SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 30, 1996
Kleinert's, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 1-6454 13-0921860
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
120 West Germantown Pike
Plymouth Meeting, PA 19462
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 828-7261
Former name or former address,
if changed since last report
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On September 30, 1996, Kleinert's, Inc. ("Kleinert's" or the "Company")
consummated the merger (the "Merger") of Scott Mills, Inc. ("Scott Mills,
Inc."), with and into the Company's wholly-owned subsidiary, Kleinert's, Inc. of
Alabama ("Kleinert's Alabama"), pursuant to an Agreement and Plan of Merger
dated as of June 10, 1996 among the Company, Scott Mills and Kleinert's Alabama
(the "Merger Agreement"). Pursuant to the Merger Agreement, each share of Scott
Mills Common Stock outstanding on September 30, 1996 was converted into the
right to receive $.03 in cash and 1.52% of a share of Kleinert's Common Stock,
which is equal to that fraction of a share of Kleinert's Common Stock having a
market value of $.27 based upon the Average Price (as determined pursuant to the
Merger Agreement) of the Common Stock. Cash will be paid in lieu of fractional
shares. Kleinert's expects to issue approximately 51,000 shares of its Common
Stock and approximately $101,000 in cash in exchange for all of the outstanding
shares of Common Stock of Scott Mills.
The Merger was consummated upon receipt of approval of the Merger
Agreement and the Merger by the Scott Mills shareholders at the Scott Mills
Annual Meeting of Shareholders held on September 27, 1996. Approximately 43.8%
of the shares of Scott Mills Common Stock was beneficially owned by the
directors and executive officers of Kleinert's as a group, many of whom also
served as officers and directors of Scott Mills.
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 expects to continue the business in which Scott Mills was engaged
immediately prior to the Merger, which was the knitting of fabrics for the
children and women's apparel markets.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
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.
<PAGE>
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
<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
<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
<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
<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
<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
<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
<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
<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
<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
<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
<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
<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
<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.
<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
====== ====== ====== ======
<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.
<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 $ -- $ --
=========== ===========
<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.
<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.
<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.
<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
<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>
<PAGE>
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.
<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
<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
<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
<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)
------- -------
<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
<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.
<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.
<PAGE>
(b) Pro Forma Financial Information
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.
<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>
<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>
<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>
<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.
<PAGE>
(c) Exhibits
10.1 Agreement and Plan of Merger dated as of June 10, 1996 among
Kleinert's, Inc., Kleinert's, Inc. of Alabama (incorporated by
reference to the copy thereof filed as Annex "A" to Kleinert's
Registration Statement on Form S-4, File No. 333-5841).
<PAGE>
SIGNATURE
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.
Dated: October 15, 1996
KLEINERT' S, INC.
By: /s/ Gerald Monigle
----------------------------
Name: Gerald Monigle
Title: Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document Page
10.1 Agreement and Plan of Merger dated as of June 10, 1996
among Kleinert's, Inc., Kleinert's, Inc. of Alabama
and Scott Mills, Inc. (incorporated by reference to
the copy thereof filed as Annex "A" to Kleinert's
Registration Statement on Form S-4, File No. 333-5841).
