page 43 of the Prospectus/Proxy
Statement under the caption "Kleinert's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Six Months Ended June 1, 1996
Compared to Six Months Ended June 3, 1995," in which Kleinert's has added an
additional paragraph which addresses the reason for the increase in Kleinert's
sales for the periods compared.
29. Reference is made to page 43 of the Prospectus/Prosy
Statement under the caption "Kleinert's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Six Months Ended June 1, 1996
Compared to Six Months Ended June 3, 1995," which has been revised to
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 8
- -------------------------
disclose the impact of Pixie Playmates' selling, general and administrative
expenses in future periods.
30. Reference is made to the addition of a new paragraph under
the caption "Income Taxes" on page 45 of the Prospectus/Proxy Statement which
has been added in response to the Staff's comment.
31. Reference is made to page 44 of the Prospectus/Proxy
Statement under the caption "Kleinert's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Inflation and
Changing Prices on Sales and Income from Operations," which has been revised to
address the Staff's comment.
32. Please note that Kleinert's has included a cross-reference
to the Pixie, Certified and CASH acquisitions on page 44 of the Prospectus/Proxy
Statement in response to the Staff's comment.
33. Reference is made to page 45 of the Prospectus/Proxy
Statement under the caption "Kleinert's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," in which Kleinert's has added a table setting forth information
regarding its current short-term borrowings.
34. Reference is made to the addition of a new paragraph on
page 45 of the Prospectus/Proxy Statement under the caption "Kleinert's
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," which discloses the Company's
capital needs. Please note that the additional disclosure also states that
Kleinert's has no material capital commitments.
35. Reference is made to pages 44 and 45 of the
Prospectus/Proxy Statement under the caption "Kleinert's Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," which has been revised in response to the Staff's comment.
36. Please refer to the Companies' response to comment
no. 34 above.
37-38. Reference is made to page 47 of the Prospectus/Proxy
Statement under the caption "Scott Mills Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Fiscal Year
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 9
- -------------------------
1995 Compared To Fiscal Year 1994 and Fiscal Year 1993," which has been revised
to provide information regarding the sale by Scott Mills of its dyeing and
finishing assets as well as the material terms of the transaction.
39. Reference is made to the additional paragraph which has
been added to page 51 of the Prospectus/Proxy Statement under the caption "Scott
Mills Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Fiscal Year 1995 Compared To Fiscal Year
1994 and Fiscal Year 1993," which discloses Scott Mills' material indebtedness.
40. Please note the addition of a new paragraph on page 46 of
the Prospectus/Proxy Statement under the caption "Scott Mills Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Fiscal Year 1995 Compared To Fiscal Year 1994 and
Fiscal Year 1993," which has been revised to response to the Staff's comment.
Supplementally, the Companies advise the Staff that Kleinert's suffered slight
operating deficiencies as a result of Scott Mills' quality and delivery problems
while Scott Mills was engaged in its dyeing and finishing operations.
Nonetheless, because Kleinert's maintains sufficient inventory of raw materials
to maintain its reputation with its customers, the impact was minimized so that
no significant operating problems were experienced by Kleinert's as a result of
the operating problems experienced by Scott Mills.
41. Reference is made to page 50 of the Prospectus/Proxy
Statement under the caption "Scott Mills Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," which has been revised to disclose that Scott Mills has
subcontracted its dyeing and finishing operating business to several
unaffiliated vendors including Dyersburg, the company which purchased the dyeing
and finishing assets from Scott Mills in November 1995.
42-43. Reference is made to page 54 of the Prospectus/Proxy
Statement under the caption "Information Concerning Kleinert's --
Manufacturing," which has been revised in response to the Staff's comments.
44. Reference is made to the first paragraph on page 54 of
the Prospectus/Proxy Statement under the caption "Information Concerning
Kleinert's -- Marketing," which has been
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 10
- -------------------------
revised to indicate the percentage of sales attributable to Kleinert's
independent sales representatives.
45. Reference is made to the addition of a sentence in the
first full paragraph on page 55 of the Prospectus/Proxy Statement under the
caption "Information Concerning Kleinert's -- Marketing," which has been added
in response to the Staff's comment.
46. In response to the Staff's comment, the Companies have
added additional disclosure on page 24 of the Prospectus/Proxy Statement under
the caption "The Merger Reasons for the Merger; Recommendation of the Board of
Directors," which addresses the litigation involving Wesley Edwards. Please also
note that the Companies have included a cross reference to the detailed
discussion of the litigation appearing on page 62 of the Prospectus/Proxy
Statement under the caption "Information Concerning Scott Mills - Legal
Proceedings."
47. Please note that on page 7 of the Prospectus/Proxy
Statement under the caption "Summary - Votes Required; Security Ownership of
Management and Certain Other Persons," and on page 24 under the caption "The
Merger - Reasons for the Merger; Recommendation of the Board of Directors," the
Companies have included disclosure indicating that Mr. Edwards owns less than
1.0% of the issued outstanding common stock of Scott Mills. Reference is also
made to the addition of Mr. Edwards to the table on page 63 under the caption
"Beneficial Ownership of Scott Mills Common Stock."
48. Reference is made to page 72 of the Prospectus/Proxy
Statement under the caption "Election of Directors - Certain Relationships and
Related Transactions - Kleinert's Loan and Financing Transaction," which has
been revised in response to the Staff's comment.
49. Reference is made to the addition of a new section in the
Prospectus/Proxy Statement on page 68 under the caption "Kleinert's Executive
Compensation," which has been included pursuant to Item 18 of the Form
Requirements of Form S-4.
50. Reference is made to page 72 of the Prospectus/Proxy
Statement under the caption "Election Of Directors - Certain Relationships and
Related Transactions Common Officers, Directors and Shareholders," which has
been revised to indicate that the conflicts of interests will be eliminated if
the Merger consummated and, if the Merger is not
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 11
- -------------------------
consummated, that the conflicts will likely continue in the absence of any
formal procedures implemented to address the same.
51. Reference is made to the addition of a new paragraph to
Note 3 on page F-35 of the Prospectus/Proxy Statement which has been added in
response to the Staff's comment regarding the interest rate swap agreement.
52. Scott Mills' business is the production of circular knit
fabrics for the children's and women's apparel market. The processes that a
textile manufacturer uses to produce finished products are knitting, dyeing and
finishing. Scott Mills believes that it operates only within one segment, as
defined under FAB 14 and APB 30. Therefore, the disclosure requirements of FAS
14 and APB 30 do not apply to the financial statements for the fiscal year ended
December 2, 1995.
53. The development of Kleinert's estimate of good will to be
received upon the acquisition of Scott Mills in the merger was determined as
follows: The purchase price of $.30 per share will be allocated to the net
assets of Scott Mills, based on their relative fair values. Such fair values
have been estimated by Kleinert's subject to final determination based on
valuations and other studies to be performed following the Merger. The excess of
the purchase price over the net assets as finally determined will be allocated
to goodwill.
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 12
- -------------------------
Additionally, please note that although Kleinert's and Scott
Mills are unable to assure with absolute certainty the number of common
shareholders of the Companies because certain of the shares are held in "street
name" brokerage accounts, both Kleinert's and Scott Mills believe that in excess
of 90% of the shareholders of Scott Mills are also shareholders of Kleinert's,
although, as discussed in the filing, less than 50% of the Scott Mills shares
are beneficially owned by the directors and officers of Kleinert's.
54. As noted in the Companies' response to comment no. 56
below, Kleinert's has applied the significance tests as described in Regulation
S-X Rule 3-05 (cross-referenced to Rule 1-02.(v)) to the acquisition of Pixie
Playmates, Inc., Certified Sewing Services, Inc. and Certified Apparel Services
of Honduras, S.A. The calculations of the significance of these acquisitions,
based upon the internal financial statements of these consolidated entities,
were below the required 10% threshold. Consequently, Kleinert's is not required
to provide pro forma financial statements and further does not believe that such
disclosure would be meaningful to a shareholder.
55. As discussed with the Staff by telephone, each of Scott
Mills and Kleinert's intends to amend its Annual Report on Form 10-K and its
Quarterly Reports on Form 10-Q to the extent necessary to comply with the
responses to the Staff's comments, once the Companies have been advised by the
Staff that the proposed revisions to the Prospectus/Proxy Statement sufficiently
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 13
- -------------------------
respond to the Staff's comments. Kleinert's acknowledges and understands that
the Registration Statement will not be declared effective unless and until such
amendments have been filed.
56. In response to the Staff's comment, Kleinert's has applied
the significance tests as described in Regulation S-X, Rule 305
(cross-referenced to Rule 1-02.(v)) to the acquisition of Pixie Playmates, Inc.,
Certified Sewing Services, Inc. and Certified Apparel Services of Honduras, S.A.
The calculations of the significance of these acquisitions, based on the
internal financial statements of these consolidated entities, resulted in a 9.6%
significance for the income test ($641,000 net loss before income taxes of the
consolidated entities divided by the year ended December 2, 1995 income before
taxes of Kleinert's of $6,683,000), and the significance of the asset test was
9.64% ($4,650,000 purchase price divided by the December 2, 1995 total assets of
Kleinert's of $48,222,000). Since the results of the significance tests are
below 10%, Kleinert's is not required to provide audited financial statements in
accordance with Item 7 of Form 8-K.
Kleinert's utilized the financial statements for the fiscal
year ended December 2, 1995 to determine the relative significance of the
acquisitions since the related Annual Report on Form 10-K was filed with the
Securities and Exchange Commission on March 1, 1996, which was prior to the due
date, including giving effect to the automatic extension provided by the rules
to Form 8-K for the filing of such financial statements, in accordance with the
Staff's practice.
57. Please note that the financial statements have
been updated to include the six month period of each of
Kleinert's and Scott Mills ended June 1, 1996.
58. Please note that the Registration Statement includes as
exhibits currently dated consents of the independent accountants, and manually
signed consents have been placed on file with Kleinert's as required by Rule 402
of Regulation C.
Kleinert's and Scott Mills trusts that the foregoing fully
responds to the Staff's comments. Please contact the undersigned at 215-665-4171
should there be any further questions or comments relating to the filing. On
behalf of both Kleinert's and Scott Mills, we thank the Staff in advance for its
cooperation and timely response to the foregoing.
<PAGE>
Securities and Exchange Commission
August 15, 1996
Page 14
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Kindly acknowledge receipt of the enclosed materials by
stamping the attached copy of this letter and returning it to the messenger who
has been instructed to wait.
Sincerely,
COZEN AND O'CONNOR
BY: STEVEN N. HAAS
cc: Karla Boyd, Esquire
David Ryan, Accounting Examiner
H. Christopher Owings, Assistant Director
