SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SCOTT MILLS, INC.
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(Name of Registrant as Specified in its Charter)
[INSERT NAME OF FILER WHEN APPLICABLE]
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $1.00
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(2) Aggregate number of securities to which transaction applies: 72,000
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(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): $.33
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(4) Proposed maximum aggregate value of transaction: $23,793.00
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(5) Total fee paid: $383.00
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/X/ Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $383.00
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(2) Form, Schedule or Registration Statement No.: Form S-4, File No. 333-5841
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(3) Filing Party: Kleinert's, Inc.
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(4) Date Filed: June 12, 1996
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SCOTT MILLS, INC.
120 WEST GERMANTOWN PIKE, SUITE 100
PLYMOUTH MEETING, PENNSYLVANIA 19462
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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 the Company's principal offices,
120 West Germantown Pike, Suite 100, Plymouth Meeting, Pennsylvania 19462, on
September 27, 1996 at 10:00 o'clock a.m., local Philadelphia time, for the
following purposes:
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 51,000 shares of Common Stock of Kleinert's, Inc. will be
issued and approximately $101,000 in cash will be paid in exchange for all
issued and outstanding shares of Common Stock of the Company.
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.
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 6, 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.
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PROXY STATEMENT/PROSPECTUS
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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, 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 prices 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.
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 6, 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 August 30, 1996.
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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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TABLE OF CONTENTS
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AVAILABLE INFORMATION.................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 5
SUMMARY.................................................................. 6
The Companies............................................................ 6
The Meeting.............................................................. 6
The Merger............................................................... 7
COMPARATIVE PER SHARE DATA............................................... 11
THE ANNUAL MEETING....................................................... 11
Solicitation of Proxies.................................................. 12
Revocation of Proxies.................................................... 13
Voting Securities; Record Date; Quorum................................... 13
KLEINERT'S SELECTED FINANCIAL INFORMATION................................ 14
SCOTT MILLS SELECTED FINANCIAL INFORMATION............................... 15
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION.............. 16
THE MERGER............................................................... 17
Purpose and Structure of the Merger...................................... 17
Background of the Merger................................................. 17
Reasons for the Merger; Recommendation of the Board of Directors......... 19
THE MERGER AGREEMENT..................................................... 20
Effective Time........................................................... 21
Merger Consideration..................................................... 21
Exchange of Certificates in the Merger................................... 22
Representations and Warranties........................................... 22
Conduct of Business Pending the Merger................................... 22
Conditions to the Merger................................................. 24
Termination.............................................................. 24
Effect of Termination.................................................... 25
Indemnification of Directors and Officers................................ 25
INTERESTS OF CERTAIN PERSONS IN THE MERGER............................... 26
ACCOUNTING TREATMENT OF THE MERGER....................................... 27
REGULATORY APPROVALS..................................................... 27
DISSENTERS' RIGHTS OF APPRAISAL.......................................... 27
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. 29
FEDERAL SECURITIES LAW CONSEQUENCES...................................... 30
COMPARATIVE STOCK PRICE INFORMATION...................................... 31
KLEINERT'S DIVIDEND POLICY............................................... 32
SCOTT MILLS DIVIDEND POLICY.............................................. 32
KLEINERT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................... 33
SCOTT MILLS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................... 38
INFORMATION CONCERNING KLEINERT'S........................................ 43
INFORMATION CONCERNING SCOTT MILLS....................................... 47
BENEFICIAL OWNERSHIP OF SCOTT MILLS COMMON STOCK......................... 51
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DESCRIPTION OF KLEINERT'S CAPITAL STOCK.................................. 52
BENEFICIAL OWNERSHIP OF KLEINERT'S COMMON STOCK.......................... 53
KLEINERT'S EXECUTIVE COMPENSATION........................................ 54
ELECTION OF DIRECTORS.................................................... 55
REPORT OF THE SCOTT MILLS BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION... 61
STOCK PERFORMANCE GRAPH.................................................. 62
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934........................................ 62
RELATIONSHIP WITH INDEPENDENT AUDITORS................................... 62
PROPOSALS OF SECURITY HOLDERS............................................ 63
LEGAL MATTERS............................................................ 63
EXPERTS.................................................................. 63
INDEX TO FINANCIAL STATEMENTS............................................ F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER.................................. A-1
ANNEX B -- STATUTORY PROVISIONS CONCERNING DISSENTERS RIGHTS OF
SCOTT MILLS SHAREHOLDERS............................................... B-1
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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
60661-2511. 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
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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 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, as amended by Amendment No. 1 on
Form 10-K/A, for the fiscal year ended December 2, 1995;
2. Kleinert's Quarterly Report on Form 10-Q, as amended by Amendment No. 1
on Form 10-Q/A, for the quarterly period ended March 2, 1996;
3. Kleinert's Quarterly Report on Form 10-Q, as amended by Amendment No. 1
on Form 10-Q/A, 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 16, 1996.
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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
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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 'Election of
Directors -- 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.
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THE MEETING
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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 the Company's principal offices, 120
West Germantown Pike, Suite 100, Plymouth Meeting, PA 19462 on
September 27, 1996.
Record Date; Shares Entitled
to Vote...................................... Holders of record of Scott Mills Common Stock at the close of
business on September 5, 1996 are entitled to notice of and to
vote at the Meeting.
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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 Ownership
of Management and
Certain Other Persons........................ The affirmative vote of the holders of a majority of the issued
and outstanding shares 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 3,377,598 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 Date; Quorum',
'Interests of Certain Persons in the Merger' and 'Beneficial
Ownership of Scott Mills Common Stock.'
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THE MERGER
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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 sales 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
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Stock is the same as the closing price for such stock on September
4, 1996, the holders of Scott Mills Common Stock and Scott Mills
Options would receive, as a result of their holdings,
approximately 51,000 shares of Kleinert's Common Stock, or
approximately 1.4% of the Kleinert's Common Stock to be
outstanding immediately following consummation of the Merger.
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 of Directors..... The Board of Directors of Scott Mills has 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.'
Interests of Certain Persons in the Merger... Except for one director and one officer, all 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. If the notes
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are converted following the Merger, holders shall be entitled to
receive the Per Share Merger Consideration which they would have
received if the notes were converted into Scott Mills Common Stock
prior to the Effective Time. If the notes are converted, the
number of shares of Kleinert's Common Stock to be issued in
respect thereof would not have a material effect on the number of
shares of Kleinert's Common Stock to be issued and outstanding
giving effect to the Merger. 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 $238 in cash and 120 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
'Interests of Certain Persons in the Merger,' 'Beneficial
Ownership of Scott Mills Common Stock' and 'Election of Directors
- Certain Relationships and Related Transactions.'
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
Common Stock Certificates.................... As soon as reasonably practicable after the 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; Termination of the
Merger Agreement............................. The obligations of Scott Mills and Kleinert's to consummate the
Merger are subject to 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.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
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 Agreement.'
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 Consequences...... Kleinert's and Scott Mills intend that the 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.'
</TABLE>
10
<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' and 'Scott Mills 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.
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 September 27, 1996 at 10:00 a.m. local time at the
Company's principal offices, 120 West Germantown Pike, Suite 100, Plymouth
Meeting, PA 19462.
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 prices 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 September 4, 1996 as reported on the Nasdaq
National Market, it is anticipated that approximately 51,000 shares of
Kleinert's Common Stock and approximately $101,000 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
11
<PAGE>
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. 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 and Scott Mills Options.
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 mail, proxies in connection with the
Meeting may be solicited by directors of Scott Mills, at no additional
compensation, by
12
<PAGE>
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 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 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
3,377,598 shares issued and outstanding. Each share entitles 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.
13
<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
--------- --------- --------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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.
14
<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.
15
<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
exclude 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>
16
<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 September 4, 1996, approximately 51,000 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 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.
17
<PAGE>
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, 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 due to
Congress Talcott Corporation, the Company's accounts receivable factor, and
other lenders including General Electric Capital Corporation and Deutsche
Financial Services. See 'Scott Mills Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources.'
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
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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.
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 'Scott Mills Selected
Financial Information.' 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, 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
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<PAGE>
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.
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.
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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. It is expected that the Effective Time will occur shortly after the 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 prices 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 Scott Mills 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 September 4, 1996, as reported on the Nasdaq National Market, it
is anticipated that approximately 51,000 shares of Kleinert's Common Stock
(representing approximately 1.4% of the Kleinert's Common Stock to be issued and
outstanding giving effect to the Merger) will be issued and approximately
$101,000 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 $15.00 and $18.00. 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>
FRACTION OF KLEINERT'S
COMMON STOCK TO BE ISSUED TOTAL NUMBER OF
FOR ONE SHARE OF SCOTT SHARES OF KLEINERT'S
MILLS COMMON STOCK TO BE
AVERAGE PRICE COMMON STOCK ISSUED IN MERGER
- ------------- --------------------------- -----------------------
<S> <C> <C>
$15.00....... 1.80% 60,797
$15.50....... 1.74% 58,836
$16.00....... 1.68% 56,997
$16.50....... 1.63% 55,270
$17.00....... 1.59% 53,644
$17.50....... 1.54% 52,111
$18.00....... 1.50% 50,664
</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.
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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 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;
(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;
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(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;
(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.
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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 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.
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
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<PAGE>
(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 have 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 respect 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.
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.
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<PAGE>
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 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. If the notes are
converted following the Merger, holders shall be entitled to receive the Per
Share Merger Consideration which they would have received if the notes were
converted into Scott Mills Common Stock prior to the Effective Time. If the
notes are converted, the number of shares of Kleinert's Common Stock to be
issued in respect thereof would not have a material effect on the number of
shares of Kleinert's Common stock to be issued and outstanding giving effect to
the Merger.
Approximately 43.8% of the issued and outstanding Scott Mills Common Stock
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, of
which Scott Mills Options to purchase 10,000 shares were exercised at a price of
$.0625 per share. All of the Scott Mills Options, other than those to purchase
10,000 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 on September 5,
1996, holders of the Scott Mills Options to purchase the 10,000 shares of Scott
Mills Common Stock would be entitled to receive 120 shares of Kleinert's Common
Stock and approximately $238 in cash in exchange for their Scott Mills Options
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
26
<PAGE>
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.
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 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
27
<PAGE>
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 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
28
<PAGE>
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.
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
29
<PAGE>
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.
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.
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.
30
<TABLE>
<CAPTION>
STOCK PRICE RANGE
----------------------------
HIGH LOW
------------- -------------
<S> <C> <C>
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 -- September 4, 1996................................ 18 3/8 15 1/2
</TABLE>
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.
<TABLE>
<CAPTION>
STOCK PRICE RANGE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
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 -- September 4, 1996.................................. .1875 .125
</TABLE>
31
<PAGE>
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 June 1, 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 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.
32
<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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
(000'S OMITTED)
DEC. 2, DEC. 3, NOV. 27,
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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, in which the last week of the 53 week fiscal year would have
been included, 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:
33
<PAGE>
<TABLE>
<CAPTION>
(000'S OMITTED)
DEC. 2, 1995 DEC. 3, 1994 NOV. 27, 1993
---------------------- ---------------------- ----------------------
% OF % OF % OF
NET SALES NET SALES 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 'Election of Directors -- 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.
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 % OF % OF
NET SALES NET SALES 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
34
<PAGE>
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 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 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:
<TABLE>
<CAPTION>
FISCAL YEAR
1993
---------------
(000'S OMITTED)
<S> <C>
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
=========
</TABLE>
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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
(000'S OMITTED)
INCREASE
JUNE 1, 1996 JUNE 3, 1995 (DECREASE)
------------ ------------ -----------
<S> <C> <C> <C>
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
------- ------- ------
</TABLE>
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.
35
<PAGE>
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.
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.
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 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.
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.
36
<PAGE>
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 $42,000,000 of which
$18,850,000 was outstanding at June 1, 1996 bearing interest at rates ranging
from 6.2% to 7.0%. The following table sets forth certain information concerning
this indebtedness:
<TABLE>
<CAPTION>
PRINCIPAL
NAME OF LENDER AMOUNT OUTSTANDING
- -------------- ------------------
<S> <C>
CoreStates Bank, N.A................................................... $ 6,850,000
Brown Brothers, Harriman and Co........................................ 2,000,000
PNC Bank............................................................... 5,000,000
Republic National Bank of New York..................................... 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.
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 a 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.
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.
37
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
(000'S OMITTED)
DEC. 2, DEC. 3, NOV. 27,
1995 1994 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 27, 1995, Scott Mills
sold substantially all of its dyeing and finishing assets, free and clear of all
liabilities, to Dyersburg Fabrics, Inc. ('Dyersburg'), an unaffiliated textile
manufacturer. The Company received $2,750,000 on the sale and used the proceeds
to repay its secured term debt to Congress Talcott Corporation, the Company's
accounts receivable factor, and other lenders including General Electric Capital
Corporation and Deutsche Financial Services.
During the same period, significant reductions in overhead expenses were
implemented as Scott Mills continued to initiate action to aggressively respond
to operating problems previously identified, including those which arose from an
overly aggressive sales plan, operating inefficiencies and quality control
problems. These measures included decreasing production and costs to levels
designed to rebuild customer confidence. Although Scott Mills' measures
negatively impact net sales and operating results in the short-term, Scott Mills
believes that these measures were necessary in an attempt to improve operating
results in the long-term. There can be no assurance, however, that Scott Mills'
objectives will be achieved.
Gross Profit (Loss). 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
(000'S OMITTED)
DEC. 2, DEC. 3, NOV. 27,
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Gross Profit (Loss)............... $(1,191) $(989) $(1,542)
% of Net Sales.................... (8.0%) (5.7%) (10.8%)
</TABLE>
38
<PAGE>
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.
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.
Income 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.
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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 1, JUNE 3,
1996 1995
--------- ---------
($000'S)
<S> <C> <C>
Fabric................................ $4,076 $8,259
Commission............................ 42 1,626
------ ------
$4,118 $9,885
====== ======
</TABLE>
Net Sales. 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
39
<PAGE>
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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 1, JUNE 3,
1996 1995
----------- ---------
($000'S)
<S> <C> <C>
Gross Profit (Loss).................... $124 $(266)
% of Net Sales......................... 3.0% (2.7%)
</TABLE>
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 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.
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.
Income 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
40
<PAGE>
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
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 upon 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.
41
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 a 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.
42
<PAGE>
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.
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., S.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 a 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.
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,
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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
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.
44
<PAGE>
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 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 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.
45
<PAGE>
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 Honduran law. Kleinert's considers its relationship
with its employees to be good.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Kleinert's 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. Kleinert's believes it is in
substantial compliance with all applicable governmental requirements under these
laws and regulations.
Kleinert's and its operations are subject to federal, state and local laws
and regulations concerning the protection of the environment. Kleinert's 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.
Kleinert's 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 Kleinert's 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 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.
46
<PAGE>
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.
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 'Election of Directors -- 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.
47
<PAGE>
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 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
polycotton yarns. The raw materials are knitted into five basic constructions --
terrycloth, interlock, jersey, mini-jacquard and rib. In addition, Scott Mills
makes variations of these basic constructions, including fleece and novelty
fabrics.
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
48
<PAGE>
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.
EMPLOYEES
As of January 1, 1996, Scott Mills had 43 full-time employees in Gastonia,
North Carolina, including 38 engaged in manufacturing, two clerical employees
and, three engaged in general management. None of Scott Mills' employees is
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.
49
<PAGE>
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.
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 'Election of Directors -- 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.
50
<PAGE>
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 Stock Jack Brier 368,347(1) 10.3%
Common Stock Joseph J. Connors 61,100(2) 1.8%
Common Stock Wesley Edwards 100,000(3) 2.9%
Common Stock William Forman 262,500(4) 7.6%
Common Stock E. Gerald Riesenbach 820,000(5) 24.1%
Common Stock Estate of Louis Yaeger in care of
the Bank of New York 270,785(6) 8.0%
Common Stock All Directors and Executive
Officers as a Group (five persons) 1,663,647(1)(2)(3)(4)(5)(7) 48.0%
</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 30,000 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.
(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.
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<PAGE>
(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.'
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 3,684,931 shares are issued and outstanding as
of September 5, 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.
52
<PAGE>
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>
PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER NUMBER OF SHARES CLASS
-------------- ------------------------- ---------------- -----------
<S> <C> <C> <C>
Common Stock Jay B. Andrews 70,833(1) 1.90%
Common Stock Jack Brier 1,317,997(2) 34.40%
Common Stock Kenneth Brier 81,872(3 (4) 2.20%
Common Stock Joseph J. Connors 46,200(5) 1.25%
Common Stock William Forman 200,000(6) 5.40%
Common Stock Nathan Greenberg 39,000 1.05%
Common Stock Marvin Grossman 126,250(7) 3.40%
Common Stock E. Gerald Riesenbach 10,000 .30%
Common Stock Estate of Louis Yaeger in care of
The Bank of New York 270,785(8) 7.40%
Common Stock All Directors and Executive Officers
as a Group (eight persons) 1,892,152(1)-(7) 49.8%
</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.
(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.
53
<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).
54
<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
55
<PAGE>
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 Secretary 1993
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.
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 to 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
56
<PAGE>
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 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
$100,000 for fiscal year 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------------
ANNUAL COMPENSATION NUMBER OF
--------------------------------- OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL FISCAL SALARY($) COMPENSATION UNDERLYING ALL OTHER
POSITION YEAR (1) BONUS($) ($) OPTIONS (#) COMPENSATION(2)
- ----------------------------------- --------- ----------- --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack Brier (1) 1995 $ 56,250 -- -- -- $ 1,031
Director, Chairman 1994 $106,250 -- -- 200,000 $ 1,594
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.
57
<PAGE>
FISCAL YEAR END 1995 OPTION VALUES
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.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 2, 1995 AT DECEMBER 2, 1995
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- ------------------------------------------- ----------------------------- ---------------------------
<S> <C> <C>
Jack Brier................................. 200,000/-- $ -0-
</TABLE>
- ------------------
(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.'
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 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
entire $500,000 principal balance remained outstanding.
58
<PAGE>
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. If the notes are converted following
the Merger, holders shall be entitled to receive the Per Share Merger
Consolidation which they will have received if the notes were converted into
Scott Mills Common Stock prior to the Effective Time. If the notes are
converted, the number of shares of Kleinert's Common Stock to be issued in
respect thereof would not have a material effect on the number of shares of
Kleinert's Common Stock to be issued and outstanding giving effect to the
Merger. See '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
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.
59
<PAGE>
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.
60
<PAGE>
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 'Election of Directors --
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
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/Prospectus under the caption 'Election of Directors
- -- Scott Mills Executive Compensation.'
Board of Directors
Jack Brier William Forman
Joseph J. Connors E. Gerald Riesenbach
61
<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.
[In the printed version of this document a graph appears here that depicits
the following plot points.]
<TABLE>
<CAPTION>
5/18/94 1994 1995
----------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
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.
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.
62
<PAGE>
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 May 6, 1997. 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.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Historical Audited Consolidated Financial Statements of Kleinert's, Inc.:
Report of Independent Auditors............................................................. F-2-F-3
Consolidated Balance Sheets at December 2, 1995 and December 3, 1994....................... F-4-F-5
Consolidated Statements of Operations for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993................................ F-6
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993................................ F-7
Consolidated Statements of Cash Flow for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993................................ F-8-F-9
Notes to Consolidated Financial Statements................................................. F-10
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-21
Consolidated Balance Sheets at June 1, 1996, December 2, 1995
and June 3, 1995........................................................................ F-22
Consolidated Statements of Cash Flow for the six months ended
June 1, 1996 and June 3, 1995........................................................... F-23
Notes to Unaudited Consolidated Financial Statements....................................... F-24
Historical Audited Consolidated Financial Statements of Scott Mills, Inc.:
Report of Independent Auditors............................................................. F-27
Report of Independent Accountants.......................................................... F-28
Consolidated Balance Sheets at December 2, 1995 and December 3, 1994....................... F-29
Consolidated Statements of Operations for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993................................ F-30
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993................................ F-31
Consolidated Statements of Cash Flow for the fiscal years ended
December 2, 1995, December 3, 1994 and November 27, 1993................................ F-32-F-33
Notes to Consolidated Financial Statements................................................. F-34
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-42
Consolidated Balance Sheets at June 1, 1996,
December 2, 1995 and June 3, 1995....................................................... F-43
Consolidated Statements of Cash Flow for the six months ended June 1, 1996
and June 3, 1995........................................................................ F-44
Notes to Unaudited Consolidated Financial Statements....................................... F-45
Unaudited Pro Forma Combined Condensed Financial Statements of Kleinert's, Inc.
and Scott Mills, Inc............................................................................. F-47
Unaudited Pro Forma Combined Condensed Balance Sheet at June 1, 1996....................... F-48
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-49
Footnotes to Unaudited Pro Forma Combined Condensed Financial Information.................. F-50
</TABLE>
F-1
<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-2
<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-3
<PAGE>
HISTORICAL AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF KLEINERT'S, INC.
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 2, 1995 AND DECEMBER 3, 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ --------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS -- CONTINUED
DECEMBER 2, 1995 AND DECEMBER 3, 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
- ------------------------------------ --------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-6
<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>
CAPITAL
NUMBER OF 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-7
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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-8
<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-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
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.
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.
<TABLE>
<CAPTION>
USEFUL LIVES
----------------
<S> <C>
Buildings 30-40 years
Leasehold improvements Term of lease
Machinery and equipment 3-10 years
Furniture and fixtures 3-5 years
</TABLE>
Earnings Per Share -- Earnings 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.
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.
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
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 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 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
Financing arrangements consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
--------- ----------- --------- -----------
($000'S OMITTED)
<S> <C> <C> <C> <C>
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
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
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
2. FINANCING ARRANGEMENTS -- CONTINUED
The following information relates to the Company's short-term revolving
lines of credit:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C>
1995..... 7.0% $ 23,480 $ 13,521
1994..... 6.3% $ 20,540 $ 11,388
1993..... 5.6% $ 19,475 $ 12,866
</TABLE>
- ------------------
(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.
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 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
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
3. DISCONTINUED OPERATIONS -- CONTINUED
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, 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:
<TABLE>
<CAPTION>
LIABILITY METHOD DEFERRED METHOD
---------------------------- ----------------
1995 1994 1993
------------- ------------- ----------------
<S> <C> <C> <C>
Continuing operations.................................. $ 2,352,000 $ 2,051,000 $ 1,794,000
Discontinued operations................................ -- -- (673,000)
------------- ------------- ----------------
$ 2,352,000 $ 2,051,000 $ 1,121,000
------------- ------------- ----------------
------------- ------------- ----------------
</TABLE>
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
4. INCOME TAXES -- CONTINUED
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
LIABILITY METHOD DEFERRED METHOD
---------------------------- ----------------
1995 1994 1993
------------- ------------- ----------------
<S> <C> <C> <C>
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
------------- ------------- ----------------
------------- ------------- ----------------
</TABLE>
The components of the deferred tax provision, including the related tax
effects of timing differences, are as follows:
<TABLE>
<CAPTION>
DEFERRED METHOD
1993
----------------
<S> <C>
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)
</TABLE>
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
operations 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:
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
4. INCOME TAXES -- CONTINUED
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The projected benefit obligation below is based on the following
assumptions:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
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%
</TABLE>
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
5. RETIREMENT PLANS -- CONTINUED
The following is a reconciliation of the Plan's assets and liabilities to
amounts recorded in the Company's financial statements:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
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.
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:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ------------------------------ -------------
<S> <C>
1996.......................... $ 853,000
1997.......................... 722,000
1998.......................... 597,000
1999.......................... 535,000
2000.......................... 434,000
-------------
Total......................... $ 3,141,000
-------------
-------------
</TABLE>
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
6. PROPERTY, PLANT AND EQUIPMENT AND LEASE COMMITMENTS -- CONTINUED
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 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.
The information with respect to these incentive stock option plans is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
12/2/95 12/3/94 11/27/93
--------------- --------------- ---------------
<S> <C> <C> <C>
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
</TABLE>
- ------------------
(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.
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.
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
8. COMMITMENTS -- CONTINUED
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 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.
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
</TABLE>
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
10. SEGMENT INFORMATION -- CONTINUED
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
12/2/95 12/3/94 11/27/93
--------- --------- ---------
($000'S OMITTED)
<S> <C> <C> <C>
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.
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.
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 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
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
13. SUBSEQUENT EVENT -- CONTINUED
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.
14. EVENTS SUBSEQUENT TO THE DATE OF THE ACCOUNTANTS REPORT (UNAUDITED)
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 on February
28, 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 effectively fixes the rate at
7.0%. This reduces the Company's risk of incurring higher interest costs due to
rising interest rates. At February 28, 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
February 28, 1996 was $0.
F-20
<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-21
<PAGE>
KLEINERT'S, 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......................................................................... $ 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
--------- --------- ---------
--------- --------- ---------
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes
F-22
<PAGE>
KLEINERT'S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 1, JUNE 3,
1996 1995
----------- -----------
<S> <C> <C>
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)
----------- -----------
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
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
F-23
<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.
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:
<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 $ 12,245 $ 23,082 $ 22,841
Net income.............................................. 570 391 1,049 688
Net income per common share:............................ .15 .10 .28 .18
</TABLE>
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
F-24
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 1, 1996 AND JUNE 3, 1995
3. REFINANCING OF TERM LOAN -- CONTINUED
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.
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.
F-25
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 1, 1996 AND JUNE 3, 1995
5. SUBSEQUENT EVENTS -- CONTINUED
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-26
<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-27
<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 from 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-28
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 2, 1995 AND DECEMBER 3, 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
ASSETS
1995 1994
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
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
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements
F-29
<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)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
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)
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
(1) Pro-forma loss and shares outstanding (Note 10) (unaudited)
See notes to consolidated financial statements
F-30
<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-31
<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)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
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)
------- ------- -------
</TABLE>
See notes to consolidated financial statements
F-32
<PAGE>
SCOTT MILLS, 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:
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
</TABLE>
See notes to consolidated financial statements
F-33
<PAGE>
SCOTT MILLS, 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
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 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
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
F-34
<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 -- CONTINUED
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 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 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 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
F-35
<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 -- CONTINUED
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 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.
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.
F-36
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
3. FINANCING ARRANGEMENTS -- CONTINUED
Financing arrangements consist of the following:
<TABLE>
<CAPTION>
1995 1994
--------------------- --------------------
CURRENT LONG TERM CURRENT LONG TERM
------- --------- ------- ---------
($000'S OMITTED)
<S> <C> <C> <C> <C>
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
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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-37
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FISCAL YEARS 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:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
DEC. 2, DEC. 3, NOV. 27,
1995 1994 1993
----------- --------- -----------
<S> <C> <C> <C>
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) $ --
----------- --------- -----------
----------- --------- -----------
</TABLE>
The net deferred income tax balances relate to the following cumulative
temporary differences:
<TABLE>
<CAPTION>
DEC. 2, DEC. 3,
1995 1994
----------- ---------
<S> <C> <C>
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.................... $ -- $ --
----------- ---------
----------- ---------
</TABLE>
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-38
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FISCAL YEARS 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.
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.
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.
F-39
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
8. SHAREHOLDERS' EQUITY -- CONTINUED
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 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.
F-40
<PAGE>
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>
- ------------------
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-41
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
<S> <C> <C> <C> <C>
JUNE 1, JUNE 3, JUNE 1, JUNE 3,
1996 1995 1996 1995
------- ------- ------- -------
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-42
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
($000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 1, DEC. 2, JUNE 3,
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
ASSETS
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
------- ------- -------
------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
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-43
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 1, JUNE 3,
1996 1995
--------- ---------
<S> <C> <C>
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)
------- -------
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
</TABLE>
See accompanying notes
F-44
<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.
(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.
F-45
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 1, 1996 AND JUNE 3, 1995
(3) GOING CONCERN -- CONTINUED
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-46
<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-47
<PAGE>
KLEINERT'S INC. AND SCOTT MILLS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
KLEINERT'S, SCOTT MILLS, PRO FORMA PRO FORMA
INC. INC. ADJUSTMENTS COMBINED
AT 6/1/96 AT 6/1/96 AT 6/1/96 AT 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
------- ------- ------- -------
------- ------- ------- -------
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-48
<PAGE>
KLEINERT'S INC. AND SCOTT MILLS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT 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
INC. MILLS, INC. ADJUSTMENTS COMBINED INC. MILLS, INC. ADJUSTMENTS
6/1/96 6/1/96 6/1/96 6/1/96 12/2/95 12/2/95 12/2/95
----------- ----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales --
non-affiliates........... $23,011 $ 433 $ -- $23,444 $75,121 $ 7,955 $ --
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)
Cost of goods sold......... 17,806 3,994 (3,669)(J) 18,131 61,636 15,987 (6,841)(J)
------- ------- ---------- ------- ------- ------- ------
Gross Profit............... 5,205 124 (16) 5,313 13,485 (1,191) --
Provision for dyehouse
closing.................. -- 138 -- 138 -- 2,044 --
Selling, general and 2,798 28 (8)(K) 2,818 5,151 919 (28)(K)
administrative
expenses............... -- -- 38 (L) 38 -- -- 76 (L)
------- ------- ------- ------- ------- ------- ------
Total selling, general and
administrative
expenses................. 2,798 28 30 2,856 5,151 919 48
Interest expense........... 760 145 -- 905 1,651 704 --
------- ------- ------- ------- ------- ------- ------
Income (loss) before income
taxes.................... 1,647 (187) (46) 1,414 6,683 (4,858) (48)
Provision for income taxes
(benefit)................ 598 -- (79)(N) 519 2,352 -- (1,840)(M)
------ -------- ------- ------- ------- ------- -------
Net income (loss).......... $ 1,049 $ (187) $ 33 $ 895(O) $ 4,331 $(4,858) $ 1,792
------- -------- ------- ------- ------- ------- -------
------- -------- ------- ------- ------- ------- -------
Net income (loss) per
share.................... $ 0.28 $ (0.06) $ 0.24(O) $ 1.15 $ (1.44)
------- -------- ------- ------- -------
------- -------- ------- ------- -------
Weighted average shares
outstanding.............. 3,752 3,368 3,808 3,750 3,368
------- -------- ------- ------- -------
------- -------- ------- ------- -------
<CAPTION>
PRO FORMA
COMBINED
12/2/95
---------
Net sales --
non-affiliates........... $83,076
Net sales -- related
party.................... --
-------
Net sales total............ 83,076
Cost of goods sold......... 70,782
-------
Gross Profit............... 12,294
Provision for dyehouse
closing.................. 2,044
Selling, general and 6,042
administrative
expenses............... 76
-------
Total selling, general and
administrative
expenses................. 6,118
Interest expense........... 2,355
-------
Income (loss) before income
taxes.................... 1,777
Provision for income taxes
(benefit)................ 512
-------
Net income (loss).......... $ 1,265
-------
-------
Net income (loss) per
share.................... $ 0.33
-------
-------
Weighted average shares
outstanding.............. 3,806
-------
-------
</TABLE>
F-49
<PAGE>
KLEINERT'S, INC. AND SCOTT MILLS, INC.
FOOTNOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
</TABLE>
F-50
<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
A-1
<PAGE>
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) 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
'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.
A-2
<PAGE>
(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.
(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
A-3
<PAGE>
records of Scott Mills. On or after the Effective Time, any certificates
presented to the Exchange Agent 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 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
A-4
<PAGE>
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.
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
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
A-5
<PAGE>
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, 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 all personal property which is used, directly or indirectly, in the
operation of its respective business; (iii) all material
A-6
<PAGE>
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;
(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.
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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.
(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 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
Code 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
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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 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 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.
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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 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
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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.
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.
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,
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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 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.
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
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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 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 report filed by Kleinert's pursuant to Section 13 or 15(d) of the Exchange
Act which has not been so disclosed.
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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 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
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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.
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.
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
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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.
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
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
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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 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 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
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determinations and recommendation of the Board of Directors as to the Merger set
forth in Section 3.20 hereof.
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 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.
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(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
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
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
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(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
(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
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officers, directors, employees, agents or shareholders, regardless of whether
such termination and abandonment arose out 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 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
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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 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
A-22
<PAGE>
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.
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.
A-23
<PAGE>
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)
ANNEX B
STATUTORY PROVISIONS CONCERNING DISSENTERS
RIGHTS OF SCOTT MILLS SHAREHOLDERS
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988
SUBCHAPTER D. DISSENTERS RIGHTS
SECTION 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).
B-1
<PAGE>
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.
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 subchapter; 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.
B-2
<PAGE>
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).
SECTION 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 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.
SECTION 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.
SECTION 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 shares
under this subchapter. Neither a proxy nor a vote against the proposed
corporation action shall constitute the written notice required by this section.
B-3
<PAGE>
SECTION 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.
SECTION 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 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.
SECTION 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:
B-4
<PAGE>
(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 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.
SECTION 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.
SECTION 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.
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).
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.
B-5
<PAGE>
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.
SECTION 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 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.
B-6
<PAGE>
SCOTT MILLS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS SEPTEMBER 27, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Jack Brier and Joseph
Connors or either one of them, as proxies, with full power of substitution, to
vote all shares of stock of Scott Mills, Inc. (the 'Company') which the
undersigned would be entitled to vote if personally present at the Annual
Meeting of Shareholders of the Company to be held at 120 West Germantown Pike,
Suite 100, Plymouth Meeting, PA 19462, at 10:00 o'clock a.m., local Philadelphia
time, on September 27, 1996, or at any adjournments or postponements thereof:
Proposal 1. Adoption and approval of the Agreement and Plan of Merger dated
as of June 10, 1996 and the Merger contemplated thereby.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 2. Election of Directors
<TABLE>
<S> <C>
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) / / to vote for all nominees below / /
</TABLE>
Jack Brier Joseph Connors William Forman E. Gerald Riesenbach
[TO WITHHOLD AUTHORITY FOR ANY ONE NOMINEE, STRIKE A LINE THROUGH SUCH NOMINEE'S
NAME.]
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED, OR IF NO
SPECIFICATIONS ARE MADE, WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE
AGREEMENT AND PLAN OF MERGER AND THE MERGER AND FOR THE NOMINEES FOR ELECTION AS
DIRECTOR.
<PAGE>
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT FURNISHED HEREWITH, AND HEREBY CONFIRMS THAT THIS PROXY
SHALL BE VALID AND MAY BE VOTED WHETHER OR NOT THE SHAREHOLDER'S NAME IS SET
FORTH BELOW OR A SEAL IS AFFIXED OR THE DESCRIPTION, AUTHORITY OR CAPACITY OF
THE PERSON SIGNING IS GIVEN OR OTHER DEFECT OF SIGNATURE EXISTS.
Dated: _____________________ , 1996
___________________________________
Signature of Shareholder
Note: When signing as
attorney-in-fact, executor,
administrator, trustee or guardian,
please add your title as such, and
if signer is a corporation, please
sign with full corporate name by
duly authorized officer or officers
and affix the corporate seal. Where
stock is issued in the name of two
or more persons, all such persons
should sign.
PLEASE DATE, SIGN AND RETURN PROMPTLY IN THE ENCLOSED POSTAGE PAID ENVELOPE
