SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
-----------------
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-6454
------
KLEINERT'S, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 13-0921860
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 West Germantown Pike, Suite 100
Plymouth Meeting, Pennsylvania 19462
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 828-7261
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
----------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
<PAGE>
2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
Continued
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate value of the voting stock held by the non-affiliates of the
registrant was $35,000,175 at February 3, 1997.
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date:
Class Outstanding at February 3, 1997
- ------------------------------------- -------------------------------
Common Stock
Par Value $1.00 per share 3,722,834
DOCUMENTS INCORPORATED BY REFERENCE: Part III-Definitive proxy statement for the
Annual Meeting of Shareholders presently scheduled to be held April 17, 1997 to
be filed pursuant to Regulation 14A.
<PAGE>
3
PART I
Item 1. Business
Kleinert's, Inc. (together with its subsidiaries, "Kleinert's" or the
"Registrant") is engaged in the design, manufacture and sale of infants' and
children's sleepwear and playwear, children's sportswear and children's
T-shirts. The Registrant also manufactures, distributes and sells certain items
of personal apparel. In September 1996, the Registrant re-entered the textile
industry when it acquired Scott Mills, Inc. which was merged into the
Registrant's Kleinert's, Inc. Of Alabama subsidiary.
The Registrant was founded in 1869 under the name of I.B. Kleinert Rubber
Company and was reincorporated in Pennsylvania under its current name in 1970.
The Registrant'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, 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 Registrant
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
<PAGE>
4
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, the Registrant paid an aggregate purchase price of $4,650,000. The
purchase price was financed by the Registrant through an amendment to its
existing bank financing agreement to provide for an additional term debt
facility.
On September 30, 1996, the Registrant consummated the Merger (the "Merger")
of Scott Mills, Inc. ("Scott Mills"), with and into the Company's wholly-owned
subsidiary, Kleinert's, Inc. of Alabama ("Kleinert's Alabama"), pursuant to an
Agreement and Plan of Merger dated June 10, 1996 among the Company, Scott Mills
and Kleinert's Alabama (the "Merger Agreement"). Pursuant to the Merger
Agreement, each share of Scott Mills Common Stock outstanding on September 30,
1996 was converted into the right to receive $.03 in cash and .0152 of a share
of the Company's Common Stock, determined by the division of $.27 for each share
of Scott Mill's stock by $17.75 which represented the average price of the
Company's stock on the five trading days immediately preceding the consummation
of the Merger (as determined pursuant to the Merger Agreement). Cash was paid in
lieu of fractional shares. The Company has issued approximately 51,000 shares of
its Common Stock and approximately $101,000 in cash in exchange for all of the
outstanding shares of Common Stock of Scott Mills.
As used herein, unless the context otherwise indicates, the term
"Registrant" refers to Kleinert's, Inc. and its subsidiaries, Kleinert's, Inc.
of Alabama, Kleinert's, Inc. of
<PAGE>
5
Delaware, Kleinert's, Inc. of New York, Kleinert's, Inc. of Florida and
Certified Apparel Services of Honduras Inc., S.A.
To more reasonably reflect the seasonality of operations, the Registrant's
fiscal year ends the Saturday nearest November 30. Fiscal years 1996 and 1995
were fifty two week years. Fiscal year 1994 was a fifty three week year. The
following table sets forth financial information for each of the Registrant's
last three fiscal years relating to: (1) net sales; (2) operating profit; and
(3) identifiable assets.
Fiscal Year Ended
Nov. 30, Dec. 2, Dec. 3,
1996 1995 1994
-------- -------- --------
($000's omitted)
Net sales $ 86,759 $ 75,121 $ 69,262
Operating profit $ 9,705 $ 8,334 $ 7,326
Identifiable assets* $ 62,832 $ 48,222 $ 40,462
- ----------
*Includes goodwill of $3,803, $310 and $325, respectively.
1. Apparel
Children's Apparel
The sleepwear manufactured by the Registrant consists primarily of blanket
sleepers made of 100% polyester fleece in sizes ranging from newborn to girls'
and boys' size 14 and knit sets made of polyester interlock, jersey, double-knit
or terrycloth fabric for infants in sizes ranging from newborn to size 24
months. All of the Registrant's sleepwear is made of 100% polyester and complies
with the requirements of the Consumer Products Safety Commission relating to
flammability standards (See "Manufacturing"). Sales of sleepwear represented
48%, 50%
<PAGE>
6
and 51% of children's apparel net sales in fiscal year 1996, 1995 and 1994,
respectively.
The Registrant's playwear consists primarily of activewear sets and
separates in sizes ranging from infant 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 printed interlock fabric.
Separates are the same as the jog sets, except separates consist of either the
top or the pant only. The Registrant also manufactures and sells T-shirts,
primarily for children, made of 100% cotton or polyester cotton blend, in sizes
ranging from infant through toddler. Sales of playwear including T-shirts
represented 41%, 50% and 49% of children's apparel net sales in fiscal year
1996, 1995 and 1994, respectively.
The Registrant's sportswear line is made mainly from woven fabrics
including denim and corduroy. Sizes range from infant through boys and girls
size 14. Sales of sportswear represented 11% of children's apparel net sales in
fiscal year 1996.
The Registrant has screen print and embroidery equipment which is used in
the apparel manufacturing process. The Registrant's in-house staff of artists
create 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 the Registrant's sleepwear products.
<PAGE>
7
The Registrant'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,
from $5.00 to $9.00 for T-shirts/polo shirts and from $6.00 to $18.00 for
sportswear (See "Marketing").
Personal Apparel
The Registrant 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 the Registrant generally ranges from $4.25 to
$15.90. The Registrant distributes adult incontinence products under the names
"Safe `N Dry" and "Feel and Sure". These products are distributed in conjunction
with Hygienics Industries, Inc., in accordance with an exclusive licensing
arrangement. Sales of personal apparel items represented less than 2% of the
Registrant's consolidated net sales during each of the last three fiscal years.
Textiles
The Registrant knits polyester, cotton/polyester blend, cotton and acrylic
fabrics for the children's and women's apparel markets. The fabrics are used in
the manufacturing of the Registrant's children's apparel and are also sold to
outside apparel manufactures. Sales of textiles to third parties were less than
1% for the two months of operations included in consolidated net sales for
fiscal year 1996.
2. Manufacturing - Apparel
<PAGE>
8
Production
The Registrant's infants' and children's playwear and sleepwear is cut,
sewn, inspected, packaged and warehoused at the Registrant's 340,000 square foot
Elba, Alabama facility. The Elba facility performs the same functions with
respect to T-shirts, except for the sewing and inspection of T-shirts, which are
currently performed at the Registrant's 22,000 square foot Greenville, Alabama
facility. The 85,000 square foot facilities of the Kleinert's, Inc. of Florida
facility in the Tampa Bay area of Florida perform essentially the same functions
as the Elba facility with respect to woven children's wear products. The
Registrant's Honduras facility is primarily engaged in sewing, inspection and
packaging of sleepwear and sportswear 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.
<PAGE>
9
In an effort to control more closely its apparel manufacturing process, the
Registrant during the past five years has installed new equipment and upgraded
existing equipment. The Registrant has installed a completely integrated screen
print system, and a "real time" work-in-process system at its Alabama facilities
to better monitor and control the manufacturing process and additional
embroidery machines. The Registrant has also installed in its Elba, Alabama
facility 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 the Registrant 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 Registrant'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 1996 and 1995, the Registrant spent $2,238,000 and
$5,808,000, respectively, for contract sewing of T-shirts, jog sets and basic
separates. The Registrant will continue to use outside contractors to
manufacture various products in order to meet peak season deliveries which are
in
<PAGE>
10
excess of the existing in-house manufacturing capacity of the Registrant.
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.
Raw Materials
During fiscal year 1996, approximately 21.7% of the fabric purchased for
the Registrant's children's apparel division was purchased from one vendor. The
Company also purchased $6,917,000 or 9.2% of its fabric requirements from Scott
Mills during fiscal year 1996. Vendors are selected on the basis of quality,
price and service; however, the Registrant's fabric needs could be met by other
vendors at prices that in most cases are competitive. The remaining materials
used in the manufacture of children's apparel were purchased from a variety of
sources.
Raw materials for the Registrant's personal apparel products are purchased
from a limited number of sources. The Registrant believes that alternative
sources are readily available at competitive prices.
<PAGE>
11
Manufacturing - Textiles
Production
The Registrant's fabric and textile manufacturing process since its merger
with Scott Mills during fiscal year 1996 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 is 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,
<PAGE>
12
Textile Fiber Products Identification Act and other rules and regulations
promulgated by the Consumer Products Safety Commission.
Raw Materials
The principal raw materials used in the textile division are acrylic,
polyester and poly-cotton yarns. The raw materials are knit into five basic
constructions-terrycloth, interlock, jersey, mini jacquard and rib. In addition,
the Registrant makes variations of those basic constructions including fleece
and novelty fabrics.
The Registrant believes that the consistent quality of raw materials and
service provided by its vendors is very important; therefore, it relies on one
principal supplier for each of its principal raw materials rather than relying
on a diversified supplier base. While the number of potential suppliers has
decreased in recent years, the Registrant believes there are alternative sources
of raw materials should the need arise in the future.
3. Marketing
The Registrant's children's apparel products are sold primarily by an
in-house sales staff of nine people which are organized on the basis of specific
customers. In addition, there are six independent commissioned sales
representatives. The independent commissioned sales representatives account for
38% of total children's apparels sales. Sales efforts are principally conducted
from the Registrant's New York City showroom.
<PAGE>
13
The Registrant sells most of its apparel to national chain stores, mass
merchandisers, department stores and specialty stores, such as Target Stores,
J.C. Penney, Sears, Wal-Mart, Kids R'Us, K-Mart, Federated, May, Nordstrom and
Mercantile Stores. During fiscal year 1996 sales of apparel were made to
approximately 300 customers. No single customer accounted for more than 10% of
the Registrant's consolidated net sales for fiscal year 1996 other than
Wal-Mart, Target Stores and J.C. Penney, which accounted for approximately 14%,
12% and 11%, respectively, of consolidated net sales during the period.
In recent years the Registrant has received awards from its customers in
recognition of the Registrant's outstanding quality and service. The awards are
indicative of strategic partnerships which the Registrant 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 the
Registrant's emphasis on quality is demonstrated by the Registrant'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 the Registrant in
servicing the customer by enabling the Registrant
<PAGE>
14
to monitor on a "real time" basis goods on the sewing floor and in the
warehouse, thereby permitting the Registrant to circumvent production
bottlenecks that could cause late deliveries.
The Registrant 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.
Sales of the Registrant's textile products are directed through the
Registrant's in-house management primarily to garment manufacturers, including
children's wear manufacturers.
Backlog
The backlog of orders for apparel goods was approximately $4,598,000 at
February 3, 1997 which is consistent with the level of open orders at February
2, 1996 of $4,486,000. 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 Registrant anticipates that all orders will be filled during the
current fiscal year.
The backlog of orders for the knitting operation was approximately
$1,800,000 at February 3, 1997. The level of orders reflects the addition of one
new salesmen in the textile division. The Registrant anticipates that all orders
will be filled during the current fiscal year.
<PAGE>
15
4. 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 the Registrant. The Registrant 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 children's apparel
industry. The Registrant 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. The benefits of
manufacturing domestically may permit retailers to reduce their inventory levels
and lower the risk that product availability will not match consumer demand.
The Registrant experiences limited competition in the personal apparel
market.
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 the Registrant.
Although domestic textile producers currently are the Registrant's greatest
competitors, foreign textile and apparel
<PAGE>
16
producers are significantly increasing their penetration of the domestic market.
The Registrant expects foreign producers to further expand their market share at
the expense of domestic producers in the years ahead.
The long-term prospects of the Registrant 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.
5. Employees
As of January 1, 1997, the Registrant had 1,585 full time employees
including approximately 1,387 in manufacturing (of which 755 are in Elba,
Alabama, 76 in Greenville, Alabama, 204 in the Florida plants, 325 in Honduras,
and 27 in Gastonia, N.C.) 25 in merchandising, design and sales, 110 in
supervisory/clerical/administration and 63 in general management. Historically,
the number of employees increases during the summer and fall due to seasonal
factors. None of the Registrant's domestic employees are party to a collective
bargaining agreement and the Registrant believes its employee relations are
satisfactory. The employees in Honduras are under a collective bargaining
agreement as required by Honduras laws.
<PAGE>
17
6. Governmental and Environmental Regulation
The Registrant 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 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. The Registrant believes it is in substantial compliance with all
applicable governmental requirements under these laws and regulations.
The Registrant and its operations are subject to federal, state and local
laws and regulations concerning the protection of the environment including
those related to the generation and discharge of waste water, the generation,
storage, transportation and disposal of other wastes, and emissions into the
air. The Registrant is not currently the subject of any proceedings under these
laws and regulations, and believes it is in substantial compliance with all
applicable governmental requirements under these laws and regulations.
The Registrant does not anticipate that environmental or O.S.H.A. 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
<PAGE>
18
conditions unknown to the Registrant are discovered or new or stricter
requirements are imposed.
Item 2. Properties
The Registrant conducts its manufacturing operations from three plants in
Alabama, two plants in Florida, one plant in Honduras, C.A. and one plant in
North Carolina. The Registrant's principal executive offices are located in
Plymouth Meeting, Pennsylvania, a suburb of Philadelphia. The Registrant's
sales, marketing, merchandising and design functions are conducted from its
offices located in New York, New York. The Registrant 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 1997. In addition, the Registrant leases an office in suburban Wilmington,
Delaware for its subsidiary, Kleinert's, Inc. of Delaware.
<PAGE>
19
The following table sets forth a summary of the principal facilities owned
or leased by the Registrant as of January 1, 1997:
Basis of
Location Primary Use Sq. Ft. Occupancy
- -------- ----------- ------- ---------
Elba, Manufacture of children's 340,000 Owned
Alabama apparel
Elba, Finished goods warehouse 11,000 Lease expiring
Alabama November 30, 1997
Greenville, Sewing of T-shirts and 22,000 Lease expiring
Alabama activewear tops February 14, 1998(1)
New York, Marketing, merchandising 12,878 Lease expiring
New York and design of infant's March, 2001
and children's wear
Plymouth Executive offices 3,900 Lease expiring
Meeting, September, 2001
Pennsylvania
Largo, Manufacture of Children's 78,000 Lease expiring
Florida apparel December, 1998(2)
Safety Harbor, Manufacture of Children's 7,000 Lease expiring
Florida apparel July, 1997(2)
San Pedro Manufacture of Children's 42,000 Lease expiring
Sula apparel October, 2000(2)
Honduras, CA
San Pedro Visitors housing facility 1,400 Lease expiring
Sula May 1997
Honduras, CA
Gastonia, Knitting and warehouse 27,000 Lease expiring
North Carolina yarn and finished goods April, 2001
- ----------
(1) The Registrant has an option to renew the lease for an additional one 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) The Registrant has options to renew these leases.
<PAGE>
20
Item 3. Legal Proceedings
The Registrant currently is not a party to any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of fiscal year
1996.
<PAGE>
21
PART II
Item 5. Market For The Registrant's Common Stock
And Related Stockholder Matters
The Registrant's common stock is traded in the over-the-counter market on
the NASDAQ National Market System under the symbol "KLRT". The following table
sets forth for the periods indicated the high and low closing sale prices as
reported by NASDAQ.
Stock Price Range
-----------------
High Low
---- ---
Fiscal Year 1996
----------------
Dec 3, 1995 - Mar. 2, 1996 $17 1/2 $15 3/4
Mar. 3, 1996 - June 1, 1996 $17 1/2 $15
June 2, 1996 - Aug. 31, 1996 $17 1/2 $15
Sept. 1, 1996 - Nov. 30, 1996 $18 $16 1/8
Fiscal Year 1995
----------------
Dec. 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
The Registrant's common stock is thinly traded. The average weekly trading
volume in fiscal years 1996 and 1995 was approximately 7,300 and 9,100 shares,
respectively.
<PAGE>
22
On February 3, 1997, the closing sale price of the common stock was $17.50.
On that date there were in excess of 250 holders of record of the common stock
of the Registrant and there is estimated to be in excess of 500 shareholders of
the common stock of the Registrant.
No cash dividends were paid with respect to the Registrant's common stock
during the past five fiscal years. The Registrant's working capital loan
agreements provide that no cash dividends may be paid on the common stock unless
the Registrant's consolidated net worth exceeds $15,000,000 after the payment of
cash dividends. The Registrant's working capital loan agreements also require
the Registrant to maintain certain financial covenants, including requirements
on pretax income, working capital, tangible net worth, debt and capital
expenditures. The Registrant was in compliance with all such financial covenants
as of November 30, 1996. The Registrant 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 seasonal borrower for working capital.
<PAGE>
23
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
--------------Fiscal Year Ended--------------
Nov. 30, Dec. 2, Dec. 3, Nov. 27, Nov. 28,
1996 1995 1994 (1) 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Results:
Net sales $ 86,759 $ 75,121 $ 69,262 $ 61,428 $ 58,542
========== ========== ========== ========== ==========
Income from
continuing
operations before
cumulative effect
of change in
accounting for
income taxes $ 4,976 $ 4,331 $ 3,872 $ 3,325 $ 3,124
========== ========== ========== ========== ==========
Loss from
discontinued opera-
tions, net of tax
effect $ -- $ -- $ -- $ (1,263) $ (2,599)
========== ========== ========== ========== ==========
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 $ 1.31 $ 1.15 $ 1.04 $ .93 $ .90
========== ========== ========== ========== ==========
Loss from
discontinued opera-
tions $ -- $ -- $ -- $ (.35) $ (.75)
========== ========== ========== ========== ==========
Cumulative effect
of change in
accounting for
income taxes $ -- $ -- $ .06 $ -- $ --
========== ========== ========== ========== ==========
Total assets $ 62,832 $ 48,222 $ 40,462 $ 41,907 $ 42,472
========== ========== ========== ========== ==========
Long-term debt $ 6,834 $ 3,429 $ 4,624 $ 5,469 $ 6,643
========== ========== ========== ========== ==========
</TABLE>
(1) Includes 53 weeks of operations.
<PAGE>
24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net Sales. The following table presents, for the periods indicated,
Kleinert's net sales by product line and segment.
Fiscal Year Ended
---------------------------------------
Nov. 30, Dec. 2, Dec. 3,
1996 1995 1994
-------- -------- --------
($000's omitted)
Sleepwear $ 40,155 $ 37,015 $ 34,601
Playwear 30,831 31,432 29,892
T-shirts 4,762 5,640 3,604
Sportswear 9,363 -- --
-------- -------- --------
Total Children's Apparel 85,111 74,087 68,097
Personal Apparel 916 1,034 1,165
Textile 732(1) -- --
-------- -------- --------
Total $ 86,759 $ 75,121 $ 69,262
======== ======== ========
(1) Includes net sales for the two months of operations included in the
Registrant's consolidated net sales from and after the effective date of the
merger of Scott Mills into Kleinert's, Inc. of Alabama.
Kleinert's business is highly seasonal the second half of the fiscal year
(June through November) typically accounts for greater than 70% of annual
sales. Retail customers typically build inventory levels prior to the
August-September "back to school" period and continue to re-stock throughout the
fall.
Net sales increased $11,638,000 or 15.5% in fiscal year 1996 compared to
fiscal year 1995. This increase was primarily due to the acquisition in December
1995 of Pixie Playmates, a woven sportswear company. Sportswear sales
represented 10.8% of the Company's net sales for 1996. In addition, Kleinert's
core business showed improved sales in sleepwear, an 8.5% or $3,140,000
increase. This increase was a result of increased market share as retail selling
prices remained relatively constant throughout both years. These increases were
offset by decreases in both the T-shirt and playwear lines; 15.6% or $878,000 in
T-shirts and 1.9% or $601,000 in playwear. The decrease in T-shirts is due to
lower sales to the Company's
<PAGE>
25
significant customer in this product line. The Company is evaluating its options
with regard to the T-shirt business due to a change in the financial stability
of its significant customer in this product line.
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 or $2,414,000
in sleepwear and a 5% increase or $1,540,000 in playwear and a 56% increase or
$2,036,000 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 years ended November 30, 1996 and December 2, 1995 were 52 week years
and the year ended December 3, 1994 contained 53 weeks. 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.
<PAGE>
26
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.
Fiscal Year Ended
-----------------------------------------------------------
Nov. 30, 1996 Dec. 2, 1995 Dec. 3, 1994
------------- ------------ ------------
% of Net % of Net % of Net
Sales Sales Sales
-------- -------- --------
($000's omitted))
Children's
Apparel $15,184 18% $13,114 18% $12,039 18%
Personal Apparel 348 40% 371 36% 437 38%
Textiles 114 16% -- -- -- --
------- -- ------- -- ------- --
Total $15,646 18% $13,485 18% $12,476 18%
======= == ======= == ======= ==
Gross profit increased $2,161,000 in fiscal year 1996 compared to fiscal
year 1995 and the profit margin remained stable at 18% when compared to fiscal
year 1995. Gross profit increased $1,009,000 in fiscal year 1995 compared to
fiscal year 1994 while the profit margin remained stable at 18% when compared to
fiscal year 1994.
General corporate expenses which are included in cost of goods sold
increased $62,000 to $1,766,000 in fiscal year 1996 compared to $1,704,000 in
fiscal year 1995.
Total overhead included in cost of goods sold also included a large fixed
cost component related to Kleinert'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 slight increase in
general corporate expenses noted between fiscal year 1996 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.
<PAGE>
27
General corporate expenses which are included in cost of goods sold
increased $743,000 to $1,704,000 in fiscal year 1995 compared to fiscal year
1994 principally due to 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 1994.
Depreciation and amortization expense was $1,038,000, $676,000 and $674,000
in the three fiscal years ended November 30, 1996, December 2, 1995, and
December 3, 1994, respectively.
<PAGE>
28
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.
Fiscal Year Ended
---------------------------------------------------------------
Nov. 30, 1996 Dec. 2, 1995 Dec. 3, 1994
------------- ------------ ------------
% of Net % of Net % of Net
Sales Sales Sales
-------- -------- --------
($000's omitted))
Children's
Apparel $5,667 6.7% $4,971 6.7% $4,967 7.3%
Personal
Apparel 195 21.3% 180 17.4% 183 15.7%
Textile 79 8% -- -- -- --
------ ---- ------ ---- ------ ----
Total $5,941 6.8% $5,151 6.9% $5,150 7.4%
====== ==== ====== ==== ====== ====
The percentage of selling, general and administrative expenses to net sales
("expense ratio") in fiscal year 1996 was 6.8% compared to 6.9% in fiscal year
1995.
The 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 1994.
Interest Expense
Interest expense in fiscal year 1996 was $1,932,000, a $281,000 increase
when compared to fiscal year 1995. The increase was principally due to the term
debt related to the Pixie Acquisition. Interest expense in fiscal year 1995 was
$1,651,000, a $248,000 increase when compared to fiscal year 1994. The increase
was due primarily to higher short-term interest rates partially offset by lower
average short term borrowing levels.
<PAGE>
29
Income Taxes:
The effective tax rates for fiscal years 1996, 1995 and 1994 were 36.0%,
35.2% and 34.6%, respectively.
Impact of Inflation and Changing Prices
on Sales and Income from Operations
In fiscal year 1994, Kleinert's experienced an increase in raw material
prices which continued into fiscal year 1995. The impact on 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 did not change significantly in 1996. Kleinert's was not able to increase
its selling prices 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 November 30, 1996, the Registrant had working capital of
$22,706,000 compared to $18,557,000 at December 2, 1995. The ratio of current
assets to current liabilities was 1.95 to 1.0 and 1.91 to 1.0 at November 30,
1996 and December 2, 1995, respectively. The ratio of liabilities to equity was
.98 to 1.0 and 1.0 to 1.0 at November 30, 1996 and December 2, 1995,
respectively.
Net cash used in operating activities increased $111,000 from ($314,000) in
fiscal year 1995 to $(425,000) in fiscal year 1996.
Cash used in investing activities increased $4,391,000 to ($6,187,000) in
1996 from ($1,796,000) in 1995. The increase was primarily the result of the
acquisition of the assets of Pixie and the capital stock of CASH for an
aggregate cash purchase price of $4,650,000.
Net cash provided by financing activities increased by $4,375,000 to
$6,680,000 in 1996 from $2,305,000 for 1995. The increase was primarily
<PAGE>
30
the result of $1,938,000 of proceeds from the sale of common stock upon the
exercise of stock options, the addition of a $4,650,000 term debt facility to
finance the purchase of the Pixie Acquisition, offset by the purchase of
treasury stock of $749,000. 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 November 30, 1996 was $7,449,000 which is payable in quarterly
installments of $300,000 through September 2002 with a final installment of
$249,000 due December 2002. The annual interest rate is based on LIBOR but has
been effectively fixed at 7.00% by an interest rate swap agreement with the same
bank.
Kleinert's uses its 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 1997 and for the foreseeable
future.
<PAGE>
31
The Registrant anticipates spending approximately $1.6 million for capital
expenditures in fiscal year 1997 primarily for machinery improvements at the
Elba facility, leasehold improvements at the New York office and to replace old
equipment which the Registrant believes will improve its manufacturing
operations. Depreciation expense is expected to approximate $1.3 million for
fiscal year 1997.
The Registrant sold its non-operating property in June 1994 for $500,000
which required the Registrant to accept a three year $350,000 note receivable.
The sale of the property resulted in a small loss. The balance on the note
receivable at November 30, 1996 was $80,000.
Kleinert's has unsecured line of credit aggregating $42,500,000 of which
$12,871,000 was outstanding at November 30, 1996 bearing interest at rates
ranging from 6.2% to 7.0%. The maximum outstanding borrowings were $29,676,000
in fiscal year 1996.
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 FASB issued Statement No. 121 Accounting for the
Impairment of Long-Lives 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 Registrant expects the impact of adoption in 1997 will be insignificant.
<PAGE>
32
In October 1995, the Financial Accounting Standards Board issued FASB
Statement No. 123, Accounting for Stock-Based Compensation. The new standard
prescribes new accounting and reporting standard which reflect the standards'
"fair value method" to estimate expense associated with stock based
compensations plans. Companies may elect to continue to use existing accounting
rules or adopt the "fair value method" for expense recognition. Companies that
elect to continue to use existing accounting rules will be required to provide
pro-forma disclosures of what net income and earnings per share would have been
had the new "fair value method" been used. The Registrant 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.
<PAGE>
33
Item 8. Consolidated Financial Statements
and Supplementary Data
Page
----
Report of Independent Auditors 34
Consolidated Balance Sheets at November
30, 1996, and December 2, 1995 35
Consolidated Statements of Operations
for the Fiscal Years ended November 30,
1996, December 2, 1995 and December 3, 1994 37
Consolidated Statements of Shareholders'
Equity for the Fiscal Years ended November 30,
1996, December 2, 1995, and December 3, 1994 38
Consolidated Statements of Cash Flows
for the Fiscal Years ended November 30,
1996, December 2, 1995 and December 3, 1994 39
Notes to Consolidated Financial
Statements 41
<PAGE>
34
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 November 30, 1996 and December 2, 1995 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended November 30, 1996. 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 text 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 November 30, 1996 and December 2, 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
November 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Company changed
its method for accounting for income taxes.
Philadelphia, Pennsylvania
February 14, 1997
<PAGE>
35
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1996 AND DECEMBER 2, 1995
($000's omitted)
ASSETS 1996 1995
------ -------- --------
Current assets:
Cash $ 395 $ 327
Accounts receivable (net of allowances
for doubtful accounts of $206 and
$259, respectively) 23,552 21,899
Inventories:
Raw materials 6,451 4,222
Work-in-process 4,430 4,321
Finished goods 7,545 5,987
-------- --------
Total inventories 18,426 14,530
-------- --------
Deferred tax assets 3,101 182
Other current assets 1,067 2,198
-------- --------
Total current assets 46,541 39,136
-------- --------
Property, plant and equipment, at cost
Building and leasehold improvements 5,714 5,106
Machinery and equipment 10,825 6,070
Furniture and fixtures 621 368
Construction in progress 317 --
-------- --------
17,477 11,544
-------- --------
Less accumulated depreciation 8,287 6,051
-------- --------
Net property, plant and equipment 9,190 5,493
-------- --------
Goodwill 3,803 310
Cash surrender value (net) 2,861 2,402
Other assets 437 881
-------- --------
$ 62,832 $ 48,222
======== ========
See notes to consolidated financial statements
<PAGE>
36
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(continued)
NOVEMBER 30, 1996 AND DECEMBER 2, 1995
($000's omitted)
LIABILITIES and SHAREHOLDERS' EQUITY 1996 1995
------------------------------------ -------- --------
Current liabilities:
Notes payable and current portion of
long-term debt $ 14,768 $ 14,195
Accounts payable 6,071 5,024
Accrued expenses 2,996 1,360
-------- --------
Total current liabilities 23,835 20,579
Deferred income taxes 410 134
Long-term debt 6,834 3,429
-------- --------
Total liabilities 31,079 24,142
-------- --------
Commitments -- --
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,
4,249,398 and 3,798,398 shares
issued, respectively 4,249 3,798
Capital in excess of par value 13,621 10,626
Retained earnings 17,848 12,872
-------- --------
35,718 27,296
Less:
Treasury stock, at cost, 513,467 and
466,967 common shares (3,965) (3,216)
-------- --------
Total shareholders' equity 31,753 24,080
-------- --------
$ 62,832 $ 48,222
======== ========
See notes to consolidated financial statements
<PAGE>
37
KLEINERT'S INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Years Ended November 30, 1996,
December 2, 1995 and December 3, 1994
($000's omitted, except per share amounts)
1996 1995 1994
-------- -------- --------
Net sales $ 86,759 $ 75,121 $ 69,262
Cost of goods sold 71,113 61,636 56,786
-------- -------- --------
Gross profit 15,646 13,485 12,476
-------- -------- --------
Selling, general and administrative
expenses 5,941 5,151 5,150
Interest expense 1,932 1,651 1,403
-------- -------- --------
7,873 6,802 6,553
-------- -------- --------
Income before income taxes and cumulative
effect of change in accounting
for income taxes 7,773 6,683 5,923
Provision for income taxes 2,797 2,352 2,051
-------- -------- --------
Income before cumulative effect of change
in accounting for income taxes 4,976 4,331 3,872
Cumulative effect of change in
accounting for income taxes -- -- 210
-------- -------- --------
Net income $ 4,976 $ 4,331 $ 4,082
======== ======== ========
Earnings per share:
Income before change in accounting
for income taxes $ 1.31 $ 1.15 $ 1.04
Cumulative effect of change in
accounting for income taxes -- -- .06
-------- -------- --------
Net income $ 1.31 $ 1.15 $ 1.10
======== ======== ========
Weighted average shares outstanding 3,801 3,750 3,702
======== ======== ========
See notes to consolidated financial statements
<PAGE>
38
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended November 30, 1996,
December 2, 1995 and December 3, 1994
($000's Omitted except share data)
<TABLE>
<CAPTION>
Number of Capital in Total
Shares Common Excess of Retained Treasury Shareholders'
Outstanding Stock Par Value Earnings Stock Equity
----------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 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
Exercise of incentive stock
options 400,000 400 1,538 1,938
Repurchase of common stock (46,500) (749) (749)
Tax benefit of exercise of stock
options 758 758
Acquisition of Scott Mills 51,000 51 699 750
Net income -- -- -- 4,976 -- 4,976
---------- ---------- ---------- ---------- ---------- ----------
Balance, November 30, 1996 3,735,931 $ 4,249 $ 13,621 $ 17,848 $ (3,965) $ 31,753
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
<PAGE>
39
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended November 30, 1996,
December 2, 1995 and December 3, 1994 and
($000's omitted)
1996 1995 1994
-------- -------- --------
Cash flows from operations:
Net income $ 4,976 $ 4,331 $ 4,082
Adjustments to reconcile net income
to net cash (used in) provided
by operating activities
Depreciation and amortization 1,038 676 674
Cumulative effect of change in
accounting principle -- -- (210)
Loss on disposal of fixed assets -- -- 29
Provision for losses on
accounts receivable 53 71 80
Change in assets and liabilities
net of business acquired:
Increase in accounts
receivable (1,631) (3,915) (318)
Increase in inventory (1,382) (1,834) (943)
Decrease(increase)in other
current assets 513 (767) (450)
(Decrease)increase in accounts
payable and accrued expenses (4,844) 1,186 (1,529)
Increase (decrease) in income
taxes payable 659 (73) --
Decrease (increase) in other assets (83) -- --
Increase in deferred income taxes 276 11 89
-------- -------- --------
Total adjustments (5,401) (4,645) (2,578)
-------- -------- --------
Net cash (used in) provided by
operating activities (425) (314) 1,504
-------- -------- --------
Cash flows from investing activities:
Purchase of Pixie (4,650) -- --
Purchase of Scott Mills (101) -- --
Capital expenditures (1,556) (1,012) (618)
Note receivable related party -- (500) --
Proceeds from sale of non-operating
property -- -- 185
Additions to other assets (384) (457)
Proceeds from note receivable 120 100 --
-------- -------- --------
Net cash used in investing
activities (6,187) (1,796) (890)
-------- -------- --------
See notes to consolidated financial statements
<PAGE>
40
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Fiscal Years Ended November 30, 1996,
December 2, 1995 and December 3, 1994
($000's omitted)
1996 1995 1994
-------- -------- --------
Cash flows from financing activities:
Net borrowings and (repayments) under
revolving line-of-credit agreement (129) 3,500 1,389
Proceeds from long-term debt 4,650 -- 544
Dividends paid -- -- (1,300)
Principal payments on debt 1,119 (1,195) (1,407)
Proceeds from exercise of stock options 1,939 -- 69
Payments to acquire treasury stock (749) -- (544)
Scott Mills acquisition (150) -- --
-------- -------- --------
Net cash provided by (used in)
financing activities 6,680 2,305 (1,249)
-------- -------- --------
Net increase (decrease) in cash 68 195 (635)
Cash at beginning of period 327 132 767
-------- -------- --------
Cash at end of period $ 395 $ 327 $ 132
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,556 $ 1,730 $ 1,150
Income taxes $ 1,215 $ 2,046 $ 2,289
Note receivable on sale of non-operating
property -- -- $ 350
See notes to consolidated financial statements
<PAGE>
41
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
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, sportswear, 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. The Company made two acquisitions during fiscal year 1996.
In December 1995, certain assets of Pixie Playmates were purchased. Pixie
is engaged in the manufacturing of children's playwear, principally the
manufacturing of woven products.
In October 1996, the Company acquired Scott Mills, Inc. ("Scott Mills") in
a merger of Scott Mills into Kleinert's, Inc. of Alabama. Scott Mills is a
knitting mill producing double knit, fleece, terrycloth and jersey fabrics. It
has been and will continue to be a large supplier of fabric for Kleinert's.
Scott Mills prior to December 1993 was a subsidiary of the Company in its
textile division. On November 27, 1993, Scott Mills was spun-off in a tax-free
distribution to Kleinert's shareholders to operate as a separate Company.
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, Kleinert's, Inc. of
Florida, Certified Apparel Services of Honduras, Inc. and Kleinert's, Inc. of
New York.
<PAGE>
42
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
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 years 1996 and 1995 were 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 $1,766,000, $1,704,000 and $961,000 for fiscal years
1996, 1995 and 1994, respectively. Such costs remaining in inventory at November
30, 1996 and December 3, 1995 were approximately $434,000, $390,000, and
$211,000, respectively.
Revenue Recognition - The Company's sale of product is recorded net of
returns, allowances and discounts.
<PAGE>
43
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment - Property, plant and equipment is recorded
at cost. The Company depreciates property, plant and equipment over their
estimated useful lives, principally on a straight-line basis.
Useful Lives
------------
Buildings 30 - 40 years
Leasehold improvements Term of lease
Machinery and equipment 3 - 10 years
Furniture and fixtures 3 - 5 years
Earnings Per Share - Earnings per share has been computed based on the weighted
average number of common shares and equivalents outstanding during each period
presented.
Goodwill - Goodwill 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 - 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. Prior to fiscal year 1994, income taxes were accounted for under APB
Opinion No. 11. The impact of the adoption of the
<PAGE>
44
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
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 1996 presentation.
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 (APB 25) or adopt the "fair value method" for expense
recognition. Companies that elect to continue to use existing accounting rules
(APB 25) 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
<PAGE>
45
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
1. Business of the Company and
Summary of Significant Accounting Policies (continued)
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-Lives 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 implemented until the Company's fiscal year ended November 29, 1997.
The Company expects the impact of adoption in 1997 will be insignificant.
2. Financing Arrangements
Financing arrangements consist of the following:
1996 1995
---- ----
Current Long-Term Current Long-Term
------- --------- ------- ---------
($000's omitted)
Scott Mills loan $ 450 $ -- $ -- $ --
Term loans 1,200 6,249 $ 1,000 $ 2,649
Equipment loan 52 -- -- --
Revenue bond 195 585 195 780
Revolving line
of credit 12,871 -- 13,000 --
-------- -------- -------- --------
$ 14,768 $ 6,834 $ 14,195 $ 3,429
======== ======== ======== ========
<PAGE>
46
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
2. Financing Arrangements (continued)
The following information relates to the Company's short-term revolving
lines of credit:
Weighted
Weighted Maximum Amount Average Amount
Average Outstanding At Outstanding
Interest Any Month-End During The
Rate (1) During the Period Period (2)
-------- ----------------- ----------
($000's omitted)
1996 6.4% $29,676 $17,874
1995 7.0% $23,480 $13,521
1994 6.3% $20,540 $11,388
(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 $42,500,000 unsecured
line of credit in fiscal year 1996 bearing interest between 6% and the prime
rate (8.25% as of November 30, 1996) and required compensating balances. For
fiscal year 1997, the Company also has available $42,500,000 in unsecured lines
of credit. On November 30, 1996 the unused portion of the lines of credit was
$29,629,000. Short term debt includes $450,000 assumed by the Company upon the
acquisition of Scott Mills related to subordinated five year term notes bearing
interest at 8.5% per annum. The Company repaid these loans on February 14, 1997.
On February 28, 1996, the Company amended its existing term loan and
provided for an additional term debt facility of
<PAGE>
47
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
2. Financing Arrangements (continued)
$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 November 30, 1996 was $7,449,000. The interest rate is
indexed by LIBOR rates plus 1.12%. The LIBOR rate at November 30, 1996 was 5.5%.
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 November 30, 1996, the interest rate swap agreement
had a notional amount of $7,449,000 which decreases $300,000 quarterly through
the September 2002 termination date. The fair value of this agreement at
November 30, 1996 was ($3,418).
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 $16,753,000 of
retained earnings available for dividends at November 30, 1996. The Company
holds an industrial revenue bond from the Industrial Development Board
<PAGE>
48
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
2. Financing Arrangements (continued)
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 8.25% at November
30, 1996 and 8.75% at December 2, 1995.
Aggregate maturities of long-term debt after November 30, 1996 are as
follows: 1997 - $1,897,000; 1998 - $1,395,000; 1999 - $1,395,000; 2000 -
$1,395,000; 2001 - $1,200,000; thereafter - $1,449,000
Borrowings against the cash surrender value of officers' life insurance
policies amounted to $3,754,000 and $3,450,000 as of November 30, 1996 and
December 2, 1995, respectively. These borrowings are recorded as a reduction in
the related assets and bear interest ranging from 7.11% to 7.24% in fiscal year
1996.
<PAGE>
49
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
3. Income Taxes
The provision for income taxes consists of the following:
Liability Method
----------------
1996 1995 1994
---- ---- ----
Current:
Federal $ 2,508,000 $ 2,245,000 $ 1,838,000
State 232,000 135,000 43,000
------------ ------------ ------------
2,740,000 2,380,000 1,881,000
------------ ------------ ------------
Deferred:
Federal 56,000 (30,000) 176,000
State 1,000 2,000 (6,000)
------------ ------------ ------------
57,000 (28,000) 170,000
------------ ------------ ------------
$ 2,797,000 $ 2,352,000 $ 2,051,000
============ ============ ============
Income tax expense differs from the amount computed by applying the federal
tax rate to income before income taxes are as follows:
Liability Method
----------------
1996 1995 1994
---- ---- ----
Statutory rate applied to
income before income taxes $ 2,643,000 $ 2,272,000 $ 2,014,000
State taxes, net of federal
benefit 154,000 90,000 28,000
Other -- (10,000) 9,000
------------ ------------ ------------
$ 2,797,000 $ 2,352,000 $ 2,051,000
============ ============ ============
<PAGE>
50
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
3. Income Taxes (continued)
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 November 30, 1996 and
December 2, 1995 are as follows:
1996 1995
---- ----
Deferred Tax Assets:
Benefit plans $ 170,000 $ 156,000
Inventory reserves 104,000 75,000
Bad debt expense 73,000 92,000
Vacation 23,000 15,000
Scott Mills - dyehouse closing
reserve 188,000 --
Scott Mills net operating loss 2,814,000 --
Valuation allowance (101,000) --
------------ ------------
$ 3,271,000 $ 338,000
------------ ------------
Deferred Tax Liabilities:
Depreciation $ 580,000 $ 290,000
------------ ------------
Net deferred tax asset $ 2,691,000 $ 48,000
============ ============
The Company succeeded to the tax attributes of Scott Mills, Inc. which was
acquired on September 30, 1996. Accordingly, the deferred tax accounts of Scott
Mills, Inc. have been adjusted to reflect the acquisition. Approximately,
$7,500,000 of net operating loss carryforwards of Scott Mills, Inc. are
available to be utilized to reduce federal and state income taxes. The federal
tax carryforwards begin to expire in 2009 and the state tax carryforwards begin
to expire in 1999.
<PAGE>
51
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
3. Income Taxes (continued)
A valuation allowance has been reflected to provide for state tax carryforwards
that may expire prior to utilization.
4. 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. 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 1996, 1995, and 1994 are as follows:
1996 1995 1994
---- ---- ----
Benefits earned during the period $ 336,249 $ 289,688 $ 271,405
Interest cost on benefits earned
in prior years 277,855 231,054 209,540
Net investment (income) loss (388,750) (475,375) 88,677
Net amortization and deferral 71,520 207,339 (317,020)
---------- ---------- ----------
$ 296,874 $ 252,706 $ 252,602
========== ========== ==========
The projected benefit obligation below is based on the following
assumptions:
1996 1995 1994
---- ---- ----
Discount rate 7.75% 7.0% 7.75%
Weighted average expected
long-term rate of return 8.75% 8.75% 7.75%
Annual rate of increased
compensation 4.00% 4.0% 5.0%
<PAGE>
52
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
4. Retirement Plans (continued)
The following is a reconciliation of the Plan's assets and liabilities to
amounts recorded in the Company's financial statements:
1996 1995
---- ----
Present value of future benefit
payments based on service to date and
present pay levels:
Vested ................................... $ 3,549,197 $ 3,295,523
Non-vested ............................... 99,514 88,664
------------ ------------
Accumulated benefit obligation ......... 3,648,711 3,384,187
Projected pay increases ..................... 452,914 472,967
------------ ------------
Projected benefit obligation (PBO) ....... 4,101,625 3,857,154
Fair value of plan assets
available for benefits ...................... 3,983,020 3,494,944
------------ ------------
Liabilities in excess of PBO ................. (118,605) (362,210)
Items not yet recognized in the
Company's balance sheet:
Unamortized transition asset ............. (111,983) (130,646)
Unamortized prior service cost ........... 17,096 27,707
Unrecognized net actuarial and
investment losses ...................... 401,310 560,099
------------ ------------
Prepaid pension cost ......................... $ 187,818 $ 94,950
============ ============
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
$129,000, $104,000, and $58,000 in fiscal years 1996, 1995, and 1994,
respectively.
<PAGE>
53
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
5. Property, Plant and Equipment and Lease Commitments
Depreciation expense was $1,013,000, $661,000 and $659,000 for fiscal years
1996, 1995 and 1994 respectively.
Rent expense under operating leases was $1,579,797, $1,350,000 and
$1,094,000 in fiscal years 1996, 1995 and 1994, 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
November 30, 1996 are as follows:
Fiscal Year Amount
1997 - 1,445,000
1998 - 1,261,000
1999 - 833,000
2000 - 668,000
2001 - 236,000
----------
Total $4,443,000
==========
<PAGE>
54
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
5. 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.
6. Shareholders' Equity
The Company's 1991 stock option plan authorizes the issuance of 500,000
shares of common stock to officers, directors and key employees.
During 1996, a new stock incentive plan began authorizing the issuance of
500,000 shares of common stock to officers, directors and key employees.
<PAGE>
55
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
6. Shareholders' Equity (continued)
The information with respect to the 1991 and 1996 incentive stock option
plans related to qualified stock options is as follows:
Fiscal Year Ended
11/30/96 12/2/95 12/3/94
---------- ---------- ----------
Options outstanding beginning
of period 200,000 190,000 215,000
Granted under Plan (1) 40,000 10,000 --
Exercised -- -- (8,333)
Canceled -- -- (16,667)
---------- ---------- ----------
Options outstanding end
of period 240,000 200,000 190,000
========== ========== ==========
Exercise price per share $6.90-$18.00 $6.90-$18.00 $6.90-$12.50
Options exercisable end
of period 209,000 193,333 185,000
(1) Options granted during fiscal 1996 were granted at $15.75 per share.
Options granted during fiscal year 1995 were granted at $18.00.
On June 23, 1992 the Board of Directors granted three outside directors
non-qualified stock options to purchase 25,000 shares each of common stock at
$8.50 per share. Two of the options to purchase 25,000 shares were exercised,
one in November 1993 and one in April 1996. The remaining option expires in June
1997.
In May 1991, the Board of Directors granted the Company's Chairman and
Chief Executive Officer (the Chairman) a non-qualified stock option to purchase
375,000 shares of the Company's common stock at $4.60 per share. This option was
exercised during 1996.
On April 18, 1996, the Board of Directors granted four outside directors
non-qualified stock options to purchase 25,000 shares each of common stock at
$15.50 per share. In addition, the Board of Directors granted the Chairman a
non-qualified stock option to purchase 150,000
<PAGE>
56
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
6. Shareholders' Equity (continued)
shares of the Company's common stock at $15.50 per share. At November 30, 1996,
no options have been exercised.
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. During 1996, the Company repurchased 46,500
shares of common stock at an average price of $16 1/8. Repurchases were funded
by cash from operations.
7. Commitments
The Company is funding life insurance contracts on behalf of the Chairman,
whose beneficiaries are designated by the Chairman. 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 November 30,
1996, as a non-current asset, $1,588,087.
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
<PAGE>
57
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
7. Commitments (continued)
were approximately $1,871,000, $2,525,000 and $2,539,000 in fiscal years 1996,
1995 and 1994, respectively. The Company is presently renewing the existing
agreement with P.T.I. on a year-to-year basis.
8. Major Customers
In 1996 three apparel customers individually accounted for 14%, 12% and 11%
each of the Company's consolidated net sales while the same three apparel
customers individually accounted for 6%, 19% and 14% in 1995 and 2% 21% and 15%
in 1994 of the Company's consolidated net sales.
<PAGE>
58
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
9. 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.
Fiscal Year Ended
11/30/96 12/2/95 12/3/94
-------- -------- --------
($000's omitted)
Net sales to unaffiliated customers:
Children's apparel $ 85,111 $ 74,087 $ 68,097
Other 1,648 1,034 1,165
Operating profit:
Children's apparel 11,263 $ 9,847 $ 8,033
Other 208 191 254
-------- -------- --------
11,471 10,038 8,287
General corporate expenses (1,766) (1,704) (961)
Interest expense (1,932) (1,651) (1,403)
-------- -------- --------
Income before income taxes $ 7,773 $ 6,683 $ 5,923
======== ======== ========
Identifiable assets*:
Children's apparel $ 50,067 $ 43,082 $ 35,995
Other** 12,765 5,140 4,467
Capital expenditures:
Children's apparel $ 935 $ 989 $ 603
Other 621 23 15
Depreciation and amortization:
Children's apparel $ 986 $ 635 $ 619
Other 52 41 55
** Includes goodwill of $3,803, $310 and $325, respectively.
<PAGE>
59
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
10. Related Party Transactions
The Company had a six month note receivable of $373,920 with the Chairman
in accordance with his employment contract. This amount plus accrued interest
was paid in full on the due date of November 14, 1996.
11. Acquisitions
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., 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 Transaction, the Company entered into a three year
lease agreement with the principal shareholder of Pixie for the Largo, Florida
premises in which Pixie was conducting business. Rent expense related to this
lease was $312,000 during fiscal year 1996. The Company intends to continue
manufacturing operations as was conducted by Pixie, Certified and CASH prior to
the Transaction.
In consideration for the assets of Pixie and Certified and the shares of
CASH, the Company paid an aggregate purchase price of $4,650,000 in cash. The
Company used the purchase method to account for the acquisition; accordingly,
the results of operation are included from date of acquisition. The purchase
price was financed by the Company through an amendment to its existing bank
financing agreement to provide for an
<PAGE>
60
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
11. Acquisition (continued)
additional term debt facility.
On September 30, 1996, the Company consummated the Merger (the "Merger") of
Scott Mills, Inc. ("Scott Mills"), with and into the Company's wholly-owned
subsidiary, Kleinert's, Inc. of Alabama ("Kleinert's Alabama"), pursuant to an
Agreement and Plan of Merger dated as of June 10, 1996 among the Company, Scott
Mills and Kleinert's Alabama (the "Merger Agreement"). Pursuant to the Merger
Agreement, each share of Scott Mills Common Stock outstanding on September 30,
1996 was converted into the right to receive $.03 in cash and .0152 of a share
of the Company's Common Stock, determined by the division of $.27 for each share
of Scott Mill's stock by $17.75 which represented the average price of the
Company's stock on the five trading days immediately preceding the consummation
of the Merger (as determined pursuant to the Merger Agreement). Cash was paid in
lieu of fractional shares. The Company issued approximately 51,000 shares of its
Common Stock and approximately $101,000 in cash in exchange for all of the
outstanding shares of Common Stock of Scott Mills.
Following is a schedule of assets and liabilities acquired as a result of
acquisitions:
Pixie Scott Mills
----- -----------
Current assets $ 1,722 $ 3,646
Property, plant and
equipment 2,010 1,144
Goodwill 875 2,640
Other assets 43 --
Current liabilities -- (5,866)
Long-term liabilities -- (558)
-------- --------
Net assets $ 4,650 $ 1,006
======== ========
<PAGE>
61
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEARS ENDED NOVEMBER 30, 1996
DECEMBER 2, 1995, AND DECEMBER 3, 1994
11. Acquisition (continued)
The proforma unaudited results of operations for the year ended November 30,
1996 and December 2, 1995 after giving effect to these two acquisitions are as
follows:
Year Ended
Nov. 30, Dec. 2,
1996 1995
-------- --------
Net sales $ 87,934 $ 92,755
Pretax net income 6,778 1,184
Net income 4,338 758
Net income per common share 1.14 .20
The 1995 proforma results of operations include a charge of approximately
$2 million for the writedown of assets and other costs associated with the
ceasation of the dyeing and finishing operations of Scott Mills. In addition,
Scott Mills had an additional operating loss of $2,864 for fiscal year 1995
which related primarily to its unprofitable dyeing and finishing operations.
Scott Mills decided in September of 1995 to concentrate its business solely on
its knitting operations and to subcontract the dyeing and finishing services.
<PAGE>
62
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
This item is incorporated by reference from the definitive proxy statement
for the Annual Meeting of Shareholders presently scheduled to be held on April
17, 1997, to be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
This item is incorporated by reference from the definitive proxy statement
for the Annual Meeting of Shareholders presently scheduled to be held on April
17, 1997, to be filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
This item is incorporated by reference from the definitive proxy statement
for the Annual Meeting of Shareholders presently scheduled to be held on April
17, 1997, to be filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
This item is incorporated by reference from the definitive proxy statement
for the Annual Meeting of Shareholders presently scheduled to be held on April
17, 1997, to be filed pursuant to Regulation 14A.
<PAGE>
63
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
The Company filed a report on Form 8-K dated October 15, 1996 disclosing the
merger of Scott Mills into Kleinert's, Inc. Of Alabama.
KLEINERT'S, INC. INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors 34
Consolidated Balance Sheets at November 30, 1996
and December 2, 1995 35
Consolidated Statements of Operations
for the Fiscal Years Ended November 30, 1996,
December 2, 1995 and December 3, 1994 37
Consolidated Statements of Shareholders' Equity
for the Fiscal Years Ended November 30, 1996,
December 2, 1995 and December 3, 1994 38
Consolidated Statements of Cash Flows
for the Fiscal Years Ended November 30, 1996,
December 2, 1995 and December 3, 1994 39
Notes to Consolidated Financial Statements 41
- -----------
All other financial statements or schedules are omitted since the required
information is not present or is not present in amounts sufficient to
require submission of the financial statement or schedule, or because the
information required is included in the Consolidated Financial Statements
and notes thereto.
<PAGE>
64
INDEX TO EXHIBITS
Exhibit No. Page
- ----------- ----
(3) (a) By-Laws
(b) Articles of Incorporation Incorporated by reference to the
copy thereof filed as an Exhibit
to Registrant's Quarterly Report
on Form 10-Q for its fiscal
quarter ended February 29, 1992
(10) Material Contracts Incorporated by reference to the
(a) Property Lease Agreement copy thereof filed as an Exhibit
dated January 24, 1986 to Registrant's Annual Report
between C/N Leedon Limited on Form 10-K for its fiscal
Partnership II and year ended December 3, 1988
Kleinert's, Inc., and as
amended
(b) License Agreement dated Incorporated by reference to the
May 12, 1989 between copy thereof filed as an Exhibit
Hygienics Industries, Inc. to Registrant's Quarterly Report
and Kleinert's, Inc. of on Form 10-Q for its fiscal
Alabama quarter ended June 3, 1989
(c) Agreement dated as of Incorporated by reference to the
September 1, 1990 between copy thereof filed as an Exhibit
the Industrial Development to Registrant's Quarterly Report
Board of the City of Elba, on Form 10-Q for its fiscal
Alabama and Kleinert's, quarter ended September 1, 1990
Inc. of Alabama
(d) Guaranty Agreement dated Incorporated by reference to the
September 26, 1990 between copy thereof filed as an Exhibit
Brown Brothers Harriman to Registrant's Quarterly Report
and Co. and Kleinert's, Inc. on Form 10-Q for its fiscal
quarter ended September 1, 1990
(e) Guaranty Agreement dated Incorporated by reference to the
September 26, 1990 between copy thereof filed as an Exhibit
Brown Brothers Harriman and to Registrant's Quarterly Report
Co. and Kleinert's, Inc. of on Form 10-Q for its fiscal
Alabama quarter ended September 1, 1990
(f) Letter Agreement dated Incorporated by reference to the
September 26, 1990 between copy thereof filed as an Exhibit
Philadelphia National Bank to Registrant's Quarterly Report
and Kleinert's, Inc. of on Form 10-Q for its fiscal
Alabama quarter ended September 1, 1990
<PAGE>
65
INDEX TO EXHIBITS-Continued
Exhibit No. Page
- ----------- ----
(g) Agreement dated as of Incorporated by reference to the
November 9, 1989 between copy thereof filed as an Exhibit
Precision Textiles, Inc. and to Registrant's Quarterly Report
Kleinert's, Inc. of Alabama on Form 10-Q for its fiscal
quarter ended September 1, 1990
(h) Line of Credit Agreement Incorporated by reference to the
dated October 18, 1990 between copy thereof filed as an Exhibit
Republic National Bank and to Registrant's Annual Report
Kleinert's, Inc. of Alabama on Form 10-K for its fiscal
year ended December 1, 1990
(i) Sublease Agreement between Incorporated by reference to the
Harco Drug, Inc. and copy thereof filed as an Exhibit
Kleinert's, Inc. of Alabama to Registrant's Annual Report
dated February 14, 1991 on Form 10-K for its fiscal
year ended December 1, 1990
(j) Property Lease Agreement dated Incorporated by reference to the
February 15, 1992 between copy thereof filed as an Exhibit
Fortex and Kleinert's, Inc. of to Registrant's Annual Report
Alabama on Form 10-K for its fiscal
year ended November 30, 1991
(k) Demand Grid Note dated Incorporated by reference to the
October 22, 1990 between copy thereof filed as an Exhibit
Republic National Bank of New to Registrant's Quarterly Report
York and Kleinert's, Inc. of on Form 10-Q for its fiscal
Alabama and Guaranty of quarter ended February 29, 1992
Kleinert's, Inc. dated October
23, 1990
(l) Consent letter dated October 30, Incorporated by reference to the
1990 between Philadelphia copy thereof filed as an Exhibit
National Bank, incorporated as to Registrant's Quarterly Report
CoreStates Bank, N.A., on Form 10-Q for its fiscal
Kleinert's, Inc. of Alabama and quarter ended February 29, 1992
Kleinert's, Inc.
(m) Kleinert's, Inc. 1991 Stock Incorporated by reference to the
Option Plan copy thereof filed as an Exhibit
to Registrant's Quarterly Report
on Form 10-Q for its fiscal
quarter ended February 29, 1992
<PAGE>
66
INDEX TO EXHIBITS-Continued
Exhibit No. Page
- ----------- ----
(n) Unsecured Promissory Note dated Incorporated by reference to the
February 19, 1992 to Brown copy thereof filed as an Exhibit
Brothers, Harriman & Co. from to Registrant's Quarterly Report
Kleinert's, Inc. of Alabama and on Form 10-Q for its fiscal
Surety Agreement dated quarter ended February 29, 1992
February 19, 1992 between
Brown Brothers, Harriman and
Co. and Kleinert's, Inc.
(o) Non-Qualified Stock Option Incorporated by reference to the
Agreement with Kenneth Brier, copy thereof filed as an Exhibit
a Director for Kleinert's, Inc. to Registrant's Annual Report
dated June 23, 1992 on Form 10-K for its fiscal
year ended November 28, 1992
(p) Line of Credit and Term Loan Incorporated by reference to the
Agreement dated April 8, 1993 copy thereof filed as an Exhibit
between CoreStates Bank, N.A., to Registrant's Quarterly Report
Philadelphia National Bank, and on Form 10-Q for its fiscal
Kleinert's, Inc. of Alabama quarter ended May 29, 1993
(q) Lease Agreement dated June 6, Incorporated by reference to the
1993 between Corestates Bank, copy thereof filed as an Exhibit
N.A., and Kleinert's, Inc. of to Registrant's Quarterly Report
Alabama on Form 10-Q for its fiscal
quarter ended May 29, 1993
(r) Amended and Restated Term Loan Incorporated by reference to the
Note dated December 10, 1993 copy thereof filed as an Exhibit
between CoreStates Bank, N.A., to Registrant's Annual Report
Philadelphia National Bank and on Form 10-K for its fiscal
Kleinert's, Inc. of Alabama year ended November 27, 1993
(s) Line of credit agreement dated Incorporated by reference to the
May 16, 1994 between PNC Bank copy thereof filed as an Exhibit
and Kleinert's, Inc. of Alabama to Registrant's Quarterly Report
on Form 10-Q for its fiscal
quarter ended May 28, 1994
(t) Note Receivable agreement dated Incorporated by reference to the
May 27, 1994 between Norman copy thereof filed as an Exhibit
Katz and Marcia Katz, as to Registrant's Quarterly Report
trustees of the Katz family on Form 10-Q for its fiscal
trust quarter ended May 28, 1994
<PAGE>
67
INDEX TO EXHIBITS-Continued
Exhibit No. Page
- ----------- ----
(u) Operating lease agreement dated Incorporated by reference to the
May 26, 1994 between Corestates copy thereof filed as an Exhibit
Bank, N.A., and Kleinert's, to Registrant's Annual Report
Inc. of Alabama on Form 10-K for its fiscal
year ended December 3, 1994
(v) Property Lease agreement dated Incorporated by reference to the
November 8, 1994 between Robert copy thereof filed as an Exhibit
Clayton Hickman and Kleinert's, to Registrant's Annual Report
Inc. of Alabama on Form 10-K for its fiscal
year ended December 3, 1994
(w) Second amended and restated Incorporated by reference to the
term loan note dated November copy thereof filed as an Exhibit
10, 1994 between CoreStates to Registrant's Annual Report
Bank, N.A. and Kleinert's, Inc. on Form 10-K for its fiscal
of Alabama year ended December 3, 1994
(x) Employment agreement dated Incorporated by reference to the
November 21, 1994 between Jack copy thereof filed as an Exhibit
Brier and Kleinert's, Inc. to Registrant's Annual Report
on Form 10-K for its fiscal
year ended December 3, 1994
(y) License agreement extension Incorporated by reference to the
dated December 22, 1994 between copy thereof filed as an Exhibit
Hygienics Industries, Inc. to Registrant's Annual Report
and Kleinert's, Inc. on Form 10-K for its fiscal
year ended December 3, 1994
(z) Letter amendment dated January Incorporated by reference to the
7, 1995 to property lease copy thereof filed as an Exhibit
agreement dated February 15, to Registrant's Annual Report
1992 between Fortex and on Form 10-K for its fiscal
Kleinert's, Inc. of Alabama year ended December 3, 1994
(aa) Operating lease agreement Incorporated by reference to the
dated December 30, 1994 copy thereof filed as an Exhibit
between Corestates Bank, N.A., to Registrant's Annual Report
and Kleinert's, Inc. of Alabama on Form 10-K for its fiscal
year ended December 3, 1994
(ab) Lease agreement dated December Incorporated by reference to the
5, 1994 between Corestates copy thereof filed as an Exhibit
Bank, N.A., and Kleinert's to Registrant's Annual Report on
Inc. Form 10-K for its fiscal year
ended December 2, 1995
<PAGE>
68
INDEX TO EXHIBITS-Continued
Exhibit No. Page
- ----------- ----
(ac) Line of Credit Demand Note Incorporated by reference to the
dated March 1, 1995 between copy thereof filed as an Exhibit
Kleinert's, Inc. of Alabama and to Registrant's Annual Report on
PNC Bank Form 10-K for its fiscal year
ended December 2, 1995
(ad) Demand Grid Note dated April Incorporated by reference to the
20, 1995 between Republic copy thereof filed as an Exhibit
National Bank of New York to Registrant's Annual Report on
and Kleinert's, Inc. of Form 10-K for its fiscal year
Alabama and Guaranty of ended December 2, 1995
Kleinert's, Inc. dated April
20, 1995
(ae) License agreement dated June Incorporated by reference to the
21, 1995 between Cadtex copy thereof filed as an Exhibit
Corporation and Kleinert's to Registrant's Annual Report on
Inc. of New York. Form 10-K for its fiscal year
ended December 2, 1995
(af) Deferred compensation Incorporated by reference to the
agreement dated August 15, copy thereof filed as an Exhibit
1995 between Jack Brier and to Registrant's Annual Report on
Kleinert's, Inc. Form 10-K for its fiscal year
ended December 2, 1995
(ag) Rent agreement dated Incorporated by reference to the
August 22, 1995 between 112 copy thereof filed as an Exhibit
West 34th Street Company and to Registrant's Annual Report on
Kleinert's, Inc. of New York Form 10-K for its fiscal year
ended December 2, 1995
(ah) Guaranty agreement dated Incorporated by reference to the
November 29, 1995 between copy thereof filed as an Exhibit
Corestates Bank, N.A., and to Registrant's Annual Report on
Kleinert's, Inc. of New York Form 10-K for its fiscal year
ended December 2, 1995
(ai) Lease agreement dated Incorporated by reference to the
November 29, 1995 between copy thereof filed as an Exhibit
Corestates Bank, N.A. and to Registrant's Annual Report on
Kleinert's, Inc. of New York Form 10-K for its fiscal year
ended December 2, 1995
<PAGE>
69
INDEX TO EXHIBITS-Continued
Exhibit No. Page
- ----------- ----
(ak) Lease agreement dated December Incorporated by reference to the
15, 1995 between Jeffrey A. copy thereof filed as an Exhibit
Lopatin and Kleinert's, Inc. of to Registrant's Annual Report on
Florida Form 10-K for its fiscal year
ended December 2, 1995
(al) Purchase agreement dated Incorporated by reference to the
December 15, 1995 between Pixie copy thereof filed as an Exhibit
Playmates, Inc., Certified to Registrant's Annual Report on
Sewing Services, Inc., Form 10-K for its fiscal year
Certified Apparel Services of ended December 2, 1995
Honduras, Inc. C.A. and
Kleinert's, Inc. of Florida
(am) Fourth Amendment to Line of Incorporated by reference to the
Credit and Term Loan Agreement copy thereof filed as an Exhibit
dated February 28, 1996 by and to Registrant's Quarterly Report
among Kleinert's, Inc. of on Form 10-Q for its fiscal
Alabama, Kleinert's, Inc. of quarter ended June 1, 1996
Florida and Corestates Bank, N.A.
(an) Third Amendment and Restated Term Incorporated by reference to the
Loan Note dated February 29, copy thereof filed as an Exhibit
1996 between Kleinert's, Inc. of to Registrant's Quarterly Report
Alabama, Kleinert's, Inc. of on Form 10-Q for its fiscal
Florida and Corestates Bank, N.A. quarter ended June 1, 1996
(ao) Guaranty dated February 28, 1996 Incorporated by reference to the
between Kleinert's, Inc. and copy thereof filed as an Exhibit
Corestates Bank, N.A. to Registrant's Quarterly Report
on Form 10-Q for its fiscal
quarter ended June 1, 1996
(ap) Certificate of Corporate Incorporated by reference to the
Resolutions dated February, 1996 copy thereof filed as an Exhibit
- Kleinert's, Inc. of Florida to Registrant's Quarterly Report
on Form 10-Q for its fiscal
quarter ended June 1, 1996
(aq) Certificate of Corporate Incorporated by reference to the
Resolutions dated February, 1996 copy thereof filed as an Exhibit
- Kleinert's, Inc. of Alabama to Registrant's Quarterly Report
on Form 10-Q for its fiscal
quarter ended June 1, 1996
(ar) Schedule to Master Agreement Incorporated by reference to the
dated February 28, 1996 between copy thereof filed as an Exhibit
Kleinert's, Inc. of Alabama, to Registrant's Quarterly Report
Kleinert's, Inc. of Florida and on Form 10-Q for its fiscal
Corestates Bank, N.A. quarter ended June 1, 1996
<PAGE>
70
INDEX TO EXHIBITS-Continued
Exhibit No. Page
- ----------- ----
(as) International Swap Dealers Incorporated by reference to the
Association, Inc. Master Agreement copy thereof filed as an Exhibit
dated February 28, 1996 between to Registrant's Quarterly Report
Kleinert's, Inc. of Alabama, on Form 10-Q for its fiscal
Kleinert's, Inc. of Florida and quarter ended June 1, 1996
and Corestates Bank, N.A.
(at) Amended and Restated Employment Incorporated by reference to the
Agreement dated June 28, 1996 for copy thereof filed as an Exhibit
Jack Brier, CEO. to Registrant's Quarterly Report
on Form 10-Q for its fiscal
quarter ended August 31, 1996
(au) Lease Agreement for Cadtex Incorporated by reference to the
workstations dated March, 1996 copy thereof filed as an Exhibit
among Corestates Bank, N.A. and to Registrant's Quarterly Report
Kleinert's, Inc. on Form 10-Q for its fiscal
quarter ended August 31, 1996
(av) Lease Agreement for Cadtex Incorporated by reference to the
workstations dated July, 1996 copy thereof filed as an Exhibit
among Corestates Bank, N.A. and to Registrant's Quarterly Report
Kleinert's, Inc. on Form 10-Q for its fiscal
quarter ended August 31, 1996
(aw) Line of Credit dated June 17, 1996 Incorporated by reference to the
by and amount Kleinert's, Inc. of copy thereof filed as an Exhibit
Alabama and Brown Brothers, to Registrant's Quarterly Report
Harriman and Co. on Form 10-Q for its fiscal
quarter ended August 31, 1996
(ax) Third Amendment to lease dated
August 31, 1996 between C/N Leedom
II LP and Kleinert's, Inc.
(ay) Kleinert's, Inc. 1996 Stock Option
Plan dated April 18, 1996
(11) Statement regarding Computation
of Per Share Earnings
(21) Subsidiaries of Registrant:
Kleinert's, Inc. of Alabama,
Kleinert's, Inc. of Delaware and
Kleinert's, Inc. of New York
Kleinert's, Inc. of Florida
Certified Apparel Services of
Honduras, S.A.
<PAGE>
71
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated October 15, 1996 disclosing
the merger of Scott Mills, Inc. into Kleinert's, Inc. of Alabama.
<PAGE>
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KLEINERT'S, INC.
By: /s/ Gerald E. Monigle
-------------------------
Gerald E. Monigle
Vice President-Finance
(Principal accounting and
financial officer)
Dated: February 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Jay B. Andrews Director 2/20/97
- -------------------------
Jay B. Andrews
/s/ Jack Brier Director, Chairman
- ------------------------- (Principal Executive
Jack Brier Officer) 2/19/97
/s/ Kenneth L. Brier Director 2/17/97
- -------------------------
Kenneth L. Brier
/s/ Gerald E. Monigle Vice President-Finance
- ------------------------- (Principal Accounting
Gerald E. Monigle and Financial Officer) 2/24/97
William Forman Director
/s/ Nathan Greenberg Director 2/18/97
- -------------------------
Nathan Greenberg
/s/ Marvin Grossman Director 2/19/97
- -------------------------
Marvin Grossman
/s/E. Gerald Riesenbach Director 2/18/97
- -------------------------
E. Gerald Riesenbach
THIRD AMENDMENT TO LEASE
THIS AGREEMENT dated as of August 31, 1996, by and between C/N LEEDOM
II LP, Pennsylvania corporation, Suite 150, 16 Campus Boulevard, Newtown Square,
Pennsylvania 19073 ("Landlord"), party of the first part, and KLEINERTS
INCORPORATED, a Pennsylvania corporation, with its principal place of business
at Building #3, 120 West Germantown Pike, Plymouth Meeting, Pennsylvania 19462
("Tenant"), party of the second part.
W I T N E S S E T H
WHEREAS, Landlord's predecessor in interest and Tenant entered into a
Lease dated January 24, 1986, which Lease was amended by Landlord and Tenant on
August 5, 1989, and again on April 9, 1991, (said Lease as amended being herein
called "Lease"), pursuant to which Tenant agreed to lease 3,919 square feet (the
"Premises") in Building Three located in Meetinghouse Business center, Plymouth
Township, Montgomery County, Pennsylvania, which Premises are more fully
described in said Lease; and
WHEREAS, the parties again desire to amend said Lease to extend the
Term and modify certain other provision thereof, all as set forth hereinafter.
NOW, THEREFORE, in consideration of the mutual convenants herein
contained and intending to be legally bound hereby, the parties hereto agree as
follows:
1. The Term of a said Lease as set forth in Section 1 thereof is hereby
extended for period of five (5) years so as to expire on October 2, 2001.
2. During the extended Term i.e. beginning on October 2, 1996, the
"Base Rent" as set forth in Section 1 of said Lease shall be as follows:
From To Annual Monthly
---- -- ------ -------
(a) October 2, 1996 October 1, 1997 $50,947.00 $4,245.58
(b) October 2, 1997 October 1, 1998 $51,926.75 $4,327.23
(c) October 2, 1998 October 1, 1999 $52,906.50 $4,408.88
(d) October 2, 1999 October 1, 2001 $53,886.25 $4,490.53
All such Base Rent shall be paid at the same time and in the same
manner as provided in said Lease for payment of Base Rent.
3. The "Operating Expense Allowance" shall be equal to the monthly
charge presently payable under said Lease together with any adjustments thereto
that may be effective pursuant to Lease Section 6 at the expiration of each
Operating Year during the Term as hereby extended.
<PAGE>
4. On or before October 1, 1996, Landlord shall, at Landlord's sole
cost and expense, perform in a workmanlike manner the work set forth on Exhibit
A attached hereto.
5. Except as specifically amended above, the terms and conditions of
the Lease shall remain in full force and during the Term as hereby extended.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
Space Lease to be executed, under seal, as of the day and year first above
written.
(CORPORATE SEAL) BRANDYWINE OPERATING
PARTNERSHIP LP
BY BRANDYWINE REALTY TRUST,
GENERAL PARTNER
ATTEST: [Client Supply] BY: [Client Supply]
-------------------------------- ------------------------------
(CORPORATE SEAL) KLEINERTS INCORPORATED,
TENANT
ATTEST: [Client Supply] BY: [Client Supply]
-------------------------------- ------------------------------
<PAGE>
EXHIBIT A
LANDLORD WORK
1. Replace front door buzzer.
2. Replace bathroom floor tiles
3. Replace carpeting in the following offices:
Gerry's Office
Bonnie's Office
Denise's Office
4. Replace the wallpaper and drapes in Denise's Office (the combined
costs thereof not to exceed $1,000).
5. Replace refrigerator with a refrigerator equipped with an automatic
defrosting freezer.
6. Repaint the following offices:
Computer Room
Bonnie's Office
Gerry's Office
7. Dust and clean wallpaper in all office.
8. Wash and clean blinds in all office.
9. Clean all linoleum floors in the Premises.
10. Shampoo the existing office carpet that is not being replaced.
KLEINERT'S, INC.
1996 STOCK OPTION PLAN
1. Purpose. Kleinert's, Inc. (the "Company) hereby adopts the Kleinert's,
Inc. 1996 Stock Option Plan (the "Plan"). The Plan is intended to recognize the
contributions made to the Company by management and key employees and by
non-employee members of the Board of Directors to and advisors of the Company or
any Affiliate (as defined below), to provide such persons with additional
incentive to devote themselves to the future success of the Company or an
Affiliate, and to improve the ability of the Company or an Affiliate to attract,
retain, and motivate individuals upon whom the Company's sustained growth and
financial success depend, by providing such persons with an opportunity to
acquire or increase their proprietary interest in the Company through receipt of
rights to acquire the Company's Common Stock (the "Common Stock").
2. Definitions. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
(a) "Affiliate" means a corporation which is a parent corporation or
a subsidiary corporation with respect to the Company within the meaning of
Section 424(e) or (f) of the Code.
(b) "Board of Directors" means the Board of Directors of the
Company.
(c) "Change of Control" shall have the meaning set forth in Section
10 of the Plan. (d) "Code" means the Internal Revenue Code of 1986, as amended.
- 1 -
<PAGE>
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall have the meaning set forth in Section 3 of
the Plan.
(f) "Company" means Kleinert's, Inc., a Pennsylvania corporation.
(g) "Disability" shall have the meaning set forth in Section
22(e)(3) of the Code.
(h) "Disinterested Director" shall mean a member of the Board of
Directors of the Company who is "disinterested" within the meaning of
Rule 16b-3.
(i) "Fair Market Value" shall have the meaning set forth in
Subsection 8(b) of the Plan.
(j) "ISO" means an Option granted under the Plan which is intended
to qualify as an "incentive stock option" within the meaning of Section 422(b)
of the Code.
(k) "Non-qualified Stock Option" means an Option granted under the
Plan which is not intended to qualify, or which otherwise does not qualify, as
an ISO.
(l) "Option" means either an ISO or a Non-qualified Stock Option
granted under the Plan.
(m) "Optionee" means a person to whom an Option has been granted
under the Plan, which Option has not been exercised and has not expired or
terminated.
- 2 -
<PAGE>
(n) "Option Document" means the document described in Section 8 or
Section 9 of the Plan, as applicable, which sets forth the terms and conditions
of the grant of an Option.
(o) "Option Price" means the price at which Shares may be purchased
upon exercise of an Option, as calculated pursuant to Subsection 8(b) or
Subsection 9(a) of the Plan.
(p) "Rule 16b-3" means Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended.
(q) "Section 16 Officer" means any person who is an "officer" within
the meaning of Rule 16a-1(f) promulgated under the Securities Exchange Act of
1934, as amended, or any successor rule.
(r) "Shares" means the shares of Common Stock of the Company which
are the subject of Options granted under the Plan.
3. Administration of the Plan. The Plan shall be administered by a
committee designated by the Board of Directors composed of two or more
directors, each of whom is, or is expected to become, a Disinterested Director
(the "Committee").
(a) Meetings. The Committee shall hold meetings at such times and
places as it may determine, shall keep minutes of its meetings, and shall adopt,
amend and revoke such rules or procedures as it may deem proper; provided,
however, that it may take action only upon the agreement of a majority of the
whole Committee. Any action which the Committee shall take through a written
instrument signed by a majority of its members shall be as effective as though
it had been taken at a meeting duly called and held. The Committee shall report
all actions taken by it to the Board of Directors.
- 3 -
<PAGE>
(b) Grants. Except with respect to Options granted pursuant to
Section 9 hereof, the Committee shall from time to time at its discretion direct
the Company to grant Options pursuant to the terms of the Plan. The Committee
shall have plenary authority to (i) determine the persons to whom, the times at
which, and the price at which Options shall be granted, (ii) determine the type
of Option to be granted and the number of Shares subject thereto, and (iii)
approve the form and terms and conditions of the Option Documents; all subject,
however, to the express provisions of the Plan. In making such determinations,
the Committee may take into account the nature of the Optionee's services and
responsibilities, the Optionee's present and potential contribution to the
Company's success and such other factors as it may deem relevant.
Notwithstanding the foregoing, grants of Options to non-employee members of the
Board of Directors shall be made exclusively in accordance with the provisions
of Section 9. The interpretation and construction by the Committee of any
provisions of the Plan or of any Option granted under the Plan shall be final,
binding and conclusive.
(c) Exculpation. No member of the Committee or of the Board of
Directors shall be personally liable for monetary damages for any action taken
or any failure to take any action in connection with the administration of the
- 4 -
<PAGE>
Plan or the granting of Options under the Plan, provided that this Subsection
3(c) shall not apply to (i) any breach of such member's duty of loyalty to the
Company, an Affiliate, or the Company's stockholders, (ii) acts or omissions not
in good faith or involving intentional misconduct or a knowing violation of law,
(iii) any transaction from which the member derived an improper personal
benefit, or (iv) the responsibility or liability of a member pursuant to any
criminal statute or to the liability of a member for the payment of taxes
pursuant to local, state or federal law.
(d) Indemnification. Service on the Committee shall constitute
service as a member of the Board of Directors of the Company. Each member of the
Committee shall be entitled, without further act on his part, to indemnity from
the Company and limitation of liability to the fullest extent provided by
applicable law and by the Company's Articles of Incorporation and/or By-laws in
connection with or arising out of any action, suit or proceeding with respect to
the administration of the Plan or the granting of Options thereunder in which he
or she may be involved by reason of his or her being or having been a member of
the Committee, whether or not he or she continues to be a member of the
Committee at the time of the action, suit or proceeding.
4. Options under the Plan. Options granted under the Plan may be in
the form of a Non-qualified Stock Option, an ISO, or a combination thereof, at
the discretion of the Committee.
- 5 -
<PAGE>
5. Eligibility. All management and key employees and non-employee
members of the Board of Directors of the Company or any Affiliate shall be
eligible to receive Options hereunder. However, non-employee members of the
Board of Directors shall receive Options only pursuant to Section 9 of the Plan.
The Committee, in its sole discretion, shall determine whether an individual is
eligible for a grant of an Option under the Plan as a management or key employee
or member of the Board of Directors (except for those Options granted
automatically to non-employee members of the Board of Directors pursuant to
Section 9 of the Plan).
6. Shares Subject to Plan. The aggregate maximum number of Shares for
which Options may be granted pursuant to the Plan is five hundred thousand
(500,000) Shares, subject to adjustment as provided in Section 11 of the Plan.
The Shares shall be issued from authorized and unissued Common Stock or Common
Stock held in or hereafter acquired for the treasury of the Company. If an
Option terminates or expires without having been fully exercised for any reason,
the Shares for which the Option was not exercised may again be the subject of
one or more Options granted pursuant to the Plan.
7. Term of the Plan. The Plan is effective as of March __, 1996, the
date on which it was adopted by the Board of Directors, subject to approval of
the Plan on or before March __, 1997 by a majority of the votes cast at a duly
called meeting of the shareholders at which a quorum representing a majority of
- 6 -
<PAGE>
all outstanding voting stock of the Company is, either in person or by proxy,
present and voting. No Option granted under the Plan may be exercised before the
Plan is so approved by the shareholders and, if the Plan is not so approved on
or before March __, 1997, all Options granted under the Plan shall be null and
void. No Option may be granted under the Plan after March __, 2006.
8. Option Documents and Terms. Each Option granted under the Plan
shall be a Non-qualified Stock Option unless the Option shall specifically be
designated as an ISO at the time of grant. To the extent any Option designated
an ISO is determined for any reason not to qualify as an incentive stock option
within the meaning of Section 422 of the Code, such Option shall be treated as a
Non-qualified Stock Option for all purposes under the provisions of the Plan.
Options granted pursuant to the Plan shall be evidenced by the Option Documents
in such form as the Committee shall from time to time approve, which Option
Documents shall comply with and be subject to the following terms and conditions
and such other terms and conditions as the Committee shall from time to time
require which are not inconsistent with the terms of the Plan. However, the
provisions of this Section 8 shall not be applicable to Options granted to
non-employee members of the Board of Directors, except as otherwise provided in
Subsection 9(c).
(a) Number of Option Shares. Each Option Document shall state the
number of Shares to which it pertains. An Optionee
- 7 -
<PAGE>
may receive more than one Option, which may include Options which are
intended to be ISO's and Options which are not intended to be ISO's, but only on
the terms and subject to the conditions and restrictions of the Plan. The
maximum number of Shares with respect to which Options may be granted under the
Plan during any calendar year to any Optionee is Two Hundred Thousand (200,000)
Shares.
(b) Option Price. Each Option Document shall state the Option Price
which, for all Options, shall be equal to or greater than the Fair Market Value
of the Shares at the time the Option is granted except in the case of an ISO
granted to an Optionee who then owns, directly or by attribution under Section
424(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliate, in
which case the Option Price shall be equal to or greater than 110% of the Fair
Market Value of the Shares on the date the Option is granted. The Fair Market
Value per share shall be as determined by the Committee if the Common Stock is
not traded in a public market and, if the Common Stock is traded in a public
market, shall be, if the Common Stock is listed on a national securities
exchange or included in the NASDAQ National Market System, the last reported
sale price thereof on the relevant date, or, if the Common Stock is not so
listed or included, the mean between the last reported "bid" and "asked" prices
thereof on the relevant date, as reported on NASDAQ or, if not so reported, as
reported by the National Daily Quotation Bureau, Inc. or as reported in a
customary financial reporting service, as applicable and as the Committee shall
determine.
- 8 -
<PAGE>
(c) Exercise. No Option shall be deemed to have been exercised prior
to the receipt by the Company of written notice of such exercise and of payment
in full of the Option Price for the Shares to be purchased. Each such notice
shall specify the number of Shares to be purchased and shall (unless the Shares
are covered by a then current registration statement or a Notification under
Regulation A under the Securities Act of 1933, as amended (the "Act")), contain
the Optionee's acknowledgment in form and substance satisfactory to the Company
that (a) such Shares are being purchased for investment and not for distribution
or resale (other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act), (b) the Optionee has been advised and understands that
(i) the Shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer and (ii) the Company is under no obligation to register
the Shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (c) such Shares may not be
transferred without compliance with all applicable federal and state securities
laws, and (d) an appropriate legend referring to the foregoing restrictions on
transfer and any other restrictions imposed under the Option
- 9 -
<PAGE>
Documents may be endorsed on the certificates. Notwithstanding the foregoing, if
the Company determines that issuance of Shares should be delayed pending (A)
registration under federal or state securities laws, (B) the receipt of an
opinion of counsel satisfactory to the Company that an appropriate exemption
from such registration is available, (C) the listing or inclusion of the Shares
on any securities exchange or an automated quotation system or (D) the consent
or approval of any governmental regulatory body whose consent or approval is
necessary in connection with the issuance of such Shares, the Company may defer
exercise of any Option granted hereunder until an event described in this
sentence has occurred.
(d) Medium of Payment. An optionee shall pay for Shares (i) in cash,
(ii) by certified or cashier's check payable to the order of the Company, (iii)
by such other mode of payment as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board, or (iv) by payment made in whole or in part in shares of
the Company's Common Stock held by the Optionee. If payment is made in whole or
in part in shares of the Company's Common Stock, then the Optionee shall deliver
to the Company certificates registered in the name of such Optionee representing
the shares owned by such Optionee, free of all liens, claims and encumbrances of
every kind and having an aggregate Fair Market
- 10 -
<PAGE>
Value on the date of delivery that is at least as great as the Option Price
of the Shares (or relevant portion thereof) with respect to which such Option is
to be exercised by the payment in shares of Common Stock, endorsed in blank or
accompanied by stock powers duly endorsed in blank by the Optionee. In the event
that certificates for shares of the Company's Common Stock delivered to the
Company represent a number of shares of Common Stock in excess of the number of
shares of Common Stock required to make payment for the Option Price of the
Shares (or relevant portion thereof) with respect to which such Option is to be
exercised by payment in shares of Common Stock, the stock certificate issued to
the Optionee shall represent (i) the Shares in respect of which payment is made,
and (ii) such excess number of shares of Common Stock.
(e) Termination of Options.
(i) No Option shall be exercisable after the first to occur of
the following:
(A) Expiration of the Option term specified in the Option
Document which, in the case of an ISO, shall not occur after (1) ten years from
the date of grant, or (2) five years from the date of grant of an ISO if the
Optionee on the date of grant owns, directly or by attribution under Section
424(d) of the Code, shares possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of an Affiliate;
- 11 -
<PAGE>
(B) Unless otherwise specified in the Option Document,
expiration of three months from the date the Optionee's employment with the
Company or its Affiliates terminates for any reason other than Disability or
death;
(C) Unless otherwise specified in the Option Document,
expiration of one year from the date such employment with the Company or its
Affiliates terminates due to the Optionee's Disability or death;
(D) Except to the extent otherwise provided in an Optionee's
Option Document, a finding by the Committee, after consideration of the facts
presented on behalf of both the Company and the Optionee, that the Optionee has
breached his or her employment contract with the Company or an Affiliate, or has
been engaged in disloyalty to the Company or an Affiliate, including, without
limitation, fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his or her employment or service, or has disclosed
trade secrets or confidential information of the Company or an Affiliate. In
such event, in addition to immediate termination of the Option, the Optionee
shall automatically forfeit all Shares for which the Company has not yet
delivered the share certificates upon refund by the Company of the option Price.
Notwithstanding anything herein to the contrary, the Company may withhold
delivery of share certificates pending the resolution of any inquiry that could
lead to a finding resulting in a forfeiture;
- 12 -
<PAGE>
(E) The date, if any, set by the Board of Directors as an
accelerated expiration date in the event of the liquidation or dissolution of
the Company or other Change of Control; or
(F) The occurrence of such other event or events as may be
set forth in the Option Document as causing an accelerated expiration of the
Option.
(ii) In the event that the right to exercise an Option is
scheduled to terminate pursuant to either Subsection 8(e)(i)(B) or Subsection
8(e)(i)(C), such Option may be exercised during the three-month or one year
period, as the case may be, following the Optionee's termination of employment
only with respect to the number of Option Shares as to which such Option was
exercisable on the date of such termination of employment. Following such
termination of employment, such Option may not be exercised with regard to any
additional Shares covered by such Option, even though all or a portion of such
additional Shares would have become subject to exercise under the Option if the
Optionee were still employed during such three-month or one year period.
(iii) Notwithstanding the foregoing, the Committee may extend
the period during which all or any portion of an Option may be exercised to a
date no later than the Option term specified in the Option Document pursuant to
Subsection 8(e)(i)(A), provided that any change pursuant to this Subsection
8(e)(iii) which would cause an ISO to become a Non-qualified Stock Option may be
made only with the consent of the Optionee.
- 13 -
<PAGE>
(iv) Notwithstanding anything to the contrary contained in the
Plan or an Option Document, an ISO shall be treated as a Non-qualified Stock
Option to the extent such ISO is exercised at any time after the expiration of
the time period permitted under the Code for the exercise of an ISO.
(f) Transfers. No Option granted under the Plan may be transferred,
except by will or by the laws of descent and distribution. During the lifetime
of an Optionee, the Optionee's Option may be exercised only by him or her.
Notwithstanding the foregoing, a Non-qualified Stock Option may be transferred
pursuant to the terms of a "qualified domestic relations order," within the
meaning of Sections 401(a)(13) and 414(p) of the Code or within the meaning of
Title I of the Employee Retirement Income Security Act of 1974, as amended.
(g) Limitation on ISO Grants. In no event shall the aggregate Fair
Market Value of the Shares with respect to which an ISO granted under the Plan
and an incentive stock option issued under any other incentive stock option plan
of the Company or its Affiliates are exercisable for the first time by an
Optionee during any calendar year exceed $100,000. For purposes of this
subsection 8(g), the Fair Market Value of the Shares shall be determined as of
the date of grant of the ISO or other incentive stock option.
- 14 -
<PAGE>
(h) Other Provisions. Subject to the provisions of the Plan, the
Option Documents shall contain such other provisions including, without
limitation, provisions authorizing the Committee to accelerate the
exercisability of all or any portion of an Option granted pursuant to the Plan,
additional restrictions upon the exercise of the Option or additional
limitations upon the term of the Option, as the Committee shall deem advisable.
(i) Amendment. Subject to the provisions of the Plan, the Committee
shall have the right to amend Option Documents issued to an Optionee, subject
to the Optionee's consent if such amendment is not favorable to the Optionee,
except that the consent of the Optionee shall not be required for any amendment
made pursuant to Subsection 8(e)(i)(E) or Section 10 of the Plan, as applicable.
9. Special Provisions Relating to Grants of Options to Non-Employee
Members of the Board of Directors. Options granted pursuant to the Plan to
non-employee members of the Board of Directors shall be granted, without any
further action by the Committee, in accordance with the terms and conditions set
forth in this Section 9. Options granted pursuant to this Section 9 shall be
evidenced by Option Documents in such form as the Committee shall from time to
time approve, which Option Documents shall comply with and be subject to the
following terms and conditions and such other terms and conditions as the
Committee shall from time to time require which are not inconsistent with the
terms of the Plan.
- 15 -
<PAGE>
(a) Timing of Grants: Number of Shares Subject of Options:
Exercisability of Options: Option Price. Each non-employee member of the Board
of Directors shall be granted on the later of the approval of this Plan by the
shareholders or the date such person becomes a member of the Board of Directors,
an Option to purchase twenty-five thousand (25,000) Shares. Each such Option
shall be a Non-qualified Stock Option pursuant to which ten thousand (10,000)
Shares shall be exercisable immediately upon the date of grant, and an
additional five thousand (5,000) Shares shall become exercisable on each of the
three anniversaries following the date of grant, subject to the provisions of
Subsection 9(b). The Option Price for each Option granted under this Section 9
be equal to the Fair Market Value of the Shares on the date the Option is
granted.
(b) Termination of Options Granted Pursuant to Section 9. All
Options granted pursuant to this Section 9 which have become exercisable shall
continue to be exercisable until the first to occur of the following:
(i) Expiration of ten (10) years from the date of grant;
(ii) Expiration of three (3) months from the date the Optionee's
service as a member of the Board of Directors terminates for any reason other
than Disability or death;
- 16 -
<PAGE>
(iii) Expiration of one (1) year from the date the Optionee's
service as a member of the Board of Directors terminates due to the Optionee's
Disability or death;
In the event that the right to exercise an Option granted under this
Section 9 terminates pursuant to either Subsection 9(b)(ii) or Subsection
9(b)(iii), such Option may be exercised during the three-month or one year
period, as the case may be, following the Optionee's termination of service only
with respect to the number of Option Shares as to which such Option was
exercisable on the date of such termination of service. Following such
termination of service, such Option may not be exercised with regard to any
additional Shares covered by such Option, even though all or a portion of such
additional Shares would have become subject to exercise under the Option if the
Optionee were still rendering services during such three-month or one year
period.
(c) Applicability of Provisions of Section 8 to Options Granted
Pursuant to Section 9. The following provisions of Section 8 shall be applicable
to Options granted pursuant to this Section 9: the last sentence of Subsection
8(b); Subsection 8(c); Subsection 8(d); Subsection 8(f); and Subsection 8(i)
(but only to the extent that the application of such Subsection to Options
granted under this Section 9 would not cause a Disinterested Director no longer
to qualify as a Disinterested Director).
10. Change of Control. In the event of a Change of Control, the
Committee may take whatever action it deems necessary
- 17 -
<PAGE>
or desirable with respect to the Options outstanding (other than Options granted
pursuant to Section 9), including, without limitation, accelerating the
expiration or termination date set forth in the Option Documents. In addition to
the foregoing, in the event of a Change of Control, Options granted pursuant to
the Plan and held by Optionees who are employees or members of the Board of
Directors at the time of a Change of Control shall become immediately
exercisable in full.
A "Change of Control" shall be deemed to have occurred upon the
earliest to occur of the following events: (i) the date the stockholders of the
Company (or the Board of Directors, if stockholder action is not required)
approve a plan or other arrangement pursuant to which the Company will be
dissolved or liquidated, or (ii) the date the stockholders of the Company (or
the Board of Directors, if stockholder action is not required) approve a
definitive agreement to sell or otherwise dispose of substantially all of the
assets of the Company, or (iii) the date the stockholders of the Company (or the
Board of Directors, if stockholder action is not required) and the stockholders
of the other constituent corporation (or its board of directors if stockholder
action is not required) have approved a definitive agreement to merge or
consolidate the Company with or into such other corporation, other than, in
either case, a merger or consolidation of the Company in which holders of shares
of the Company's Common Stock immediately prior to the merger or consolidation
will have at least a majority of the ownership of common stock of the surviving
corporation (and, if one class of common stock is not the only class of voting
securities entitled to vote on the election of directors of the surviving
corporation, a majority of the voting power of the surviving corporation's
voting securities) immediately after the merger or consolidation, which common
stock (and, if applicable, voting securities) is to be held in the same
proportion as such holders' ownership of Common Stock of the Company immediately
before the merger or consolidation, or
- 18 -
<PAGE>
(iv) the date any entity, person or group, within the meaning of Section
13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended
(other than the Company, any of its subsidiaries, any employee benefit plan or
related trust sponsored or maintained by the Company or any of its subsidiaries,
Jack Brier, family members of Jack Brier or trusts for the benefit of Jack Brier
or his family members) shall have become the beneficial owner of, or shall have
obtained voting control over, more than fifty percent (50%) of the outstanding
Shares of the Company's Common Stock, or (v) the first day after the date this
Plan is effective when members of the Board of Directors are elected such that a
majority of the members of the Board of Directors shall have been members of the
Board of Directors for less than two (2) years, unless the nomination for
election of each new member of the Board of Directors who was not a member at
the beginning of such two (2) year period was approved by a vote of at least
two-thirds of the members of the Board of Directors then still in office who
were members at the beginning of such period.
- 19 -
<PAGE>
11. Adjustments on Changes in Capitalization.
(a) In the event that the outstanding Shares are changed by reason
of a reorganization, merger, consolidation, recapitalization, reclassification,
stock split, combination or exchange of shares or the like (not including the
issuance of Common Stock on the conversion of other securities of the Company
which are outstanding on the date of grant and which are convertible into Common
Stock) or dividends payable in Shares, an equitable adjustment shall be made by
the Committee in the aggregate number of Shares available under the Plan and in
the number of Shares and price per Share subject to outstanding Options. Unless
the Committee makes other provisions for the equitable settlement of outstanding
options, if the Company shall be reorganized, consolidated, or merged with
another corporation, or if all or substantially all of the assets of the Company
shall be sold or exchanged, an Optionee shall at the time of issuance of the
stock under such corporate event be entitled to receive upon the exercise of his
or her Option the same number and kind of shares of stock or the same amount of
property, cash or securities as he or she would have been entitled to receive
upon the occurrence of any such corporate event as if he or she had been,
immediately prior to such event, the holder of the number of Shares covered by
his or her Option.
- 20 -
<PAGE>
(b) Any adjustment under this Section 11 in the number of Shares
subject to Options shall apply proportionately to only the unexercised portion
of any Option granted hereunder. If fractions of a Share would result from any
such adjustment, the adjustment shall be revised to the next lower whole number
of Shares.
(c) The Committee shall have authority to determine the
adjustments to be made under this Section, and any such determination by the
Committee shall be final, binding and conclusive.
12. Amendment of the Plan. The Board of Directors of the Company may
amend the Plan from time to time in such manner as it may deem advisable.
Nevertheless, the Board of Directors of the Company may not change the class of
individuals eligible to receive an ISO or increase the maximum number of shares
as to which Options may be granted hereunder without obtaining approval, within
twelve months before or after such action, by vote of a majority of the votes
cast at a duly called meeting of the stockholders at which a quorum representing
a majority of all outstanding voting stock of the Company is, either in person
or by proxy, present and voting on the matter. In addition, the provisions of
Section 9 that determine (i) which directors shall be granted Options pursuant
to Section 9; (ii) the amount of Shares subject to Options granted pursuant to
Section 9; (iii) the price at which shares subject to Options granted pursuant
to Section 9 may be purchased; and (iv)
- 21 -
<PAGE>
the timing of grants of Options pursuant to Section 9 shall not be amended more
than once every six months, other than to comport with changes in the Code or
the Employee Retirement Income Security Act of 1974, as amended. Except as
otherwise provided in the Plan, no amendment to the Plan shall adversely affect
any outstanding Option, without the consent of the Optionee.
13. No Commitment to Retain. The grant of an Option pursuant to the
Plan shall not be construed to imply or to constitute evidence of any agreement,
express or implied, on the part of the Company or any Affiliate to retain the
Optionee in the employ or service of the Company or an Affiliate and/or as a
member of the Company's Board of Directors or in any other capacity.
14. Withholding of Taxes. Whenever the Company proposes or is required
to deliver or transfer Shares in connection with the exercise of an Option, the
Company shall have the right to (a) require the recipient to remit or otherwise
make available to the Company an amount sufficient to satisfy any federal, state
and/or local withholding tax requirements prior to the delivery or transfer of
any certificate or certificates for such Shares or (b) take whatever other
action it deems necessary to protect its interests with respect to tax
liabilities. The Company's obligation to make any delivery or transfer of Shares
shall be conditioned on the Optionee's compliance, to the Company's
satisfaction, with any withholding requirement.
- 22 -
<PAGE>
15. Interpretation. The Plan is intended to enable transactions under
the Plan with respect to directors and officers (within the meaning of Section
16(a) under the Securities Exchange Act of 1934, as amended) to satisfy the
conditions of Rule 16b-3; to the extent that any provision of the Plan would
cause a conflict with such conditions or would cause the administration of the
Plan as provided in Section 3 to fail to satisfy the conditions of Rule 16b-3,
such provision shall be deemed null and void to the extent permitted by
applicable law.
- 23 -
<PAGE>
EXHIBIT (11)
Statement Regarding Computation of Per Share Earnings
Weighted Average
Weighted Average Weighted Average Common and Common
Number of Common Number of Dilutive Stock Equivalent
Shares Outstanding Common Stock Options Shares
------------------ -------------------- -----------------
December 3, 1994 3,346,000 356,000 3,569,000
December 2, 1995 3,331,000 419,000 3,750,000
November 30, 1996 3,548,000 253,000 3,801,000
EXHIBIT (21)
Subsidiaries of Registrant
Name: Kleinert's, Inc. of Alabama
State of Incorporation: Alabama
Trading as: Kleinert's, Inc. of Alabama
Name: Kleinert's, Inc. of Delaware
State of Incorporation: Delaware
Trading as: Kleinert's, Inc. of Delaware
Name: Kleinert's, Inc. of New York
State of Incorporation: New York
Trading as: Kleinert's, Inc. of New York
Name: Kleinert's, Inc. of Florida
State of Incorporation: Florida
Trading as: Kleinert's, Inc. of Florida
Name: Certified Apparel Services of Honduras, S.A.
State of Incorporation: Honduras, CA.
Trading as: Certified Apparel Services of Honduras, S.A.
<PAGE>
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<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1996
<PERIOD-END> Nov-30-1996
<CASH> 395
<SECURITIES> 0
<RECEIVABLES> 23,758
<ALLOWANCES> 206
<INVENTORY> 18,426
<CURRENT-ASSETS> 4,168
<PP&E> 17,477
<DEPRECIATION> 8,287
<TOTAL-ASSETS> 62,832
<CURRENT-LIABILITIES> 23,835
<BONDS> 0
0
0
<COMMON> 4,249
<OTHER-SE> 27,504
<TOTAL-LIABILITY-AND-EQUITY> 62,832
<SALES> 86,759
<TOTAL-REVENUES> 86,759
<CGS> 71,113
<TOTAL-COSTS> 71,113
<OTHER-EXPENSES> 5,941
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<INTEREST-EXPENSE> 1,932
<INCOME-PRETAX> 7,773
<INCOME-TAX> 2,797
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<EPS-PRIMARY> 1.31
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