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Kleinerts Inc/PA – ‘8-K’ for 9/30/96

As of: Tuesday, 10/15/96 · For: 9/30/96 · Accession #: 950115-96-1444 · File #: 1-06454

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

10/15/96  Kleinerts Inc/PA                  8-K:2,7     9/30/96    1:60K                                    Global Fin’l Press/FA

Current Report — Form 8-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 8-K         Current Report                                        41    122K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Acquisition or Disposition of Assets Financial Statements, Pro Forma Financial Information and Exhibits Scott Mills, Inc
1	1st Page - Filing Submission
2	Item 2. Acquisition or Disposition of Assets
3	Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
5	Scott Mills, Inc

8-K 1st Page of 41 TOC ↑Top Previous Next ↓Bottom Just 1st
 
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
 the Securities Exchange Act of 1934

 Date of Report (Date of earliest event reported):

September 30, 1996

Kleinert's, Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania                     1-6454                 13-0921860  
(State or other jurisdiction   (Commission File Number)     (I.R.S. Employer    
   of incorporation)                                     Identification No.)

120 West Germantown Pike                                            
Plymouth Meeting, PA                                    19462   
(Address of principal executive offices)                      (Zip Code)        

Registrant's telephone number, including area code:     (610) 828-7261          

Former name or former address,
if changed since last report

8-K 2nd Page of 41 TOC 1st Previous Next ↓Bottom Just 2nd
Item 2. Acquisition or Disposition of Assets.                                   

         On September 30, 1996, Kleinert's, Inc. ("Kleinert's" or the "Company")
consummated the merger (the "Merger") of Scott Mills, Inc. ("Scott Mills,       
Inc."), with and into the Company's wholly-owned subsidiary, Kleinert's, Inc. of
Alabama ("Kleinert's Alabama"), pursuant to an Agreement and Plan of Merger     
dated as of June 10, 1996 among the Company, Scott Mills and Kleinert's Alabama 
(the "Merger Agreement"). Pursuant to the Merger Agreement, each share of Scott 
Mills Common Stock outstanding on September 30, 1996 was converted into the     
right to receive $.03 in cash and 1.52% of a share of Kleinert's Common Stock,  
which is equal to that fraction of a share of Kleinert's Common Stock having a  
market value of $.27 based upon the Average Price (as determined pursuant to the
Merger Agreement) of the Common Stock. Cash will be paid in lieu of fractional  
shares. Kleinert's expects to issue approximately 51,000 shares of its Common   
Stock and approximately $101,000 in cash in exchange for all of the outstanding 
shares of Common Stock of Scott Mills.                                          

   The Merger was consummated upon receipt of approval of the Merger
Agreement and the Merger by the Scott Mills shareholders at the Scott Mills     
Annual Meeting of Shareholders held on September 27, 1996. Approximately 43.8%  
of the shares of Scott Mills Common Stock was beneficially owned by the         
directors and executive officers of Kleinert's as a group, many of whom also    
served as officers and directors of Scott Mills.                                

       Kleinert's is engaged in the design, manufacture and sale of infants'
and children's sleepwear and playwear and children's T-shirts. Kleinert's also  
manufactures, distributes and sells certain items of personal apparel.          
Kleinert's expects to continue the business in which Scott Mills was engaged    
immediately prior to the Merger, which was the knitting of fabrics for the      
children and women's apparel markets.                                           

8-K 3rd Page of 41 TOC 1st Previous Next ↓Bottom Just 3rd
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.     

(a) Financial Statements of Businesses Acquired.                                

Historical Audited Consolidated Financial Statements of Scott Mills, Inc. 

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders                                         
of Scott Mills, Inc.                                                            

We have audited the accompanying consolidated balance sheets of Scott Mills,    
Inc. as of December 2, 1995 and December 3, 1994, and the related consolidated  
statements of operations, shareholders' equity, and cash flows for each of the  
two years in the period ended December 2, 1995. These financial statements are  
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.                   

We conducted our audits in accordance with generally accepted auditing          
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting  
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the consolidated financial position of Scott Mills, Inc. 
at December 2, 1995 and December 3, 1994, and the consolidated results of its   
operations and its cash flows for each of the two years in the period ended     
December 2, 1995, in conformity with generally accepted accounting principles.  

8-K 4th Page of 41 TOC 1st Previous Next ↓Bottom Just 4th
As discussed in Note 2 to the financial statements, the Company's recurring     
losses from operations, negative operating cash flows and accumulated deficit   
raise substantial doubt about its ability to continue as a going concern.       
Management's plans as to these matters are also described in Note 2. The 1995   
financial statements do not include any adjustments that might result from the  
outcome of this uncertainty.                                                    

                                   ERNST & YOUNG LLP

Philadelphia, Pennsylvania                                                      
February 15, 1996                                                               

8-K 5th Page of 41 TOC 1st Previous Next ↓Bottom Just 5th
 SCOTT MILLS, INC.

 CONSOLIDATED BALANCE SHEETS

 December 2, 1995 and December 3, 1994

($000's omitted)

                          ASSETS                              1995        1994
                          ------                              ----        ----

Current assets:                                                                 
   Cash and cash balances at factor                           $  211      $  525
Accounts receivable (net of allowances                                    
for doubtful accounts of $26,000 and $0                             
       in 1995 and 1994)                                         180         251
   Due from factor                                                17       1,387

Inventories:                                                                    
    Raw materials                                                177         438
    Work-in-process                                              587         391
    Finished goods                                                45         124
                                                              ------      ------
       Total inventories                                         809         953
                                                              ------      ------

Other current assets                                             104         411
                                                              ------      ------

    Total current assets                                       1,321       3,527
                                                              ------      ------

Property, plant and equipment, at cost:                                         
   Leasehold improvements                                        295       1,036
   Machinery and equipment                                     1,987       7,803
   Furniture and fixtures                                        105         135
                                                              ------      ------
                                                               2,387       8,974
                                                              ------      ------

    Less accumulated depreciation                              1,350       3,244
                                                              ------      ------
    Net property, plant and equipment                          1,037       5,730
Other assets                                                      22          83

Non-operating dyeing and finishing assets                        520          --
                                                              ------      ------

                                                              $2,900      $9,340
                                                              ======      ======

See notes to consolidated financial statements

8-K 6th Page of 41 TOC 1st Previous Next ↓Bottom Just 6th
 SCOTT MILLS, INC.

 CONSOLIDATED BALANCE SHEETS
 (continued)

 December 2, 1995 and December 3, 1994
($000's omitted)

LIABILITIES and SHAREHOLDERS' EQUITY (DEFICIT)             1995         1994
----------------------------------------------             ----         ----

Current liabilities:                                                            
Current portion of                                                        
long-term debt and capital lease                                    
     obligations                                           $   103     $ 1,018
  Accounts payable                                           2,911       2,938
  Accrued expenses                                             417         386
  Due to Kleinert's, Inc. of Alabama                         1,564          94
                                                           -------     -------
     Total current liabilities                               4,995       4,436
                                                           -------     -------

Subordinated convertible term debt                              500         500 
Long term debt and capital lease obligations, net of                            
     current portion                                           210       2,851
Subordinated term debt due to Kleinert's, Inc.                                  
     of Delaware                                               500          --
                                                           -------     -------
     Total liabilities                                       6,205       7,787
                                                           -------     -------

Commitments                                                                     

Shareholders' equity (deficit):                                                 

Common stock - par value $1.00 per share,                                 
10,000,000 shares authorized,                                       
3,367,598 shares issued, and                                        
     outstanding                                             3,368       3,368
  Capital in excess of par value                               873         873
   Accumulated (deficit)                                     (7,546)     (2,688)
                                                           -------     -------

     Total shareholders' equity (deficit)                   (3,305)      1,553
                                                           -------     -------
                                                           $ 2,900     $ 9,340
                                                           =======     =======

See notes to consolidated financial statements

8-K 7th Page of 41 TOC 1st Previous Next ↓Bottom Just 7th
 SCOTT MILLS, INC.

 CONSOLIDATED STATEMENTS OF OPERATIONS

 Fiscal Years Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

 ($000's omitted, except per share amount)

                                        1995        1994        1993
                                         -------    --------     -------

Net sales - non affiliates                  $  7,955    $ 11,170    $  9,578    
Net sales - related party                      6,841       6,185       4,720    
                                        --------    --------    --------
Total                                      14,796      17,355      14,298 
Cost of goods sold                            15,987      18,344      15,840    
                                        --------    --------    --------
   Gross profit (loss)                     (1,191)       (989)     (1,542)

Provision for dyehouse closing                 2,044          --          --    
Selling, general and administrative                                             
expenses                                      919       1,338       1,297 
                                        --------    --------    --------
Operating loss                                (4,154)     (2,327)     (2,839)   
Interest expense                                 704         397         186    
                                        --------    --------    --------

Loss before income tax                                              
      benefit                              (4,858)     (2,724)     (3,025)
Income tax benefit                                --          36          --    
                                        --------    --------    --------

   Net loss                              $ (4,858)   $ (2,688)   $ (3,025)
                                        ========    ========    ========

Net loss per share                          $  (1.44)   $  (0.80)   $   (.88)(1)
                                        ========    ========    ========

Weighted average shares outstanding            3,368       3,368       3,368 (1)
                                        ========    ========    ========

-------------------                                                             
(1) Pro-forma loss and shares outstanding (Note 10) (unaudited)                 

See notes to consolidated financial statements

8-K 8th Page of 41 TOC 1st Previous Next ↓Bottom Just 8th
 SCOTT MILLS, INC.

 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)/PARENT INVESTMENT

 Fiscal Years Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

($000's omitted except share data)

                                                        [Enlarge/Download Table]

                                                                                                         Total          
                                        Number of              Capital in                           Shareholders' Equity
                                         Shares       Common    Excess of   Parent     Accumulated    (Deficit)/Parent  
                                       Outstanding    Stock     Par Value  Investment   (Deficit)        Investment     
                                       -----------    ------   ----------  ----------  -----------  --------------------

                                                                                                                        

Balance, November 28, 1992                    --      $    --     $    --  $   3,573      $    --       $   3,573       
Net loss                                      --           --          --     (3,025)          --          (3,025)      

Parent contribution                           --           --          --      1,817           --           1,817       

Other                                         --           --          --        (36)          --             (36)      

Capitalization of Scott Mills, Inc.                                                                                     
    and parent contribution                                                                                             
          of $1,300                    3,367,598        3,368         261     (2,329)          --           1,300       
                                       ---------    ---------   ---------  ---------    ---------       ---------       

Balance, November 27, 1993             3,367,598        3,368         261         --           --           3,629       

Net assets transferred to Scott Mills         --           --         612         --           --             612       
Net loss                                      --           --          --         --       (2,688)         (2,688)      
                                       ---------    ---------   ---------  ---------    ---------       ---------       

Balance, December 3, 1994              3,367,598        3,368         873         --       (2,688)          1,553       
Net loss                                      --           --          --         --       (4,858)         (4,858)      
                                       ---------    ---------   ---------  ---------    ---------       ---------       

Balance, December 2, 1995              3,367,598    $   3,368   $     873    $    --    $  (7,546)      $  (3,305)      
                                       =========    =========   =========  =========    =========       =========       


See notes to consolidated financial statements

8-K 9th Page of 41 TOC 1st Previous Next ↓Bottom Just 9th
 SCOTT MILLS, INC.

 CONSOLIDATED STATEMENTS OF CASH FLOWS

 Fiscal Years Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

($000's omitted)

                                                  1995       1994       1993
                                                  ----       ----       ----
Cash flows from operating activities:                                           
   Net loss                                       $(4,858)   $(2,688)   $(3,025)

Adjustments to reconcile net loss to                                            
net cash provided by (used in)                                            
operating activities:                                                     
  Depreciation and amortization                      980        890        615
  (Gain) loss on disposal of fixed assets             --         (2)         2
Provision for losses on                                                   
     accounts receivable                              --         --         17
  Provision for dyehouse closing                   2,044         --         --

Change in operating assets and liabilities:                                     
(Increase) decrease in accounts                                           
     receivable/factor                             1,441     (1,638)       274
  (Increase) decrease in inventory                   144       (165)       747
(Increase) decrease in other                                              
      current assets                                  307        (52)       (10)
   (Increase) in other assets                          --        (74)       (38)
Increase (decrease) in accounts                                           
     payable and accrued expenses                   (273)     3,212         68

Increase (decrease) in deferred income                                    
     tax payable                                      --        (36)        36
  Other                                               61        (45)        --
                                                 -------    -------    -------
     Total adjustments                             4,704      2,090      1,711
                                                 -------    -------    -------
Net cash (used in)                                                  
         operating activities                        (154)      (598)    (1,314)
                                                 -------    -------    -------
Cash flows from investing activities:                                           
   Capital expenditures                            (1,064)    (3,356)       (84)
  Proceeds from sale of fixed assets               2,760          7         --
                                                 -------    -------    -------
Net cash provided by (used in)                                      
          investing activities                      1,696     (3,349)       (84)
                                                 -------    -------    -------

See notes to consolidated financial statements

8-K 10th Page of 41 TOC 1st Previous Next ↓Bottom Just 10th
SCOTT MILLS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

Fiscal Years Ended December 2, 1995,
December 3, 1994 And November 27, 1993

($000'S Omitted)

                                               1995       1994        1993
                                               ----       ----        ----
Cash flows from financing activities:                                           
  Debt payments                                $(2,911)    $  (489)    $    --
   Principal payments on capital leases            (915)       (342)       (380)
  Parent contribution                               --       1,300       1,781
  Proceeds from term debt                           --       3,900          --
  Increase in due to Kleinert's Inc.             1,470          94          --
  Proceeds from subordinated debt                  500          --          --
                                               -------     -------     -------
Net cash provided from                                              
        financing activities                    (1,856)      4,463       1,401

Net increase (decrease) in cash                    (314)        516           3 

Cash at beginning of period                         525           9           6 
                                               -------     -------     -------

Cash at end of period                           $   211     $   525     $     9 
                                               =======     =======     =======

Supplemental disclosures of cash flow information:                              

Cash paid during the period for                                                 
interest (including interest allocated                                          
     by parent in 1993)                        $   562     $   405     $   189

Equipment purchased under capital                                               
     leases                                    $   269     $    --     $   140

Due from Kleinert's, Inc.                       $    --     $    --     $ 1,300 

Equipment deposits financed by parent           $    --     $    --     $   594 

See notes to consolidated financial statements

8-K 11th Page of 41 TOC 1st Previous Next ↓Bottom Just 11th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

 Fiscal Years Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

1. Business of the Company and                                                  
Summary of Significant Accounting Policies                                

Basis of Presentation -                                               

 Scott Mills, Inc. and its wholly-owned subsidiary, Scott Mills, Inc. of
North Carolina, (collectively, Scott Mills or the Company) were formed in August
1993. Scott Mills, Inc. was a wholly-owned subsidiary of Kleinert's, Inc. of    
Alabama, which was a wholly-owned subsidiary of Kleinert's, Inc. (collectively, 
Kleinert's). On November 27, 1993, certain assets and liabilities of Scott      
Mills, a division of Kleinert's Inc. of Alabama, were transferred to Scott      
Mills, Inc. The accompanying financial statements reflect the financial position
and results of operations of the Scott Mills division through November 27, 1993.
All references herein to the Company and Scott Mills refer to the Scott Mills   
division or to Scott Mills, Inc., as applicable.                                

On September 12, 1995, the Company announced that in light of poor    
operating results and as part of its ongoing effort to control operating costs, 
it had decided to concentrate its business solely on its knitting operations and
subcontract all of its dyeing and finishing operations. In connection with the  
closing of its dyeing and finishing facility, the Company has reduced its       
work-force and has either sold or is currently seeking buyers for its dyeing    

8-K 12th Page of 41 TOC 1st Previous Next ↓Bottom Just 12th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

1. Business of the Company and                                                  
Summary of Significant Accounting Policies (continued)                    

and finishing equipment. The Company has provided a charge of $2,044,000 in     
fiscal year 1995 for the write-down to estimated net realizable value of assets 
and for other costs associated with the cessation of dyeing and finishing       
operations. The provision of $2,044,000 included $1,640,000 for the write-down  
of equipment and other assets to their net realizable value, the write-off of   
certain inventory of $166,000, severance for terminated employees of $119,000   
and non-cancelable lease costs and certain other costs of $119,000. During the  
fiscal quarter ended December 2, 1995, the Company consummated the sale of a    
significant portion of the dyeing and finishing assets. At December 2, 1995,    
accrued liabilities relating to the dyehouse closing totaled $277,000.          

  Scott Mills knits fabric for the children's and women's apparel markets.
The Company's principal customer is Kleinert's while the remaining customers are
primarily other children's and women's apparel companies.                       

Distribution -                                                        

On November 15, 1993 the Board of Directors of Kleinert's declared a  
distribution (the Distribution) of one share of Scott Mills common stock for    
every one share of Kleinert's common stock distributable to the holders of      
record of Kleinert's common stock, par value $1.00 per share, at the close of   
business on the record date, November 27, 1993. The Distribution which occurred 

8-K 13th Page of 41 TOC 1st Previous Next ↓Bottom Just 13th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

1. Business of the Company and                                                  
Summary of Significant Accounting Policies (continued)                    

on March 15, 1994, resulted in 100% of the outstanding shares of Scott Mills    
Common Stock being distributed to holders of Kleinert's Common Stock on a       
proportionate basis.                                                            

   Fiscal Year - The Company utilizes a 52-53 week fiscal year ending on the
Saturday nearest November 30. The fiscal year ending December 2, 1995 is a fifty
two week year. The fiscal year ended December 3, 1994 was a fifty three week    
year. Fiscal year ended November 27, 1993 was a fifty two week year.            

  Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make       
estimates and assumptions that affect the amounts reported in the financial     
statements and accompanying notes. Actual results could differ from those       
estimates.                                                                      

   Inventories - Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis. The cost of products produced     
include raw materials, direct labor, operating overhead and corporate general   
and administrative charges. There was no corporate general and administrative   
charge to product costs in fiscal year 1995. Such charges amounted to $208,000  
and $300,000 for the fiscal years ended 1994 and 1993. Such costs               

8-K 14th Page of 41 TOC 1st Previous Next ↓Bottom Just 14th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

1. Business of the Company and                                                  
Summary of Significant Accounting Policies (continued)                    

remaining in inventory at December 3, 1994 were insignificant.                  

  Revenue Recognition - The Company records sale of product upon shipment,
net of provision for returns, allowances and discounts.                         

     Property, Plant and Equipment - The Company depreciates property, plant and
equipment over their estimated useful lives, principally on a straight-line     
basis.                                                                          

Useful Lives    
------------    

Leasehold improvements     Term of lease                              
Machinery and equipment    3 - 10 years                               
Furniture and fixtures     3 -  5 years                               

     Income Taxes - The operating results of the Company prior to March 15, 1994
have been included in the consolidated income tax returns of Kleinert's. The    
financial statements reflect the application of Statement of Financial          
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") for all  
years presented. SFAS 109 is an asset and liability approach that requires the  
recognition of deferred tax assets and liabilities for the expected future tax  
consequences of events that have been recognized in the Company's financial     
statements.                                                                     

 Loss Per Share - Loss per share has been computed based on the weighted
average number of common shares outstanding and common stock equivalent shares  
deemed outstanding during each period presented. The 1993 pro-forma loss per    
share (unaudited) is based on the number                                        

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 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

1. Business of the Company and                                                  
Summary of Significant Accounting Policies (continued)                    

of common shares outstanding at November 27, 1993, the date the division assets 
and liabilities were transferred to Scott Mills, Inc.                           

   Financial Statement Presentation - The Company has prepared the financial
statements on the basis of a going concern entity (See Note 2).                 

     Stock Based Compensation - The Company accounts for stock options according
to the provisions of Accounting Principles Board Opinion 25 (APB 25), Accounting
for Stock Issued to Employees. In October 1995, the Financial Accounting        
Standards Board issued FASB Statement No. 123, Accounting for Stock-Based       
Compensation. The new standard prescribes new accounting and reporting standards
which reflect the standards' "fair value method" to estimate expense associated 
with stock based compensations plans. Companies may elect to continue to use    
existing accounting rules or adopt the "fair value method" for expense          
recognition. Companies that elect to continue to use existing accounting rules  
will be required to provide pro-forma disclosures of what net income and        
earnings per share would have been had the new "fair value method" been used.   
The Company will elect to continue to use existing accounting rules. The new    
statement is                                                                    

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 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

1. Business of the Company and                                                  
Summary of Significant Accounting Policies (continued)                    

effective for fiscal years beginning after December 15, 1995. Accordingly, the  
new standards pro-forma disclosure provisions will be required for the Company  
for its fiscal year ending November 29, 1997.                                   

     Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of

In March 1995, the FASB issued Statement No. 121 Accounting for the   
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of,    
which requires impairment losses to be recorded on long-lived assets used in    
operations when indicators of impairment are present and the undiscounted cash  
flows estimated to be generated by those assets are less than the assets'       
carrying amount. Statement 121 also addresses the accounting for long-lived     
assets that are expected to be disposed of. The statement is effective for      
fiscal years beginning after December 15, 1995 and accordingly will not be      
required until fiscal year 1997. The Company expects the impact of adoption in  
1997 will be insignificant.                                                     

2. Going Concern                                                                

  The Company has experienced severe financial difficulty and has incurred
significant operating losses of $4,858,000 (including the $2,044,000 provision  
for closing the dyeing and finishing operation) in fiscal year 1995 and net     
losses of $2,688,000 in fiscal year 1994. Additionally, the Company's cash from 
operations were insufficient to meet the Company's working capital requirements.
As a result of                                                                  

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 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

2. Going Concern (continued)                                                    

these recurring losses, and insufficient cash flows, in September 1995 the      
Company closed its dyeing and finishing facility. Funds were provided during the
year primarily by the proceeds of a subordinated note payable to Kleinert's of  
$500,000 working capital provided by Kleinert's of $1,470,000 and the sale of   
certain dyehouse assets for $2,760,000. These funds were primarily used to repay
debt and purchase certain capital equipment during the year. In late 1995, the  
Company has attempted to control operating costs by reducing personnel, and     
adjusting production levels. In addition, the Company also is negotiating with  
its vendors to defer payment of amounts it currently owes until the Company has 
the cash resources with which to satisfy its obligations in an orderly fashion. 
The Company believes that all of these efforts will result in increased         
operating efficiencies and assist the Company in meeting its future financial   
obligations as they become due. In the event these efforts prove unsuccessful,  
the Company will be required to seek additional financing to meet its           
obligations. There can be no assurance, however, that the Company will be       
successful in its efforts to satisfy its obligations as they become due, thereby
enabling the Company to continue as a going concern. The 1995 financial         
statements do not include any adjustments that might result from the outcome of 
this uncertainty.                                                               

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 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

3. Financing Arrangements                                                       

 In fiscal year 1994, investors lent $500,000 to the Company pursuant to
subordinated five year term notes bearing interest at 8.5% per annum which are  
convertible into common stock at a price of $.50 per share.                     

 In fiscal year 1995, the Company obtained a $500,000 subordinated three
year loan from Kleinert's which bears interest at 8.5% per annum. As previously 
discussed in Note 2, the Company completed the sale of a substantial portion of 
its dyeing and finishing equipment assets in November, 1995. The proceeds       
enabled the Company to satisfy the major portion of term debt and capital lease 
obligations secured by these and other assets.                                  

  Aggregate principal maturities of the capital leases and term debt after
December 2, 1995 are as follows:                                                

1996 - $102,700; 1997 - $118,100; 1998 - $578,900; 1999 - $513,500; 2000 - 0;   
thereafter - none.                                                              

Financing arrangements consist of the following:                                

                                  1995                    1994
                                   ---------------------    --------------------
                                   Current     Long Term    Current    Long Term
                                   -------     ---------    -------    ---------
                              ($000's omitted)

Capital Leases                     $  103      $  210       $  334        $  624
Term Debt                              --          --          684         2,227
Subordinated                                                                    
 convertible notes                     --         500           --           500
Due to Kleinert's                                                               
   Inc. of Delaware                    --         500           --            --
                                   ------      ------       ------        ------
                                   $  103      $1,210       $1,018        $3,351
                                   ======      ======       ======        ======

8-K 19th Page of 41 TOC 1st Previous Next ↓Bottom Just 19th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

4. Property, Plant and Equipment and Lease Commitments                          

    Property, plant and equipment includes equipment under capital leases with
a gross book value of $1,191,000 and $2,440,000 and a net book value of $549,000
and $1,520,000 at December 2, 1995 and December 3, 1994, respectively.          
Depreciation expense on equipment under capital leases was $296,000, $310,000   
and $292,000 in 1995, 1994 and 1993, respectively.                              

   Future minimum lease payments under capital leases as of December 2, 1995
are as follows:                                                                 

1996.................................          $ 131,600                        
1997.................................            136,200                        
1998.................................             86,000                        
1999.................................             13,900                        
2000.................................                 --                        
                       ---------
Total minimum lease payments.........          $ 367,700                        

Less amount representing interest                                         
(interest rate ranging from 9.1% - 11.5%)      54,300                     
                       ---------
Present value of minimum lease payments        $ 313,400                        
                       =========

    Rent expense under operating leases was $383,000, $293,000 and $245,000 in
1995, 1994 and 1993, respectively. Repairs and maintenance expense was $340,000,
$383,000 and $232,000 in fiscal years 1995, 1994 and 1993, respectively. Minimum
rentals for operating leases (principally production facilities, office space,  
machinery and equipment) that have initial or remaining noncancelable lease     
terms in excess of one year as of December 2, 1995 are as follows: 1996 -       
$306,000; 1997 - $201,000; 1998 - $154,000; 1999 - $11,000; thereafter - $0.    

8-K 20th Page of 41 TOC 1st Previous Next ↓Bottom Just 20th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

5. Income Taxes                                                                 

     Income tax benefit differs from the amount computed by applying the federal
tax rate to income before income taxes as follows:                              

                                    Fiscal Years Ended
                                   -------------------------------------------
                                    Dec. 2,          Dec. 3,        Nov. 27,
                                   1995             1994            1993
                                   -----------     -----------     -----------

Statutory U.S. income tax                                                       
rate applied to loss                                                        
  before income tax benefit         $(1,651,000)    $  (926,000)    $(1,029,000)
State income tax benefit                                                        
net of Federal income tax                                                   
  benefit                                  --              --          (151,000)

Operating loss not utilized           1,651,000         890,000       1,180,000 
                                   -----------     -----------     -----------
                                 $      --       $   (36,000)    $      --
                                   ===========     ===========     ===========

 The net deferred income tax balances relate to the following cumulative
temporary differences:                                                          

                                                  Dec. 2,            Dec. 3,
                                                 1995               1994
                                                -----------        -----------

Accounts receivable reserve                      $    10,000        $        -- 
Inventory reserves                                    32,000              4,000 
Vacation reserve                                       9,000             29,000 
Insurance                                                 --              2,000 
Leases                                                58,000             46,000 
Reserves dyehouse closing                            448,000                 -- 
Net operating loss carryforward                    2,531,000            893,000 
Valuation allowance                               (2,490,000)          (650,000)
                                                -----------        -----------
 Deferred tax asset                                 598,000            324,000
                                                -----------        -----------

Benefit plan                                           7,000              7,000 
Depreciation                                         591,000            317,000 
                                                -----------        -----------
 Deferred tax liability                             598,000            324,000
                                                -----------        -----------

Deferred tax liability, net                      $        --          $      -- 
                                                ===========        ===========

8-K 21st Page of 41 TOC 1st Previous Next ↓Bottom Just 21st
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

5. Income Taxes (continued)                                                     

During fiscal year 1994 tax benefits of $240,000 relating to losses   
incurred through March 15, 1994 were utilized in the Kleinert's consolidated tax
return. Kleinert's agreed to make an additional capital contribution equal to   
this benefit to the Company. Such amount has been reflected as a reduction in   
the Company's balance due to Kleinert's at December 3, 1994.                    

     The Company has a net operating loss carryforward of $6,453,000 for federal
tax purposes to offset future taxable income available through 2010. Tax losses 
incurred for periods up to March 15, 1994 were utilized in the Kleinert's       
consolidated tax return and no tax loss benefit was carried forward into fiscal 
year 1994.                                                                      

8-K 22nd Page of 41 TOC 1st Previous Next ↓Bottom Just 22nd
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

6. Retirement Plans                                                             

   The Company adopted a defined contribution plan in December 1993 covering
substantially all full-time employees. These expenses were $15,000 in fiscal    
year 1995 and $34,000 in fiscal year 1994.                                      

7. Related Party Transactions                                                   

     The Company, a former subsidiary of Kleinert's, Inc., (a children's apparel
manufacturer) was spun off to Kleinert's, Inc. Shareholders, and has operated   
independently since November 27, 1993. Kleinert's, Inc., continues to be a      
significant customer of the Company, providing $6,841,000 of the Company's net  
sales during the fiscal year ended December 2, 1995, $6,185,000 during fiscal   
year ended December 3, 1994 and $4,720,000 during fiscal year ended November 27,
1993.                                                                           

 Kleinert's, Inc. provides certain third party services on behalf of the
Company, including data processing, treasury, accounts payable, check processing
and management functions. Funds disbursed on behalf of the Company are          
subsequently reimbursed to Kleinert's, Inc. As a consequence, the balance due to
Kleinert's, Inc. fluctuates based on the timing of disbursements on behalf of   
the Company and reimbursement by the Company. The balance payable to Kleinert's,
Inc. at December 2, 1995 was $1,564,000 and consisted primarily of the          
unreimbursed balance of these disbursements, and management expense and interest
allocations. This unreimbursed balance due Kleinert's is secured by all assets  
of the Company. Advances under this agreement are made at Kleinert's discretion.

8-K 23rd Page of 41 TOC 1st Previous Next ↓Bottom Just 23rd
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

7. Related Party Transactions (continued)                                       

 Kleinert's charged Scott Mills management fees of $85,000, $293,000 and
$415,000 in the fiscal years ended 1995, 1994 and 1993, respectively, for       
services performed by Kleinert's on behalf of Scott Mills including, financial, 
legal, accounting, credit and collection, taxes, risk management and human      
resources and general management. Such charges were primarily allocated based on
Kleinert's estimate of the percentage of time or usage attributable to such     
services. Management believes the allocation method was reasonable and the cost 
of these services would have been comparable on a stand-alone basis. Kleinert's 
will continue to assist Scott Mills in the administration of certain of these   
activities and Scott Mills will reimburse Kleinert's, until such time that the  
Company is able to perform these services independently. For the three fiscal   
years ended 1995, 1994 and 1993, Kleinert's was the Company's largest customer  
and individually accounting for 46%, 36% and 33%, respectively, of the Company's
consolidated net sales. Prior to November 28, 1993, Scott Mills products were   
sold to Kleinert's at prices which approximated Scott Mills standard cost. Sales
to Kleinert's after November 27, 1993 are at prices approximating market.       

     On December 5, 1994, the Company borrowed $500,000 from Kleinert's, Inc. Of
Delaware in the form of a subordinated three year note. Under the terms of the  
promissory note, interest is payable annually at eight and one-half percent.    
Principal is due in full on December 4, 1997.                                   

8-K 24th Page of 41 TOC 1st Previous Next ↓Bottom Just 24th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

8. Shareholders' Equity                                                         

    In December 1993 the Board of Directors of the Company instituted the 1993
Stock Option Plan (the "Plan"). The Plan authorizes the grant of options to     
purchase 1,000,000 shares of common stock to directors, officers and key        
employees of the Company and its subsidiary at the fair market value of the     
shares on the date of grant.                                                    

The information with respect to this stock option plan is as follows: 

                                                   Fiscal Year Ended
                                                   ---------------------------
                                                   Dec. 2,             Dec. 3,
                                                   1995                 1994
                                                  --------             -------
Options outstanding at beginning of period          730,000                  -- 
Granted (1)                                          50,000             790,000 
Exercised                                                --                  -- 
Canceled                                           (390,000)            (60,000)
                                                  --------             -------
Options outstanding at end of period                390,000             730,000 
Options exercisable at end of period                390,000             430,000 

Exercise price per share                                    $.75-$2.00          

-----------------                                                               
(1)  Options were granted in 1995 at an exercise price of $.75. Options were    
granted in 1994 at exercise prices that ranged from $.75 to $2.00.    

9. Legal Proceedings                                                            

  The Company is a defendant in a complaint filed on September 13, 1995 by
its former President and chief operating officer. The complaint alleges among   
other things, that the Company breached its obligations under the President's   
employment agreement by wrongfully terminating his employment. The              

8-K 25th Page of 41 TOC 1st Previous Next ↓Bottom Just 25th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

9. Legal Proceedings (continued)                                                

complaint seeks damages in the amount of approximately $722,000. The Company has
filed an answer to the complaint in which it denies all allegations. The Company
intends to vigorously defend against the allegations.                           

10. Pro-Forma Financial Statements (unaudited)                                  

     The following represents the consolidated pro-forma statement of operations
for the fiscal year ended November 27, 1993 and the consolidated condensed      
pro-forma balance sheet at November 27, 1993 as if the consummation of the      
Distribution had occurred on November 29, 1992. These pro-forma financial       
statements do not necessarily reflect the future earnings and financial position
or what the earnings or financial position would have been, had Scott Mills'    
business operated as a separate, stand-alone Company.                           

Unaudited Pro-Forma Consolidated Statement of Operations
 Fiscal Year Ended November 27, 1993
 ($000's, except per share amount)

                                                                [Download Table]

                                Actual    Adjustments  Pro-Forma 
                                ------    -----------  --------- 
                                                                 
Net sales - non affiliates      $ 9,578   $    --       $  9,578 
Net sales - related party         4,720        --          4,720 
                                -------   -------       -------- 
         Total                   14,298        --         14,298 
Cost of goods sold               15,840      (415)(E)     15,425 
                                -------   -------       -------- 
      Gross profit (loss)        (1,542)     (415)        (1,127)
                                -------   -------       -------- 

Selling, general and                                             
  administrative expenses         1,297      (198)(A)      1,594 
                                               -- (B)            
                                              243 (F)            
                                              252 (G)            

Interest expense                    186       138 (C)            
                                     --       (66)(D)        258 
                                -------   -------       -------- 
                                  1,483       369          1,852 
                                -------   -------       -------- 

     Loss before income tax                                      
       benefit                   (3,025)      (46)        (2,979)
                                -------   -------       -------- 
Benefit from income taxes            --        --             -- 
                                -------   -------       -------- 

        Net loss                $(3,025)  $   (46)      $ (2,979)
                                =======   =======       ======== 

Pro-forma loss, per share                                  (0.88)
                                                        =========
Shares outstanding used in                                       
  computation of pro-forma per                                   
     share                                                 3,368 
                                                        ======== 

8-K 26th Page of 41 TOC 1st Previous Next ↓Bottom Just 26th
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)

Fiscal Year Ended December 2, 1995, December 3, 1994 and
 November 27, 1993

10.  Pro-Forma Financial Statements (unaudited) (continued)                     

Unaudited Pro-Forma Consolidated Statement of Operations
 Fiscal Year Ended November 27, 1993
 ($000's, except per share amount)

Notes:                                                                          

(A)   Elimination of royalty paid to Kleinert's, Inc.                           
(B)   The transactions costs incurred by Scott Mills as a result of the         
Distribution including legal and accounting fees were approximately 
$220,000. These nonrecurring costs directly attributable to the     
      Distribution were not included in this pro-forma statements of operations.
  These costs, which were incurred subsequent to November 27, 1993, were
  included in the statement of operations for Scott Mills in fiscal year
1994.                                                               
(C)   Represented the working capital interest expense and factoring charge     
 Scott Mills would have incurred under the factoring agreement had the
Distribution occurred at the beginning of the period.               
(D)   Represented the working capital interest expense allocated to Scott Mills 
by Kleinert's.                                                      
(E)   Represented the corporate allocation charged to Scott Mills by Kleinert's.
(F)   Represented the fee Scott Mills would have paid to Kleinert's in          
consideration for services provided including financial reporting,  
     insurance, accounting systems, shareholder relations, legal and corporate
office rent.                                                        
(G)   Represented the estimated net additional administrative expenses Scott    
  Mills would have incurred as a result of operating as a publicly-owned
company including audit fees and salaries for Scott Mills' corporate
     staff, including a chief operating officer and a chief financial officer.

8-K 27th Page of 41 TOC 1st Previous Next ↓Bottom Just 27th
 SCOTT MILLS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
($000's omitted, except per share amounts)

                                                                [Download Table]

                                Three Months Ended        Six Months Ended      
                             -----------------------   -------------------------
                             June 1,         June 3,   June 1,           June 3,
                              1996            1995      1996              1995  
                             -------        --------   -------         ---------

                                                                                
Net Sales - other customers  $  291         $  3,076   $  433          $  5,777 
Net Sales - Kleinert's, Inc.  2,164            2,042    3,685             4,108 
                             ------         --------   ------          -------- 
     Total                    2,455            5,118    4,118             9,885 

Cost of goods sold            2,465            5,769    3,994            10,151 
                             ------         --------   ------          -------- 
Gross profit                    (10)            (651)     124              (266)
                             ------         --------   ------          -------- 
Provision - closing dyeing                                                      
  and finishing facility        138               --      138                -- 
Selling, general and                                                            
  administrative expenses        31              332       28               613 
Interest expense                 69              183      145               338 
                             ------         --------   ------          -------- 
Loss before income taxes       (248)          (1,166)    (187)           (1,217)
                             ------         --------   ------          -------- 
Provision for income taxes       --               --       --                -- 
                             ------         --------   ------          -------- 

Net loss                     $ (248)        $ (1,166)  $ (187)         $ (1,217)
                             ======         ========   ======          ======== 
Loss per share:                                                                 
 Net loss                    $ (.07)        $   (.35)  $ (.06)         $   (.36)
                             ======         ========   ======          ======== 
Weighted average shares                                                         
 outstanding                  3,368            3,368    3,368             3,368 
                             ======         ========   ======          ======== 


See accompanying notes

8-K 28th Page of 41 TOC 1st Previous Next ↓Bottom Just 28th
 SCOTT MILLS, INC.
 CONSOLIDATED BALANCE SHEETS
($000's Omitted)

ASSETS

                                                                [Download Table]

                                        June 1,  Dec.  2,  June 3,
                                         1996      1995     1995  
                                        ------   -------   ------ 
                                                                  
Current assets:                                                   
    Cash                                $   45    $  211   $   69 
    Accounts receivable (net)                9       180      295 
    Due from factor                         --        17    1,575 
Inventories:                                                      
      Raw materials                        234       177      535 
      Work-in-process                      882       587      467 
      Finished goods                        67        45      377 
                                        ------    ------   ------ 
        Total inventories                1,183       809    1,379 
Other current assets                       144       104      399 
                                        ------    ------   ------ 

        Total current assets             1,381     1,321    3,717 
                                        ------    ------   ------ 

Property, plant & equipment, at cost     2,390     2,387    9,334 
        Less: accumulated depreciation                            
           and amortization              1,345     1,350    3,709 
                                        ------    ------   ------ 
        Net property, plant and                                   
           equipment                     1,045     1,037    5,625 

Other assets                                18        22      121 
Non-operating dyeing and finishing                                
     assets                                325       520       -- 
                                        ------    ------   ------ 
                                        $2,769    $2,900   $9,463 
                                        ======    ======   ====== 

See accompanying notes

8-K 29th Page of 41 TOC 1st Previous Next ↓Bottom Just 29th
 SCOTT MILLS, INC.
 CONSOLIDATED BALANCE SHEETS
($000's Omitted)

LIABILITIES AND SHAREHOLDERS' EQUITY

                                                                [Download Table]

                                        June 1,  Dec. 2,   June 3, 
                                         1996     1995      1995   
                                        ------   ------    ------  
                                                                   
 Current liabilities:                                              
  Notes payable and current portion                                
      of long-term debt and capital                                
        lease obligations              $    50   $   103   $ 1,100 
   Accounts payable                      2,308     2,911     3,331 
   Due to related party                  2,488     1,564       736 
   Accrued expenses                        384       417       400 
                                       -------   -------   ------- 
         Total current liabilities       5,230     4,995     5,567 
                                       -------   -------   ------- 
Deferred income taxes                       --        --        -- 
Long-term debt and capital lease                                   
  obligation net of current portion         31       210     2,560 
Subordinated term debt                     500       500       500 
Subordinated convertible term debt         500       500       500 
                                       -------   -------   ------- 

        Total liabilities                6,261     6,205     9,127 
                                       -------   -------   ------- 
Shareholders' equity:                                              
     Common stock par value $1.00 per                              
     share, 10,000,000 shares                                      
     authorized 3,367,598 shares                                   
     issued and outstanding              3,368     3,368     3,368 

     Capital in excess of par value        873       873       873 
     Accumulated deficit                (7,733)   (7,546)   (3,905)
                                       -------   -------   ------- 

       Total shareholders' equity       (3,492)   (3,305)      336 
                                       -------   -------   ------- 

                                       $(2,769)  $ 2,900   $ 9,463 
                                       =======   =======   ======= 

See accompanying notes

8-K 30th Page of 41 TOC 1st Previous Next ↓Bottom Just 30th
 SCOTT MILLS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's Omitted)

                                                    Six Months Ended
                                                     -------------------------
                                                      June 1,          June 3,
                                                     1996             1995
                                                     --------         --------
Cash flows from operating activities:                                           
 Net loss                                            $  (187)         $(1,217)

Adjustment to reconcile net loss to                                             
net cash used in operating activities:                                          
Depreciation and amortization                           121              500
Provision for dyehouse closing                          138               --
Change in assets and liabilities:                                           
(Increase) decrease in accounts                                         
      receivable, net                                    171              (45)
   (Increase) decrease in due from factor                 17             (188)
   Increase in inventory                                (374)            (426)
(Increase) decrease in other current                                    
     assets                                             (40)              12
   (Increase) decrease in other assets                     4              (38)
Increase (decrease) in accounts                                         
     payable, and accrued expenses                     (886)             408
                                                    -------          -------
                                                       (849)             223

   Net cash used in operating activities              (1,036)            (994)
                                                    -------          -------
Cash flows from investing activities:                                           
 Capital expenditures                                     (3)            (395)
Net proceeds from sale of equipment                     181               --
                                                    -------          -------

 Net cash used in investing activities               $   178          $  (395)
                                                    -------          -------

8-K 31st Page of 41 TOC 1st Previous Next ↓Bottom Just 31st
 SCOTT MILLS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's Omitted)
 (continued)

                                                        Six Months Ended
                                                       -------------------------
                                                        June 1,          June 3,
                                                       1996             1995
                                                       -------           -------
Cash flows from financing activities:                                           
    Proceeds from subordinated note                   $    --           $  500
     Principal payments on long term debt                 (232)            (504)
    Increase is due to related party                      924              642
Proceeds from term debt and capital lease                             
            obligations                                    --              295
                                                      -------           ------
Net cash provided by financing                                  
            activities                                    692              933
                                                      -------           ------
Net decrease in cash                                      (166)            (456)
Cash at beginning period                                   211              525 
                                                      -------           ------
Cash at end of period                                  $    45           $   69 
                                                      =======           ======
Supplemental disclosures of cash                                                
flow information:                                                             

Cash paid during the period for:                                                
 Interest                                             $    34           $  294

See accompanying notes

8-K 32nd Page of 41 TOC 1st Previous Next ↓Bottom Just 32nd
 SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 1, 1996 and June 3, 1995

(1)      Basis of Presentation                                                  

       The condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the     
Securities and Exchange Commission. In the opinion of management, the           
information furnished reflects all adjustments (consisting of only normal       
recurring adjustments) necessary for a fair presentation of the results for the 
interim periods. Operating results for the six months ended June 1, 1996 are not
necessarily indicative of the results that may be expected for the year ended   
November 30, 1996. Certain information and footnote disclosures normally        
included in financial statements prepared in accordance with generally accepted 
accounting principles have been condensed or omitted pursuant to such rules and 
regulations. The Company believes that the disclosures presented are adequate   
for a fair presentation of the financial statements. It is suggested that these 
condensed financial statements be read in conjunction with the financial        
statements and the notes thereto included in the Company's latest Annual Report 
on Form 10-K.                                                                   

    The cost of products produced include raw materials, direct labor,
operating overhead and corporate general and administrative charges. Selling and
administrative expenses consist primarily of marketing related administrative   
costs. The Company did not maintain a marketing department during the first     
quarter of 1996 but hired a sales executive during the second quarter of 1996.  
Due to the reduced scale of operations in 1996, selling expenses are            
significantly reduced in comparison to the comparable periods of 1995.          

(2)      Related Party Transaction                                              

    The Company, a former subsidiary of Kleinert's, Inc. (a children's
apparel manufacturer) was spun off to Kleinert's, Inc. shareholders, and has    
operated independently since November 27, 1993. Kleinert's, Inc. continues to be
a significant customer of the Company, contributing $3,685,000 or 89% to the    
Company's net sales during the first six months of fiscal year 1996.            

     On December 5, 1994, the Company borrowed $500,000 from Kleinert's,
Inc. of Delaware in the form of a subordinated three year note. Under the terms 
of the promissory note, interest is payable annually at eight and one-half      
percent. Principal is due in full on December 4, 1997.                          

         Kleinert's, Inc. provides certain third party services on behalf of the
Company, including data processing, treasury, accounts payable, check processing
and management functions. Funds disbursed on behalf of the Company are          
subsequently reimbursed to Kleinert's, Inc. As a consequence, the balance due to
Kleinert's, Inc. fluctuates based on the timing of disbursements on behalf of   
the Company and reimbursement by the Company. The balance payable to Kleinert's,
Inc. at June 1, 1996 was $2,488,000 and consisted primarily of the unreimbursed 
balance of these disbursements, and management and interest expenses. This      
unreimbursed balance due Kleinert's, Inc. is secured by all assets of the       
Company. On December 1, 1995 the Company executed a working capital agreement   
with Kleinert's, Inc. that confirms Scott Mills' obligations to Kleinert's, Inc.
and provides to Kleinert's, Inc. a first lien and security interest in          
substantially all of Scott Mills' assets to secure Scott Mills' obligation to   
repay to Kleinert's, Inc. the loan balance due. Advances under this agreement   
are made at Kleinert's discretion.                                              

  The Company and Kleinert's, Inc. have announced the signing of a
definitive merger agreement which is discussed more fully at Note 4, Subsequent 
Events.                                                                         

8-K 33rd Page of 41 TOC 1st Previous Next ↓Bottom Just 33rd
(3)      Going Concern                                                          

         The Company generated a net loss of $187,000 in the first six months of
1996 compared to a loss of $1,217,000 in the first six months of 1995.          

 The Company has experienced severe financial difficulty and has
incurred significant operating losses of $4,858,000 (including a $2,044,000     
provision for closing the dyeing and finishing operation) in fiscal year 1995   
and net losses of $2,688,000 in fiscal year 1994. Additionally, the Company's   
cash from operations was insufficient to meet the Company's working capital     
requirements. As a result of these recurring losses, and insufficient cash      
flows, in September 1995 the Company closed its dyeing and finishing facility.  
Funds were provided during the year primarily by the proceeds of a subordinated 
note payable to Kleinert's of $500,000, working capital provided by Kleinert's  
of $1,470,000 and the sale of certain dyehouse assets for $2,760,000. These     
funds were primarily used to repay debt and purchase certain capital equipment  
during the year. In late 1995, the Company attempted to control operating costs 
by reducing personnel, and adjusting production levels. In addition, the Company
also is negotiating with its vendors to pay amounts it currently owes in an     
orderly fashion. The Company believes that all of these efforts will result in  
increased operating efficiencies and assist the Company in meeting its future   
financial obligations as they become due. In the event these efforts prove      
unsuccessful, the Company will be required to seek additional external financing
to meet its obligations. There can be no assurance, however, that the Company   
will be successful in its efforts to satisfy its obligations as they become due,
thereby enabling the Company to continue as a going concern.                    

  The Company and Kleinert's, Inc. have announced the signing of a
definitive merger agreement which is discussed more fully at Note 4, Subsequent 
Events.                                                                         

(4)      Subsequent Events                                                      

Disposition                                                   

         On June 11, 1996, the Company and Kleinert's Inc. announced the signing
of a definitive merger agreement under which Kleinert's will acquire Scott      
Mills, Inc. and will pay Scott Mills shareholders $.30 per share with $.03 paid 
in cash and $.27 paid in Kleinert's common stock. The number of shares of       
Kleinert's stock will be determined by using the average closing price of       
Kleinert's common stock for the five consecutive trading days immediately       
preceding the closing. Scott Mills has approximately 3,368,000 shares           
outstanding and, upon completion of the acquisition, Kleinert's will issue,     
based on the current closing price of Kleinert's stock, approximately 56,000    
shares of its common stock or less than 2% of its outstanding shares.           

The transaction is subject to the approval of the Company's   
shareholders at its annual meeting to be held this summer.                      

      Kleinert's is the Company's largest customer. Scott Mills' sales for
the six months ended June 1, 1996 were $4,118,000 of which $3,685,000 were sales
to Kleinert's. The acquisition will permit Kleinert's to maintain its           
flexibility in servicing its retail customers in its sleepwear and activewear   
products.                                                                       

8-K 34th Page of 41 TOC 1st Previous Next ↓Bottom Just 34th
(b) Pro Forma Financial Information                                             

 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
 OF KLEINERT'S, INC. AND SCOTT MILLS, INC.

       The following Unaudited Pro Forma Combined Condensed Balance Sheet at
June 1, 1996, and the Unaudited Pro Forma Combined Condensed Statements of      
Operations for the year ended December 2, 1995 and the six months ended June    
1, 1996, combine information for Kleinert's and Scott Mills and include         
unaudited pro forma adjustments as described in the accompanying notes. The pro 
forma combined condensed statements of operations give effect to the Merger as  
if it had occurred at December 4, 1994. The Unaudited Pro Forma Combined        
Condensed Balance Sheet gives effect to the Merger as if it had occurred at     
June 1, 1996. The Unaudited Pro Forma Combined Condensed Financial Statements   
are based on historical financial statements of Kleinert's and Scott Mills,     
giving effect to the Merger applying the purchase method of accounting and the  
assumptions and adjustments as discussed in the accompanying notes to the Pro   
Forma Combined Condensed Financial Statements. These Unaudited Pro Forma        
Combined Condensed Financial Statements are based upon the audited consolidated 
financial statements as of December 2, 1995 and for the fiscal year then ended  
and the unaudited consolidated financial statements as of June 1, 1996 and for  
the six months then ended. These statements are based upon, and should be read  
in conjunction with, the historical financial statements of Kleinert's and Scott
Mills which are incorporated by reference or included elsewhere herein. The     
unaudited pro forma adjustments described in the accompanying notes are based   
upon preliminary estimates and certain assumptions that the management of       
Kleinert's and Scott Mills believe are reasonable in such circumstances. The pro
forma data are presented for information purposes only and are not necessarily  
indicative of the operating results or financial position that would have       
occurred had the Merger been consummated at the dates indicated, nor are they   
necessarily indicative of future operating results or financial position.       

8-K 35th Page of 41 TOC 1st Previous Next ↓Bottom Just 35th
 Kleinert's Inc. and Scott Mills, Inc.
Unaudited Pro Forma Combined Condensed Balance Sheet
(in thousands)

                                                        [Enlarge/Download Table]


                                                 Historical                                      
                                     -----------------------------------    Pro Forma   Pro Forma
                                     Kleinert's, Inc.  Scott Mills, Inc.   Adjustments  Combined 
                                         6/1/96             6/1/96           6/1/96      6/1/96  
                                     ----------------  -----------------  ------------  ---------
                                                                                                 
Cash                                    $    44          $    45           $  --         $    89 
Accounts receivable, net                 13,723                9            (2,488)(G)    11,244 

Inventories                              35,811            1,183               (16)(E)    36,978 

Other current assets                      1,343              144               --          1,487 
Deferred income taxes - current            --               --               1,400 (C)     1,400 
                                        -------          -------           -------       ------- 
Current assets                           50,921            1,381            (1,104)       51,198 

Property, plant and equipment,                                                                   
 net                                      7,181            1,045               180(I)      8,406 

Goodwill                                   --               --               1,806 (A)     1,806 
                                                                                   (F)           

Other assets                              4,668               18              (500)(H)     4,186 
Non operating assets                       --                325               --            325 
Deferred income taxes - non current        --               --               1,162(C)      1,162 
                                        -------          -------            ------       ------- 

Total assets                            $62,770          $ 2,769           $ 1,544       $67,083 
                                        =======          =======           =======       ======= 


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Kleinert's, Inc. and Scott Mills, Inc.
Unaudited Pro Forma Combined Condensed Balance Sheet
(in thousands)

                                                        [Enlarge/Download Table]


                                                       Historical                                              
                                          ------------------------------------    Pro Forma          Pro Forma 
                                           Kleinert's, Inc.  Scott Mills, Inc.   Adjustments         Combined  
                                             At 6/1/96           At 6/1/96        At 6/1/96          At 6/1/96 
                                          ----------------   -----------------  --------------      -----------
                                                                                                               
Notes payable & current portion                                                                                
 long-term debt                             $ 20,245           $     50           $     101 (A)       $ 20,396 

Accounts payable and accrued                                                                                   
 expenses                                      7,695              2,692                 149 (D)(F)      10,536 
Due to Kleinert's                               --                2,488              (2,488)(G)            --  
                                            --------           --------            --------           -------- 
Total current liabilities                     27,940              5,230              (2,238)            30,932 

Deferred income taxes                            134               --                 --                   134 
Subordinated convertible long-term debt,                                                                       
 long-term debt & capital leases, net          7,629                531               --                 8,160 
Subordinated term debt due Kleinert's           --                  500                (500)(H)            --  
                                            --------           --------            --------           -------- 

Total liabilities                             35,703              6,261              (2,738)            39,226 

Preferred stock                                 --                 --                    --                --  

Common stock                                   4,198              3,368              (3,368)(B)          4,198 
                                                --                 --                    56 (A)             56 
                                            --------           --------            --------           -------- 

Total common stock                             4,198              3,368              (3,312)             4,254 

Capital in excess of par value                12,164                873                (873)(B)         12,164 
                                                --                 --                   734 (A)(F)         734 
                                            --------           --------            --------           -------- 

Total capital in excess of par value          12,164                873                (139)            12,898 

Retained earnings/accumulated                                                                                  
deficit                                       13,921             (7,733)              7,733 (B)         13,921 

Treasury stock                                (3,216)              --                   --              (3,216)
                                            --------           --------            --------           -------- 

Total Shareholder's Equity                    27,067             (3,492)              4,282             27,857 
                                            --------           --------            --------           -------- 

Total Liabilities and Equity                $ 62,770           $  2,769            $  1,544           $ 67,083 
                                            ========           ========            ========           ======== 


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Kleinert's, Inc. and Scott Mills, Inc.
 Unaudited Pro Forma Combined Condensed Statements of Operations
(in thousands)

                                                        [Enlarge/Download Table]


                                 For the six months ended                 For the fiscal year ended                             
                            ----------------------------------    ----------------------------------------                      

                                                    Historical                                   Historical                     
                                                    ----------                                   ----------                     
                           Kleinert's    Scott      Pro Forma     Pro Forma    Kleinert's,    Scott      Pro Forma    Pro Forma 
                              Inc.     Mills, Inc.  Adjustments    Combined        Inc.     Mills, Inc. Adjustments    Combined 
                             6/1/96      6/1/96        6/1/96       6/1/96       12/2/95      12/2/95     12/2/95       12/2/95 
                           ----------   --------    -----------   ---------     ---------   ----------  -----------   ----------

                                                                                                                                
Net sales--non-affiliates  $ 23,011     $    433    $   --        $ 23,444      $ 75,121    $  7,955    $   --         $ 83,076 
Net sales--related party       --          3,685      (3,685)(J)      --            --         6,841      (6,841)(J)       --   
                           --------     --------    --------      --------      --------    --------    --------       -------- 

Net sales total              23,011        4,118      (3,685)       23,444        75,121      14,796      (6,841)        83,076 

Cost of goods sold           17,806        3,994      (3,669)(J)    18,131        61,636      15,987      (6,841)(J)     70,782 
                           --------     --------    --------      --------      --------    --------    --------       -------- 

Gross Profit                  5,205          124         (16)        5,313        13,485      (1,191)       --           12,294 

Provision for dyehouse                                                                                                          
closing                        --            138        --            --            --         2,044        --            2,044 

Selling, general and          2,798           28          (8)(K)     2,818         5,151         919         (28)(K)      6,042 
 administrative expenses       --           --            38 (L)        38          --          --            76 (L)         76 
                           --------     --------    --------      --------      --------    --------    --------       -------- 

Total selling, general                                                                                                          
 and administrative                                                                                                             
 expenses                     2,798           28          30         2,856         5,151         919          48          6,118 

Interest expense                760          145        --             905         1,651         704        --            2,355 
                           --------     --------    --------      --------      --------    --------    --------       -------- 

Income (loss) before                                                                                                            
 income taxes                 1,647         (187)        (46)        1,414         6,683      (4,858)        (48)         1,777 

Provision for income                                                                                                            
 taxes (benefit)                598         --           (79)(N)       519         2,352        --        (1,840)(M)        512 
                           --------     --------    --------      --------      --------    --------    --------       -------- 

Net income (loss)          $  1,049     $   (187)   $     33      $    895(O)   $  4,331    $ (4,858)   $  1,792       $  1,265 
                           ========     ========    ========      ========      ========    ========    ========       ======== 

Net income (loss)                                                                                                               
 per share                 $   0.28     $  (0.06)                 $   0.24(O)   $   1.15    $  (1.44)                  $   0.33 
                           ========     ========                  ========      ========    ========                   ======== 

Weighted average shares                                                                                                         
 outstanding                  3,752        3,368                     3,808         3,750       3,368                      3,806 
                           ========     ========                  ========      ========    ========                   ======== 


8-K 38th Page of 41 TOC 1st Previous Next ↓Bottom Just 38th
Kleinert's, Inc. and Scott Mills, Inc.
Footnotes to Unaudited Pro Forma Combined Condensed Financial Statements

A)   To record the purchase of all of the outstanding stock of Scott Mills by   
     Kleinert's for cash (reflected as an increase in line of credit borrowing),
     Kleinert's Common Stock and the assumption of Scott Mills' net liabilities,
and to reflect the excess of purchase price over the fair value of net
assets purchased.                                                     

B)   To record the elimination of Scott Mills' shareholders' equity accounts.   

C)   To eliminate Scott Mills' deferred income tax asset valuation reserve due  
   to ability of Surviving Corporation to utilize Scott Mills' net operating
loss carryforward deduction.                                          

D)   To record accrued liability for Scott Mills' merger costs.                 

E)   To adjust Kleinert's inventory at June 1, 1996 to eliminate the            
intercompany profit.                                                  

F)   To accrue Kleinert's' estimated stock offering costs.                      

G)   To eliminate Kleinert's receivable against Scott Mills' payable.           

H)   To eliminate Kleinert's subordinated note receivable against Scott Mills'  
note payable to Kleinert's.                                           

I)   Adjust Scott's property, plant and equipment to estimated fair value.      

J)   To eliminate intercompany sales and cost of goods sold.                    

K)   To eliminate the incremental expenses of operating Scott Mills as a        
separate publicly traded company.                                     

L)   To reflect amortization of goodwill over 25 years.                         

M)   To record the tax benefit of the deductibility of Scott Mills' net         
operating losses.                                                     

N)   To record the provision for income taxes for the six months ended June     
1, 1996 on a pro forma basis.                                         

O)  On December 19, 1995, Kleinert's, Inc. acquired substantially all of the    
  assets of Pixie Playmate, Inc. and Certified Sewing Services, Inc. and the
shares of Certified Apparel Services of Honduras, SA for $4,650,000. The
unaudited pro forma combined net income and net income per share for the
year ended December 2, 1995, assuming that the acquisition  had occurred
on December 4, 1994 would have been $902,000 and $.24, respectively and 
for the six months ended June 1, 1996. The impact of the acquisition    
reflects activity between December 3, 1995 and December 19, 1995 and was
insignificant.                                                          

8-K 39th Page of 41 TOC 1st Previous Next ↓Bottom Just 39th
(c) Exhibits                                                                    

10.1 Agreement and Plan of Merger dated as of June 10, 1996 among       
Kleinert's, Inc., Kleinert's, Inc. of Alabama (incorporated by
reference to the copy thereof filed as Annex "A" to Kleinert's
Registration Statement on Form S-4, File No. 333-5841).       

8-K 40th Page of 41 TOC 1st Previous Next ↓Bottom Just 40th
 SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the    
undersigned thereunto duly authorized.                                          

Dated: October 15, 1996                                                         

KLEINERT' S, INC.                                                               

                            By: /s/ Gerald Monigle
                                          ----------------------------
                                  Name: Gerald Monigle
                                            Title: Chief Financial Officer

8-K Last Page of 41 TOC 1st Previous Next ↓Bottom Just 41st
 EXHIBIT INDEX

Exhibit                                                                         
Number                  Description of Document                          Page   

10.1       Agreement and Plan of Merger dated as of June 10, 1996               
among Kleinert's, Inc., Kleinert's, Inc. of Alabama       
and Scott Mills, Inc. (incorporated by reference to       
the copy thereof filed as Annex "A" to Kleinert's         
Registration Statement on Form S-4, File No. 333-5841).

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘8-K’ Filing	Date	First	Last	Other Filings

	12/4/97	23	32
	11/29/97	16
	11/30/96	32		10-K
Filed on:	10/15/96	40		10-Q
For Period End:	9/30/96	1	2
	9/27/96	2
	6/11/96	33
	6/10/96	2	41
	6/1/96	32	38	10-Q, 10-Q/A
	2/15/96	4
	12/19/95	38
	12/15/95	16
	12/3/95	38
	12/2/95	3	38	10-K, 10-K/A
	12/1/95	32
	9/13/95	24
	9/12/95	11
	6/3/95	32		10-Q
	12/5/94	23	32
	12/4/94	34	38
	12/3/94	3	26
	3/15/94	13	21
	11/28/93	23
	11/27/93	7	32
	11/15/93	12
	11/29/92	25
	11/28/92	8
				List all Filings

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Filing Submission 0000950115-96-001444 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Kleinerts Inc/PA – ‘8-K’ for 9/30/96

As of: Tuesday, 10/15/96 · For: 9/30/96 · Accession #: 950115-96-1444 · File #: 1-06454

Current Report — Form 8-KFiling Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Current Report — Form 8-K
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