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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21940
DONNKENNY, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0228891
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1411 Broadway
New York, New York 10018
- ------------------------------------------ ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 790-3900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. __
The aggregate market value of the shares of Common Stock held by non-affiliates
of the Registrant, based on a closing sale price of the Common Stock on the
Nasdaq National Market on March 10, 2000 of $0.97 per share, was approximately
$13,784,867*. As of March 10, 2000, 14,229,540, shares of Common Stock of
Registrant were outstanding.
* For purposes of this report, the number of shares held by
non-affiliates was determined by aggregating the number of shares
held by Officers and Directors of Registrant, and by others who, to
Registrant's knowledge, own more than 10% of Registrant's Common
Stock, and subtracting those shares from the total number of shares
outstanding.
1
PART 1
ITEM 1. BUSINESS
Donnkenny, Inc. (together with its subsidiaries, the "Registrant" or the
"Company") was incorporated in Delaware in 1978 and is a holding company with
four subsidiaries. Donnkenny Apparel, Inc. ("Donnkenny Apparel") and Beldoch
Industries Corporation ("Beldoch") are the operating subsidiaries of the
Company. The Company designs, manufactures, imports and markets a broad line of
moderately priced women's sportswear labels, all of which are engaged in the
same line of business.
PRODUCTS
The Company designs, manufactures, imports, and markets broad lines of
moderately priced women's sportswear. The Company's major labels include Casey
& Max(R), Donnkenny(R), Pierre Cardin(R)and Victoria Jones(R).
Victoria Jones
The Victoria Jones label represents moderately-priced womens' knit and
sweater products which are sold to department stores, specialty stores and
chains including May Company, Kohl's, Dillard's, Saks, Inc., Stage Stores,
Catherine's, Goody's, Sam's Club, J.C. Penney and Sears. Its products are
marketed for missy, large sizes and petites. Approximately 81% of these
products are imported, predominately from Hong Kong, China and India. In
addition, it sells exclusive private label products to such customers as QVC,
Dillard's and Mervyn's.
Casey & Max
Casey & Max manufactures and imports novelty woven tops and sportswear.
The Casey & Max line consists of moderately-priced products sold to department
stores, specialty stores and chains including Kohl's, Dillard's, Federated, May
Company, Saks, Inc., Stage Stores, Catherine's, Goody's, Sam's Club, J.C.
Penney and Sears. The products are marketed for missy, large sizes and petites.
Approximately 98% of these products are imported, predominately from Hong Kong,
China and India. In addition, it sells exclusive private label products to such
customers as QVC , Dillard's and Mervyn's.
Donnkenny
Donnkenny manufactures and imports moderately-priced women's career and
casual pants for missy, petites and large sizes. Its major customers include
Stage Stores, Saks, Inc., Sterns, Bealls, J.C. Penney and Sears. Donnkenny has
been an established brand name for over 60 years. Approximately 50% of
Donnkenny products are manufactured domestically. In addition, it also sells
exclusive private label products to such customers as J.C. Penney.
Pierre Cardin
Pierre Cardin produces women's knitwear pursuant to a license. The Pierre
Cardin product is sold to knitwear departments of department stores and
specialty stores. Its major customers include Federated, Belk, Sam's Club,
Saks, Inc., and the Chadwick's Catalog. Approximately 76% of these products are
imported, predominately from Hong Kong, China and India. In addition, it also
sells exclusive private label products to such customers as Saks, Inc. and the
Bon Ton.
MANUFACTURING AND IMPORTING
Approximately 21% of the Company's products sold in the year ended
December 31, 1999 ("Fiscal 1999") were manufactured in the United States, as
compared with 29% in the year ended December 31, 1998 ("Fiscal 1998"). In
Fiscal 1999, the Company's domestically produced products were manufactured at
the Company's production facilities in Virginia and by several outside
contractors.
The remaining 79% of the Company's products sold in Fiscal 1999 were
produced abroad and imported into the United States, principally from Hong
Kong, China, India, Guatemala, Turkey, Bangladesh, the Dominican Republic, and
the Philippines. The percentage of the Company's products which are
manufactured in the United States is expected to decrease further during the
Company's year ending December 31, 2000 ("Fiscal 2000").
The Company's purchases from its foreign suppliers are effected through
individual purchase orders specifying the price and quantity of the items to be
produced. Generally, the Company does not have any long-term, formal
arrangements with any of the suppliers which manufacture its products. The
Company continually seeks additional suppliers throughout the world for its
sourcing needs. One foreign contractor accounted for 12% of the Company's
products, but no other domestic or foreign contractor manufactured more than
10% of the Company's products in Fiscal 1999.
2
Virtually all of the Company's merchandise imported into the United States
is subject to United States duties. In addition, bilateral agreements between
the major exporting countries and the United States impose quotas that limit
the amount of certain categories of merchandise that may be imported into the
United States. Because the United States may, from time to time, impose new
quotas, duties, tariffs or other import controls or restrictions, the Company
monitors import and quota-related developments.
Attendant with the Company's increased reliance on foreign manufacturing
is a risk of excess inventory. The Company must commit to its foreign
manufacturers and suppliers four to six months in advance of its selling
season, usually before the Company has received its orders from its customers.
Thus, there exists the risk that the purchase orders by the Company's customers
will be less than the amount manufactured. The Company believes that this risk
is outweighed by the cost savings to the Company by manufacturing such products
abroad. Conversely, in the event there exists excess demand for the Company's
products, the lengthy production time for imported goods makes it impossible
for the Company to return to the market to purchase additional goods for the
same selling season. The Company's relationships with foreign suppliers are
also subject to the additional risks of doing business abroad, including
currency fluctuations and revaluations, restrictions on the transfer of funds
and in certain parts of the world, political instability. The Company's
operations have not been materially affected by any of such factors to date.
However, due to the large portion of the Company's products which are produced
abroad, any substantial disruption of its relationships with its foreign
suppliers could have a material adverse effect on the Company's operations and
financial condition.
The portion of the Company's products which it currently imports from Asia
is further subject to certain political and economic risks including, but not
limited to, political instability, changing tax and trade regulations and
currency devaluations and controls. The impact, if any, of these regional
events on the Company's business, and in particular its sources of supply,
cannot be determined at this time. Approximately 70% of the products sold by
the Company in Fiscal 1999 were manufactured in Asia.
CUSTOMERS
In Fiscal 1999, the Company shipped orders to approximately 9,200 stores
in the United States. This customer base represents approximately 1,300
accounts. Of the Company's net sales for Fiscal 1999, department stores
accounted for approximately 62%, wholesale clubs for approximately 18%, mass
merchants for approximately 6%, chain stores for approximately 5%, catalog
customers for approximately 3%, specialty retailers for approximately 3%, and
other customers for approximately 3%.
The Company markets its products to major department stores, including J.
C. Penney, Dillard's, May Company, Federated, Stage Stores, Saks, Inc., Sears,
as well as wholesale clubs including Sam's and mass merchants including K-Mart.
The Company also sells exclusive private label products to catalog specialty
retailers and suppliers. In addition, the Company manufactures products
exclusively for J.C. Penney private label.
In Fiscal 1999, sales to Wal-Mart accounted for 16% and sales to J.C.
Penney accounted for 11% of the Company's net sales. The loss of, or
significantly decreased sales to, these customers could have a material adverse
effect on the Company's consolidated financial condition and results of
operations.
The Company's Electronic Data Interchange computer system ("EDI") connects
the Company to approximately 39 of its large customers and, in Fiscal 1999, was
used to place 55% of the Company's order dollars. The Company is also linked by
EDI to several of its major fabric suppliers, which allows the Company to
review purchase orders for fabric on a weekly basis.
SALES AND MARKETING
At March 10, 2000, the Company had a 12 person sales force, of whom 8 were
Company employees and 4 were independent commissioned sales representatives.
These sales representatives are located in 3 cities and provide nationwide
coverage to retailers ranging from individual specialty shops to national chain
stores and catalogs. The Company's principal showrooms are in New York City.
RAW MATERIALS SUPPLIERS
The Company's sources of fabric and trim supply are well established. As a
result of the large, steady purchases each year by the Company of domestic
fabrics and trim for its production of certain styles, the Company is a major
customer of several of the larger synthetic textile producers. The Company
typically experiences little difficulty in obtaining domestic raw materials and
believes that the current and potential sources of fabric and trim supply are
sufficient to meet its needs for the foreseeable future.
3
TRADEMARKS AND PROPRIETARY RIGHTS
The Company owns and has registered in the United States, and in certain
foreign jurisdictions, the following trademarks under which a variety of the
Company's products are sold: Beldoch Popper (R), Casey & Max (R), Donnkenny
(R), Victoria Jones (R). Upon compliance with the trademark statutes of the
United States and the relevant foreign jurisdictions, these trademark
registrations may be renewed.
The Company holds licensing rights to manufacture, import and sell women's
sportswear in the United States and the U.S. Virgin Islands with the Pierre
Cardin(R) trademark, including sweaters, pants, skirts, knitwear, jeans,
swimwear and activewear. Such license is automatically continued from year to
year at the Company's option provided net sales equal specified minimums. The
Company's sales during Fiscal 1999 surpassed the minimum requirements of this
license, and the Company intends to renew this license for an additional one
year period.
BACKLOG
At March 25, 2000, the Company had unfilled, confirmed customer orders of
approximately $48.9 million, compared to approximately $50.7 million of such
orders at March 27, 1999, with such orders generally scheduled for delivery
within three to six months of confirmation, although some extend until the end
of the fiscal year. The amount of unfilled orders at a particular time is
affected by a number of factors, including the scheduling of the production and
shipment of garments, which in some instances may be delayed or accelerated at
the customer's request. Accordingly, a comparison of unfilled orders from
period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments. There can be no assurance that cancellations,
rejections and returns will not reduce the amount of sales realized from the
backlog of orders.
COMPETITION
The women's apparel business is highly competitive and consists of many
manufacturers and distributors, none of which accounts for a significant
percentage of total sales in the overall market, but many of which are larger
and have substantially greater resources than the Company. The Company competes
with both domestic manufacturers and importers, primarily on an item-by-item
basis, with respect to brand name recognition, price, quality and availability.
EMPLOYEES
As of March 10, 2000, the Company had 545 full-time employees, of whom 133
were salaried and 412 were paid on an hourly basis. The Company had 4 part-time
employees, all of whom work on an hourly basis.
The Company's hourly labor force is non-union. The Company believes
relations with its employees are good.
ENVIRONMENTAL MATTERS
The Company believes that it is in material compliance with all applicable
federal, state and local environmental laws. The Company does not currently
anticipate the need to make material capital expenditures to remain in
compliance with applicable federal, state and local environmental laws.
ITEM 2. PROPERTIES
----------
The Company's production requirements continued to shift from domestically
owned or leased facilities to foreign sourced suppliers. The following table
indicates the facilities owned or leased at December 31, 1999.
As of March 10, 2000, the Company operated five facilities in Virginia,
one in Summerville, South Carolina, one in New York State and one in Hong Kong.
4
Approximate Square Owned or
Location Footage Function Leased
- ------------------------- --------------------- ------------------------------------------ ------------
Floyd, Virginia............................ 79,600 Fabric warehouse, sewing, cutting Owned
Independence (Grayson), Virginia........... 70,350 Sewing, finishing Owned
Independence (Kendon), Virginia............ 37,550 Company leasing to third party Owned
Rural Retreat, Virginia.................... 61,230 Storage Owned
Wytheville, Virginia....................... 161,800 Distribution, administration Owned
Summerville, South Carolina(1)............. 200,000 Distribution center Leased
New York, New York(2)...................... 47,050 Offices and principal showrooms Leased
Hong Kong (Comet Building) (3)............. 2,200 Administration, sourcing, quality control Leased
-------
TOTAL.................................. 659,780
=======
- ---------------------
1) This facility is leased, with annual rental payments totaling $463,500,
and is subject to a 3% annual rental escalation, until March 19, 2006, at
which time the lease expires.
2) Annual rental payments for the New York office/showroom space are
approximately $2,000,000 in the aggregate. The Company sublet
approximately 4,000 square feet in 1999 (sublease expired February 2000),
offsetting the rental payments by approximately $145,000. The leases for
the New York office/showrooms expire in 2006 and 2008.
3) Lease expires in 2002.
Management believes that its current facilities are sufficient to meet its
needs for the foreseeable future. On March 15, 2000 the Company announced that
it would be closing its domestic manufacturing facilities located in Grayson
and Floyd Virginia. The closings are scheduled to take place in May 2000.
ITEM 3. LEGAL PROCEEDINGS
Commencing November 1996, nine class action complaints were filed against
the Company in the United States District Court for the Southern District of
New York. Among other things, the complaints alleged violation of the federal
securities laws. By order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and entities who purchased
publicly traded securities or sold put options of the Company between February
14, 1995 and November 1996.
On October 7, 1999, the Company entered into a stipulation of settlement
(the "Settlement") with the class action plaintiffs. In consideration for the
discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million is the Company's share, and the balance is
payable by the Company's insurers; issue 3 million shares of the Company's
common stock, and to pursue litigation against two of the Company's insurers to
recover under its excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all appeals and
reviews. A settlement hearing on the proposed settlement was held on March 31,
2000 and the court orally approved the settlement. A written order should be
signed in due course. In 1999, the Company recorded a charge of $5.9 million,
which represented the cost of the Settlement. The Company had funded its
required cash contribution to the settlement as of December 31, 1999 except for
a) the sum of $0.6 million, which the Company paid during the quarter ended
March, 31, 2000; and b) the cost of the litigation with two of the Company's
insurers which are not expected to be material.
On April 27, 1998, an action was commenced against the Company in the
United States District Court for the Western District of Virginia by Wanda
King, a former employee of the Company. In her complaint, the Plaintiff claimed
that she was constructively discharged by reason of the fact that she resigned
from her position rather than follow alleged improper and illegal instructions
from her supervisors and superiors. The Company has denied the allegations
contained in the Complaint. On July 26, 1999, the District Court dismissed the
Complaint on the grounds that it failed to plead a legally recognizable case
against the Company. On August 30, 1999, the Plaintiff filed an amended
Complaint alleging additional actions on part of the Company and former
employees and seeking damages against the Company in excess of $8.0 million. On
February 1, 2000, the District Court ruled that the allegations in the amended
Complaint, if true, state claims against the Company. The Company has
interposed an answer to the Complaint denying the material allegations.
On October 7, 1999, NASDAQ notified the Company that it would delist the
Company's Common Stock from the NASDAQ National Market. NASDAQ sought the
delisting because the bid price for the Common Stock had been below $1.00.
During the quarter ended December 31, 1999, the high and low bid prices ranged
from approximately $1.25 per share to $0.53 per share. The
5
Company appealed this decision before a NASDAQ Listing Qualifications Panel. An
oral hearing was held on February 10, 2000 before the NASDAQ Listing
Qualifications Panel. At the hearing, the Company suggested that the Company
would effect a reverse split of its outstanding shares of Common Stock to see
if the bid price would rise above the $1.00 minimum bid price required for
continued listing on the NASDAQ National Market. The Company's management
believes, but cannot assure, that by reverse splitting the outstanding shares
of Common Stock on a one-for-four basis, the bid price for the Common Stock
will exceed $1.00 per share. By decision dated February 22, 2000, the NASDAQ
Listing Qualifications Panel decided to allow the Company to continue to be
listed on the NASDAQ National Market provided that on or before April 21, 2000,
the Company evidences a closing price of at least $1.00 per share and
immediately thereafter, the Company must evidence a closing bid price of at
least $1.00 per share for a minimum of ten consecutive trading days. The NASDAQ
Listing Qualifications Panel reserved the right to review its decision at any
time upon the happening of a material change in the Company's financial or
operational character.
The Company is also party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse effect on
the financial condition, results of operations, liquidity or business of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's annual meeting of Shareholders was held on November 11,
1999. The results of the vote at the meeting for the election of directors were
as follows:
NAME OF NOMINEE VOTES FOR VOTES WITHHELD
Harvey A. Appelle 13,425,130 236,972
James W. Crystal 13,433,880 228,222
Harvey Horowitz 13,433,780 228,322
Lynn Siemers-Cross 13,426,880 235,222
Herbert L. Ash 13,434,180 227,922
Sheridan C. Biggs 13,434,180 227,922
Daniel H. Levy 13,434,180 227,922
All Nominees were elected. Herbert L. Ash and James W. Crystal resigned
their positions as directors for personal reasons in December 1999 and February
2000, respectively.
At the Annual Meeting there was a proposal to ratify the appointment of
Deloitte & Touche LLP as the independent auditors of the Company for the fiscal
year ending on December 31, 1999. The result of the vote taken at the meeting
for the ratification of the appointment of Deloitte & Touche LLP, which was
approved, was as follows:
FOR AGAINST ABSTAIN
13,547,762 75,550 38,790
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the NASDAQ National Market under
the symbol "DNKY." The Common Stock began trading on the Nasdaq National Market
on June 17, 1993.
The following table sets forth the quarterly high and low closing prices
of a share of Common Stock as reported by the Nasdaq National Market for the
Company's two most recent fiscal years, plus the interim period through March
10, 2000.
PERIOD HIGH LOW
Fiscal 1998
First Quarter...................... $ 3 5/32 2 1/2
Second Quarter..................... 4 1/2 2 3/4
Third Quarter...................... 3 13/32 1 1/4
Fourth Quarter..................... 2 1/2 15/16
Fiscal 1999
First Quarter...................... $ 2 1/16 31/32
Second Quarter..................... 1 11/16 27/64
Third Quarter...................... 1 5/8 1/2
Fourth Quarter..................... 1 1/4 17/32
Fiscal 2000
Ten Weeks Ended March 10, 2000.... $ 1 1/16 21/32
On March 10, 2000, the closing price for a share of Common Stock, as
reported by the NASDAQ National Market, was $0.97 per share.
The number of holders of record for Registrant's Common Stock as of March
10, 2000 was 73.
The Company currently anticipates that it will retain all its earnings for
use in the operation and expansion of its business and, therefore, does not
anticipate that it will pay any cash dividends in the foreseeable future. In
addition, the Company's existing credit facilities and the proposed facility
each prohibit the Company from declaring or paying dividends.
7
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1999 and 1998
and for each of the years in the three year period ended December 31, 1999 have
been derived from the Company's consolidated financial statements included
elsewhere in this Form 10-K which have been audited by Deloitte & Touche LLP,
independent auditors, whose report thereon is also included herein. The
selected consolidated financial data as of December 31, 1997, December 31, 1996
and December 2, 1995 and for the fiscal years December 31, 1996 and December 2,
1995 have been derived from the Company's consolidated financial statements,
which are not included herein. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and its Subsidiaries and related notes thereto incorporated by
reference herein.
Year Ended
---------------------------------------------------------------------------
December 2, December 31, December 31, December 31, December 31,
1995 1996 1997 1998 1999
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
Net sales.......................... $197,960 $255,179 $245,963 $197,861 $173,749
Cost of sales...................... 145,460 202,580 196,633 157,069 138,816
-------- -------- -------- -------- --------
Gross profit....................... 52,500 52,599 49,330 40,792 34,933
Selling, general and
administrative expenses........... 34,508 57,370 45,361 38,221 33,002
Amortization of goodwill and
other related acquisition costs... 985 1,449 1,204 1,321 1,390
Provision for settlement of
litigation............ -- -- -- -- 5,875
Restructuring Charge.............. 2,815 -- 1,723 1,180 --
-------- -------- -------- -------- --------
Operating income (loss)........... 14,192 (6,220) 1,042 70 (5,334)
Interest expense, net............. 4,303 5,387 5,461 4,778 4,007
-------- -------- -------- -------- --------
Income (loss) before
income taxes...................... 9,889 (11,607) (4,419) (4,708) (9,341)
Income taxes (benefit)............ 4,254 (3,319) (1,210) (644) 87
-------- -------- -------- -------- --------
Net income (loss)................. $ 5,635 $ (8,288) $ (3,209) $ (4,064) $ (9,428)
======== ======== ======== ======== ========
BASIC INCOME (LOSS) PER COMMON SHARE(1):
Net income (loss).................. $ 0.41 $ (0.59) $ (0.23) $ (0.29) $ (0.66)
======== ======== ======== ======== ========
Shares used in the calculation of
basic income (loss) per share 13,910 14,012 14,070 14,150 14,208
======== ======== ======== ======== ========
DILUTED INCOME (LOSS) PER
COMMON SHARE (1):
Net Income (loss)................... $ 0.40 $ (0.59) $ (0.23) $ (0.29) $ (0.66)
======== ======== ======== ======== ========
Shares used in the calculation of
diluted income (loss) per share 13,986 14,012 14,070 14,150 14,208
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................... $ 80,270 $ 16,917 $ 38,354 $ 42,661 $ 48,302
Total assets....................... 157,486 139,433 102,460 100,215 101,837
Long-term debt, including
Current portion................... 62,611 50,761 27,048 32,055 42,775
Stockholders' equity............... 65,147 55,278 53,086 49,258 41,881
- ----------------------------
(1) All per share amounts and the shares used in the calculation of basic
income (loss) per share have been retroactively restated to reflect the
two-for-one stock split paid on December 18, 1995 to stockholders of
record on December 4, 1995 and the effects of SFAS 128.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected operating data of the Company as
percentages of net sales, for the periods indicated below:
DECEMBER 31,
------------
YEAR ENDED 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.9 79.4 79.9
----- ----- -----
Gross profit 20.1 20.6 20.1
Selling, general and administrative expenses 18.5 19.3 19.0
Amortization of goodwill and other related acquisition
costs 0.5 0.7 0.8
Provision for settlement of litigation 0.0 0.0 3.3
Restructuring charges 0.7 0.6 0.0
----- ----- -----
Operating income/(loss) 0.4 (0.0) (3.0)
Interest expense, net 2.2 2.4 2.3
----- ----- -----
Loss before income taxes (1.8) (2.4) (5.3)
Income tax (benefit) (0.5) (0.3) 0.1
----- ----- -----
Net (loss) (1.3%) (2.1%) (5.4%)
===== ===== =====
COMPARISON OF FISCAL 1999 WITH FISCAL 1998
NET SALES
Net Sales decreased by $24.1 million or 12.2% from $197.9 million in
Fiscal 1998 to $173.8 million in Fiscal 1999. The decline in net sales was due
to decreases in the Donnkenny label of $8.7 million (primarily due to a
reduction in orders from two major customers which resulted from the Company
exiting the coordinate business), the Victoria Jones label of $5.5 million, and
the Pierre Cardin label of $6.8 million (primarily from the decrease of $6.6
million in orders from one of it's customers which was caused by its change in
buying pattern). The decreases were partially offset by increases in the Casey
& Max label of $2.1 million. In addition, there was also a decline in net sales
which resulted from the Company's exiting of outside contract work, closing the
outlet divisions and exiting the Licensed Character business, which accounted
for $5.2 million of the decline.
GROSS PROFIT
Gross profit for Fiscal 1999 was $34.9 million, or 20.1% of net sales,
compared to $40.8 million, or 20.6% of net sales, for Fiscal 1998. Significant
factors that contributed to the decline in gross profit included a competitive
retail environment for non-major branded products, higher domestic
manufacturing variances due to decreased sales volume in the Donnkenny label,
and higher transportation costs. Subsequent to year end, the Company announced
its plan to exit the domestic manufacturing business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $38.2 million
in Fiscal 1998 to $33.0 million in Fiscal 1999. As a percentage of net sales,
these costs decreased from 19.3% in Fiscal 1998 to 19.0% in Fiscal 1999. The
$5.2 million decline in selling, general and administrative expense is due to
reductions in all expense categories. Included in Fiscal 1998 were charges
totaling $1.5 million related to the closing of the Company's outlet stores,
consolidating office facilities, cancellation of lease agreements and
professional fees associated with computer system installations.
9
PROVISION FOR SETTLEMENT OF LITIGATION
Commencing November 1996, nine class action complaints were filed against
the Company in the United States District Court for the Southern District of
New York. Among other things, the complaints alleged violation of the federal
securities law. By order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and entities who purchased
publicly traded securities or sold put options of the Company between February
14, 1995 and November 1996.
On October 7, 1999, the Company entered into a stipulation of settlement
(the "Settlement") with the class action plaintiffs. In consideration for the
discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million is the Company's share, and the balance is
payable by the Company's insurers; issue 3 million shares of the Company's
common stock, and to pursue litigation against two of the Company's insurers to
recover under its excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all appeals and
reviews. A settlement hearing on the proposed settlement was held on March 31,
2000 and the court orally approved the settlement. A written order should be
signed in due course. In 1999, the Company recorded a charge of $5.9 million,
which represented the cost of the Settlement. The Company had funded its
required cash contribution to the settlement as of December 31, 1999 except for
a) the sum of $0.6 million, which the Company paid during the quarter ended
March, 31, 2000; and b) the cost of the litigation with two of the Company's
insurers which are not expected to be material.
INCOME FROM OPERATIONS
In Fiscal 1999, the Company reported a loss from operations of $5.3
million inclusive of the $5.9 million provision for the settlement of the
Consolidated Class Action, versus income from operations of $0.1 million in
Fiscal 1998.
PROVISION FOR INCOME TAXES
The Fiscal 1999 provision for income taxes of $87 reflects state and local
income taxes. The tax benefit in Fiscal 1998 of $644 or 13.7% of pre-tax losses
is lower than the Company's historical rate due to the recording of a valuation
allowance on a portion of deferred tax assets related to net operating loss
carryforwards.
NET LOSS
In Fiscal 1999 the Company reported a net loss of $9.4 million, or ($.66)
per share, versus a net loss of $4.1 million, or ($0.29) per share in Fiscal
1998.
COMPARISON OF FISCAL 1998 WITH FISCAL 1997
NET SALES
Net sales decreased by $48.1 million or 19.6% from $246.0 million in
Fiscal 1997 to $197.9 million in Fiscal 1998. The decline in net sales was
primarily the result of exiting the licensed character business, which
accounted for $37.9 million of the decline and decreases in Victoria Jones of
$18.8 million due to general softness in the sweater business resulting from
warmer weather during the winter of 1998. The decreases were partially offset
by increases in Casey & Max of $8.0 million and $5.6 million in Pierre Cardin.
GROSS PROFIT
Gross profit for Fiscal 1998 was $40.8 million, or 20.6% of net sales,
compared to $49.3 million, or 20.1% of net sales, for Fiscal 1997. Significant
factors that contributed to the decline in gross profit included the exiting of
the licensed character business and general softness in the sweater business
from the warm weather during the winter of 1998. Additionally, in the fourth
quarter of Fiscal 1998, the Company recorded inventory write offs of $0.7
million related to the sale of the West Hempstead Facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $45.4 million
in Fiscal 1997 to $38.2 million in Fiscal 1998. As a percentage of net sales,
these costs increased from 18.5% in Fiscal 1997 to 19.3% in Fiscal 1998.
Included in Fiscal 1998 were charges totaling $1.5 million related to the
closing of the Company's outlet stores, consolidating office facilities,
cancellation of lease agreements and professional fees associated with system
installations. Included in Fiscal 1997 are charges in the amount of
approximately $4.1 million, the largest component of which is $3.5 million in
additional professional fees as the result of legal fees associated with the
previously reported class action lawsuits, legal and accounting fees associated
with the restatement of prior year quarterly and annual financial statements
and consulting services related to the Company's amended credit facility.
Excluding these charges, the balance of selling, general and
administrative expenses for Fiscal 1998 was $37.6 million or 19.0% of net sales
and for Fiscal 1997, $41.8 million, or 17.0% of net sales. The $4.2 million
decline in selling, general and
10
administrative expense is due to reductions in all expense categories except
design and sample expense and administrative expenses.
RESTRUCTURING CHARGES
During Fiscal 1998, the Company's production requirements continued to
shift from domestically owned or leased facilities to out sourced suppliers.
During 1998 and into 1999 several domestic facilities were closed and sold by
the Company. In the fourth quarter of 1998, the Company recorded a pre-tax
charge of $1.2 million in connection with the sale of its West Hempstead
facility which occurred on February 2, 1999. The restructuring charge included
write-offs of property, plant, equipment, employee severance payments and other
incremental charges directly attributable to the sale of the manufacturing
facility.
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of the Mickey & Co. licensed character product line under
a license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5
million for the write-down of merchandise inventories. The restructuring charge
included payments due under agreements with the licensor; write-downs of
property, plant and equipment; costs related to lease terminations; employee
severance payments; and other incremental charges directly attributable to
discontinuing the licensed character product lines.
INCOME FROM OPERATIONS
In Fiscal 1998, the Company reported income from operations of $0.1
million, versus income from operations of $1.0 million in Fiscal 1997.
PROVISION FOR INCOME TAXES
The Company's tax benefit in Fiscal 1998 amounts to 13.7% of pre-tax
losses, as compared to a benefit of 27.4% for Fiscal 1997. The benefit in
Fiscal 1998 is lower than the Company's historical tax rate due to the
recording of a valuation allowance on a portion of deferred tax assets related
to net operating loss carryforwards.
NET LOSS
In Fiscal 1998 the Company reported a net loss of $4.1 million, or ($0.29)
per share, versus a net loss of $3.2 million, or ($0.23) per share in Fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily inventory and accounts receivable, and interest and
principal payments related to certain indebtedness and capital expenditures.
The Company's borrowing requirements for working capital fluctuate throughout
the year.
Capital expenditures were $0.5 million for Fiscal 1999, compared to $2.5
million in Fiscal 1998. In Fiscal 1999, the Company was permitted to spend up
to $2.0 million on capital investments in accordance with the Revolving Credit
Agreement described below. As part of the 1999 capital expense budget, the
Company spent approximately $0.5 million for upgrading computer systems to
become Year 2000 compliant.
At the end of Fiscal 1999, direct borrowings under the revolving credit
facility were $40.0 million and the term loan amounted to $2.5 million.
Additionally, the Company had letters of credit outstanding of $17.6 million,
with unused facility of $17.4 million. At the end of Fiscal 1998, direct
borrowings and letters of credit outstanding under the prior credit facility
were $31.6 and $24.3 million, respectively.
On June 29, 1999, the Company and its operating subsidiaries signed a new
three year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services to replace the existing $75 million credit facility. The Credit
Agreement provides the Company with a $75 million facility comprised of a $72
million revolver with sublimits up to $52 million for direct borrowings, $35
million for letters of credit, certain overadvances and a $3 million term loan.
Borrowings under the Credit Agreement bear interest at the prime rate plus
one half percent (9.0% at December 31, 1999). The Credit Agreement provides for
advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60%
of eligible inventory plus (iii) up to 60% of the undrawn amount of all
outstanding letters of credit plus (iv) allowable overadvances. The term loan
requires quarterly payments of $250 plus all accrued and unpaid interest
beginning September 30, 1999 through June 30, 2002. The Credit Agreement
expires on June 30, 2002.
11
Collateral for the Credit Facility includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc.
and Beldoch Industries Corporation.
The Credit Facility contains numerous financial and operational covenants,
including limitations on additional indebtedness, liens, dividends, stock
repurchases and capital expenditures. In addition, the Company is required to
maintain specified levels of net worth and comply with a maximum cumulative net
loss test and a minimum interest coverage ratio.
Subsequent to June 1999, the Company amended the Credit Agreement. On
February 29, 2000, the Company entered into a Third Amendment and Waiver
Agreement. The Third Amendment and Waiver waived any existing defaults as of
December 31, 1999 and for the End of Month Period for January 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1% above the prime rate effective
February 29, 2000 and the Overadvance Amounts for Fiscal 2000 were amended and
restated. Certain covenants were also amended for the respective quarter ends in
Fiscal 2000. A fee of $75,000 was paid on February 29, 2000. On April 13, 2000,
the Company entered into a Fourth Amendment and Waiver Agreement to support the
Company's 2000 business plan. The Fourth Amendment and Waiver waived any
existing defaults as of the End of Month Period for March 2000 with respect to
the Company's noncompliance with covenants related to Minimum Interest Coverage,
EBITDA and Tangible Net Worth. Pursuant to this amendment, the interest rate on
borrowings was increased to 1.5% above the prime rate effective April 13, 2000,
and the Overadvance Amounts for Fiscal 2000 were amended. Certain covenants
were also amended for the respective quarter ends in Fiscal 2000. A fee of
$75,000 is payable for the Fourth Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross amount of
sales, plus certain customary charges.
During Fiscal 1999, cash used in operating activities was $11.9 million,
principally as the result of increases in accounts receivable and inventory
(which relate primarily to inventory in transit and to first quarter fiscal
2000) and decreases to accounts payable and accrued expenses, partially offset
by decreases in other non-current assets. During Fiscal 1998, cash used in
operating activities was $1.4 million, principally as the result of the
increase in accounts receivable and other non-current assets, partially offset
by decreases in inventories and recoverable income taxes.
Cash provided by investing activities in Fiscal 1999 included proceeds
from the sale of fixed assets of $1.4 million offset by $0.5 for the purchase
of fixed assets. Cash used in Fiscal 1998 for investing activities of $3.4
million included $2.5 million for the purchase of fixed assets and the $1.8
million earnout payment related to the acquisition of Beldoch, which was
partially offset by proceeds from the sale of fixed assets of $0.8 million.
Cash provided by financing activities in Fiscal 1999 was $10.7 million,
which represented net borrowings of under the revolver of $8.4 million and net
borrowings of the term loan of $2.3 million. Cash provided by financing
activities in Fiscal 1998 was $5.0 million, which represented repayments of
$5.6 million on the Term Loan, offset by net borrowings under the Revolving
Credit Agreement of $10.1 million and the proceeds from an equipment loan of
$0.5 million.
The Company believes that cash flows from operations and amounts available
under the revolving credit agreement will be sufficient for its needs for the
foreseeable future.
OTHER ITEMS AFFECTING THE COMPANY
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line manufacturers (such as the Company) and
a larger number of specialty manufacturers. The Company faces substantial
competition in its markets from manufacturers in both categories.
Apparel Industry Cycles and other Economic Factors
The apparel industry historically has been subject to substantial cyclical
variation, with consumer spending on apparel tending to decline during
recessionary periods. A decline in the general economy or uncertainties
regarding future economic prospects may affect consumer spending habits, which,
in turn, could have a material adverse effect on the Company's results of
operations and its financial condition.
Retail Environment
Various retailers, including some of the Company's customers, have
experienced declines in revenue and profits in recent periods and some have
been forced to file for bankruptcy protection. To the extent that these
financial difficulties continue, there can be no assurance that the Company's
financial condition and results of operations would not be adversely affected.
12
Seasonality of Business and Fashion Risk
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as one
year in advance and manufactured approximately one season in advance of the
related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability to successfully anticipate the needs
of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
Foreign Operations
The Company's foreign sourcing operations are subject to various risks of
doing business abroad, including indirect vulnerability to currency
fluctuations, quotas and, in certain parts of the world, political instability.
Any substantial disruption of its relationships with its foreign suppliers
could adversely affect the Company's operations. Some of the Company's imported
merchandise is subject to United States Customs duties. In addition, bilateral
agreements between the major exporting countries and the United States impose
quotas, which limit the amount of certain categories of merchandise that may be
imported into the United States. Any material increase in duty levels, material
decrease in quota levels or material decrease in available quota allocation
could adversely affect the Company's operations.
Asian Operations
The portion of the Company's products which it currently imports from Asia
is further subject to certain political and economic risks including, but not
limited to, political instability, changing tax and trade regulations and
currency devaluations and controls. The impact, if any, of these regional
events on the Company's business, and in particular its sources of supply,
cannot be determined at this time. Approximately 70% of the products sold by
the Company in Fiscal 1999 were manufactured in Asia.
Facility Closures
On March 15, 2000 the Company announced that it will be closing all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. The Company will incur a charge of approximately $0.3
million for employee severance payments and other incremental charges directly
attributable to the closing of the manufacturing facilities. The plant closings
are planned to be completed by May of Fiscal 2000.
Factors that May Affect Future Results and Financial Condition
The Company's future operating results and financial condition are
dependent upon its ability to successfully design, manufacture, import and
market apparel.
Proposed Reverse Stock Split
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to the Company's shareholders a four for one reverse stock split as
part of an effort to maintain continued listing of the Company's common stock on
the NASDAQ National Market. The reverse stock split recommendation will be put
before the Company's shareholders at a special meeting to be held on April 18,
2000. As a result of the proposed split, if the recommendation is approved by
the Company's shareholders, each four shares of common stock applicable to
shareholders on the effective date of the split will be converted into one share
of stock.
The Company's Board of Directors recommended this action to the Company's
shareholders in an effort to maintain NASDAQ National Market listing. One of
the requirements for continued listing on the NASDAQ National Market is the
maintenance of a bid price for the Company's shares of $1.00 or higher. During
the last quarter of 1999, and into 2000, the Company's bid price has fallen
below $1.00. While it is anticipated that following the reverse stock split,
the market value of the Company's shares will increase in inverse proportion to
the ratio of the reverse split, there can be no assurance that this will occur
or that the bid price of the Company's common stock will maintain a $1.00 or
higher price.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards for the
accounting and reporting for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company has determined that
this statement will not have a significant impact on its financial statements
or disclosures, as it does not engage in derivative or hedging transactions.
13
Forward Looking Statements
This Form 10-K (including by not limited to the sections hereof entitled
"Business" and "Management's Discussion and Analysis") contains or incorporates
by reference forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Where any such forward looking
statement includes a statement of the assumptions or bases underlying such
forward looking statement, the Company cautions that assumed facts or bases
almost always vary from the actual results, and the differences between assumed
facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, there can
be no assurance that the statement of the expectation or belief will result, or
be achieved or accomplished. The words "believe", "expect", "estimate",
"project", "seek", "anticipate" and similar expressions may identify
forward-looking statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following item 14 of this Annual Report of Form
10-K
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DANIEL H. LEVY, a director of the Company, has been a principal of and
consultant to LBK Consulting Inc., a retail consulting business, since January
1997 and during the period of 1994 to April 1996. From April 1996 through
January 1997, he served as Chairman of the Board and Chief Executive Officer of
Best Products, Inc., a retail sales company which filed for bankruptcy in
September 1996. From 1993 through 1994, Mr. Levy served as Chairman of the
Board and Chief Executive Officer of Conran's, a retail home furnishings
company. From 1991 to 1993, he was Vice Chairman and Chief Operating Officer of
Montgomery Ward, a retail sales company. Mr. Levy is a director of Whitehall
Jewelers, Inc. Mr. Levy is 56 years old. On January 1, 2000, Mr. Levy became
Chairman of the Board and Chief Executive Officer of the Company.
HARVEY A. APPELLE, a director of the Company, was Chairman of the Board
and Chief Executive Officer of the Company from December 19, 1996 until
December 31, 1999, when he resigned his office. Mr. Appelle had been the
President of HarGil Capital Associates Ltd., a private investment firm, since
1994. From 1983 to 1993, he was a Managing Director of the Investment Banking
Division of Merrill Lynch Pierce Fenner & Smith Inc. and a Senior Vice
President of Merrill Lynch Interfunding Inc. Mr. Appelle is 54 years old.
LYNN SIEMERS-CROSS, a director of the Company, became President and Chief
Operating Officer of the Company on April 14, 1997. Prior thereto, for more
than five years, she was President of the Oak Hill Division of the Company. Ms.
Siemers-Cross is 41 years old.
BEVERLY EICHEL, has been Executive Vice President and Chief Financial
Officer of the Company since October 1998. Prior thereto, she was Executive
Vice President and Chief Financial Officer of Danskin, Inc. from June 1992 to
September 1998, and had been its Corporate Controller from October 1987 to June
1992. Ms. Eichel also serves as Secretary of the Company. Ms. Eichel is 42
years old.
SHERIDAN C. BIGGS, a director of the Company, is Executive-in-Residence at
the Graduate Management Institute at Union College. Prior to that, he was a
senior partner of Price Waterhouse, the accounting and consulting firm; he was
with that firm for thirty-one years until his retirement in 1994. During his
career at Price Waterhouse, Mr. Biggs served as a Vice Chairman and member of
the firm's management committee. Mr. Biggs is 65 years old.
HARVEY HOROWITZ, a director of the Company, served as Vice President, and
General Counsel of the Company from October 1, 1996 to February 28, 1998 when
he resigned his office. Mr. Horowitz is of counsel to the law firm of Mintz &
Gold LLP, which provides legal services to the Company. For more than five
years, prior to October 1, 1996, he was a partner of the law firm Squadron,
Ellenoff, Plesent & Sheinfeld, LLP. Mr. Horowitz is a director of The Gotham
Bank of New York, a financial institution. Mr. Horowitz is 57 years old.
JAMES W. CRYSTAL, a director of the Company, has been President, since
1978, and Chairman of the Board since 1989, of Frank Crystal & Co.,
international insurance brokers. Mr. Crystal is 62 years old. On February 28,
2000, Mr. Crystal resigned his position as a Director of the Company for
personal reasons.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1999, all
Section 16(a) reporting requirements applicable to the Company's officers,
directors and greater than ten percent shareholders were in compliance.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years
ended December 31, 1999, December 31, 1998, and December 31, 1997 to those
persons who were, at December 31, 1999 (i) the chief executive officer and (ii)
the other most
15
highly compensated executive officers of the Company
(collectively, the "Named Executive Officers"). The information in the
following tables with respect to the number of shares of Common Stock
underlying options, option exercise prices and the number of shares of Common
Stock acquired upon the exercise of options has been retroactively restated to
reflect the two-for-one stock split paid to all holders of Common Stock of
record on December 4, 1995 (the "Stock Split").
SUMMARY COMPENSATION TABLE
-----------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------------------------
RESTRICTED SECURITIES ALL OTHER
FISCAL STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS/SARS (1)
- ----------------------------------------------------------------------------------------------------------------------
Harvey A. Appelle (2)(4)(7) 1999 $473,806 $2,130
Chairman of the Board and 1998 402,652 100,000 2,880
Chief Executive Officer 1997 400,000 $174,000 440,625 200,000 2,880
Lynn Siemers-Cross (3)(5)(7)
President and Chief 1999 $502,652 $ 810
Operating Officer 1998 502,550 100,000 1,020
1997 500,000 $212,500 440,625 200,000 660
Beverly Eichel (6)
Executive Vice President and 1999 $275,000 $ 810
Chief Financial Officer 1998 63,462 $ 50,000 150,000 255
(1) Represents insurance premiums paid by, or on behalf of, the Company during
the covered fiscal year with respect to term life insurance for the
benefit of the Named Executive Officer.
(2) This individual became an Executive Officer of the Company in 1996. This
individual resigned his office as Chief Executive Officer effective
12/31/99.
(3) This individual became an Executive Officer of the Company in 1997.
(4) Bonus for 1997 was paid in 69,600 shares of common stock; Bonus for 1998
included the grant of options to purchase 100,000 shares of common stock
(5) Bonus for 1997 was $150,000 cash payment and 25,000 shares of common
stock; Bonus for 1998 included the grant of options to purchase 100,000
shares of common stock.
(6) This individual became an Executive Officer of the Company in 1998. Annual
compensation represents prorated compensation from date of hire in October
1998 and a signing bonus paid in connection with the execution of her
employment agreement with the Company.
(7) Includes restricted stock awards of 150,000 shares of which 30,000 shares
were vested on March 31, 1999 and the remaining 120,000 shares will be
vested on March 31, 2000.
EMPLOYMENT AGREEMENTS
Daniel H. Levy
As of January 1, 2000, Mr. Levy entered into an employment agreement with
the Company to serve as its Chairman of the Board and Chief Executive Officer.
While the term of the employment agreement is for three years, the agreement
gives the Company and Mr. Levy the right to terminate the agreement at the end
of three, six and twelve months. In the event the Company exercises this
termination right, the Company agrees to pay Mr. Levy severance of three, six
and twelve months respectively.
The agreement provides for a base annual salary of $500,000, as well as a
discretionary performance bonus based on the achievement of goals to be set by
the Compensation Committee of the Company's Board of Directors, as well as
certain insurance benefits. The Company paid to Mr. Levy a relocation bonus of
$25,000, with a gross up for the tax effect of this bonus.
In connection with the execution of the employment agreement, the
Compensation Committee granted to Mr. Levy 150,000 restricted shares of the
Company's stock, which will vest December 31, 2002. The employment agreement
further provides for the issuance of another 150,000 restricted shares of the
Company's stock if Mr. Levy is employed by the Company on June 30, 2002, which
shares would also vest on December 31, 2002. Mr. Levy also was granted options
to purchase 150,000 shares of the Company's common stock, at a purchase price
of $0.6875 a share. 100,000 of these stock options vest on June 30, 2000 and
the balance of 50,000 will vest on December 31, 2000, if Mr. Levy is employed
by the Company on those dates. The employment agreement provides that the
restricted shares and the options granted would have accelerated vesting in the
event of a change in control of the Company.
16
The agreement provides that in the event Mr. Levy's employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Mr. Levy will have the right to receive severance
benefits equal to three times the sum of his then annual salary inclusive of
any performance bonus.
Harvey Appelle
On April 12, 1997, Mr. Appelle entered into a three-year employment
agreement with the Company to serve as its Chairman of the Board and Chief
Executive Officer. The agreement provides for a base annual salary of $400,000
for the first two years of the term and of $500,000 for the third year of the
term, as well as a discretionary performance bonus based on the achievement of
goals to be set annually by the Compensation Committee of the Board, as well as
certain insurance benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee granted to Mr. Appelle 150,000 restricted shares and
options to purchase an aggregate of 150,000 additional shares at a price equal
to the closing price of the Common Stock on the date of grant. The agreement
further provides for an incentive cash bonus equal to the appreciation over
five years of 50,000 shares of stock. The restricted shares, options and right
to receive the incentive cash bonus will vest over the term of the agreement,
subject to acceleration in the event of a change in control of the Company. Mr.
Appelle resigned his position as Chief Executive Officer effective December 31,
1999.
Lynn Siemers-Cross
On June 12, 1997, Ms. Siemers-Cross entered into a four-year employment
agreement with the Company to serve as its President and Chief Operating
Officer. The agreement provides for a base annual salary of $500,000, a
discretionary performance bonus based on the achievement of goals to be set
annually by the Compensation Committee, but not less than $150,000 for Fiscal
1997, as well as certain insurance and other benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee granted to Ms. Siemers-Cross 150,000 restricted
shares and options to purchase an aggregate of 150,000 additional shares at a
price equal to the closing price of the Common Stock on the date of grant. The
agreement further provides for an incentive cash bonus equal to the
appreciation over five years of 50,000 shares of stock. The restricted shares,
options and right to receive the incentive cash bonus will vest over the term
of the agreement, subject to acceleration in the event of a change in control
of the Company.
The agreement provides that in the event Ms. Siemers-Cross' employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Siemers-Cross will have the right to receive
severance benefits equal to three times the sum of the last annual salary
inclusive of performance bonus (but not incentive bonus).
Beverly Eichel
On September 28, 1998, Ms. Eichel entered into a two-year employment
agreement the Company to serve as Executive Vice President and Chief Financial
Officer, providing for a base salary of $275,000 per annum and a one time
signing bonus of $50,000. The agreement provides for a discretionary
performance bonus based on the achievement of goals to be set annually by the
Compensation Committee of the Board, as well as certain insurance benefits. In
addition, in connection with the commencement dates the agreement provides for
the grant of options to purchase 150,000 shares of Common Stock at an exercise
price equal to the fair market value on the date of grant, vesting over three
years.
The agreement provides that in the event Ms. Eichel's employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Eichel will have the right to receive severance
benefits equal to one and one half times the sum of the last annual salary
inclusive of performance bonus.
Harvey Horowitz
On February 28, 1998, Mr. Horowitz entered into a two-year consulting
agreement with the Company, which agreement superseded Mr. Horowitz's
employment agreement with the Company dated September 5, 1996. Under the new
agreement, Mr. Horowitz agrees to provide certain consulting services to the
Company and its officers with respect to legal matters arising out of the
business affairs of the Company. The new agreement provides for monthly
payments to be made by the Company to Mr. Horowitz equal to $35,000 for March
1998, $30,000 per month thereafter for the balance of calendar year 1998, and
$25,000 per month throughout calendar year 1999. Mr. Horowitz will continue to
receive certain insurance and other benefits.
17
1999 STOCK OPTIONS GRANTS
The Company strives to distribute stock option awards broadly throughout
the organization. Stock option awards are based on the individual's position
and contribution to the Company. The Company's long term performance ultimately
determines compensation from stock options because stock option value is
entirely dependent on the long term growth of the Company's common stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers and
Directors during Fiscal 1999, including information concerning the potential
realizable value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS OPTION TERM (1)
----------------------------------------------------- ----------------------
NUMBER OF
SECURITIES % OF TOTAL EXERCISE
UNDERLYING # OF OPTIONS PRICE (3) EXPIRATION
OPTION (#) GRANTED IN 1999 ($/Sh) DATE 5% ($) 10% ($)
---------- --------------- ------ ---- ------ -------
Harvey Appelle (4) 100,000 37.04% 1.1875 3/2/09 74,763 189,387
Lynn Siemers-Cross (4) 100,000 37.04% 1.1875 3/2/09 74,763 189,387
Sheridan C. Biggs (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
James W. Crystal (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
Harvey Horowitz (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
Daniel H. Levy (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the SEC and, therefore, are not intended to
forecast possible future appreciation, if any, of the Company's stock
price.
(2) Represents options granted to Messrs. Biggs, Crystal, Horowitz and Levy as
directors pursuant to the Company's 1994 Non-Employee Director Option
Plan.
(3) All options were granted at an exercise price equal to the market value of
the Company's common stock on the date of grant.
(4) Options were granted as part of Fiscal 1998 compensation.
18
AGGREGATE OPTION
EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR ENDED OPTION VALUES(1)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999 (2)
ON EXERCISE VALUE ----------------- -------------------------
(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--- -------- ----------- ------------- ----------- -------------
Harvey Appelle (3) 0 0 172,500 100,000 0 0
Lynn Siemers-Cross (4) 0 0 154,500 103,000 0 0
Herbert L. Ash 0 0 20,000 0 0 0
Sheridan C. Biggs 0 0 25,000 0 0 0
Robert H. Cohen 0 0 20,000 0 0 0
James W. Crystal 0 0 37,500 0 0 0
Harvey Horowitz 0 0 32,500 0 0 0
Daniel H. Levy 0 0 25,000 0 0 0
Robert H. Martinsen 0 0 20,000 0 0 0
Beverly Eichel (5) 0 0 60,000 90,000 0 0
(1) All options were granted at an exercise price equal to market value of the
common stock on the date of grant.
(2) Amount reflects the market value of the underlying shares of common stock
at the closing sales price reported on the Nasdaq National Market on
December 31, 1999 ($.59) per share.
(3) Represents 22,500 options granted to him under the Company's 1994
non-employee director option plan, 150,000 options granted to him in
connection with the execution of his employment agreement and 100,000
options granted as part of his Fiscal 1998 compensation.
(4) Represents 7,500 options granted to her under the Company's 1992 Stock
Option Plan, 150,000 options granted in connection with the execution of
her employment agreement and 100,000 options granted as part of her Fiscal
1998 compensation.
(5) Represents 150,000 options granted in connection with the execution of her
employment agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 10, 2000,
with respect to beneficial ownership of the Company's Common Stock by: (i) each
of the Company's directors, (ii) each of the Company's Named Executive
Officers, (iii) each person who is known by the Company beneficially to own
more than 5% of the Company's Common Stock, and (iv) by all directors and
executive officers who served as directors or executive officers of March 10,
2000 as a group. All information in the table below with respect to the Common
Stock of the Company has been restated to reflect the two-for-one stock split
paid to all holders of Common Stock of record on December 4, 1995. For purposes
of this table, beneficial ownership is defined in accordance with 13d-3 under
the Securities Exchange Act of 1934, as amended and means generally the power
to vote or dispose of the securities, regardless of any economic interest
therein.
NAME AND ADDRESS COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED
------------------- --------------------- ---------------------
Amber Arbitrage LDC 2,322,450 (2) 16.3%
C/o Custom House Fund Management Limited
31 Kildare Sheet
Dublin 2, Ireland
Putnam Investments, Inc. 1,199,250 (3) 8.4%
1 Post Office Square
Boston, MA 02109
Harvey A. Appelle 547,100 (4) 3.7%
Lynn Siemers-Cross 353,200 (5) 2.4%
Sheridan C. Biggs 26,000 (6) *
James W. Crystal 38,500 (7) *
Beverly Eichel 60,000 (8) *
Harvey Horowitz 35,000 (9) *
Daniel H. Levy 30,000 (10) *
All directors and officers as a group (7 7.3%
persons)
19
- -------
* Less than 1%.
(1) Percentage to be based on the number of shares of Common Stock outstanding
as of March 10, 2000.
(2) Based on information contained in Schedule 13G filed with the Company on
May 13, 1998.
(3) Based on information contained in Schedule 13G/A filed with the Company on
February 4, 1999. Includes shares held by Putman Investment Management,
Inc. and Putman Advisory Company, Inc.
(4) Includes 22,500 shares underlying currently exercisable stock options
which have been granted to Harvey A. Appelle pursuant to the Company's
1994 Non-Employee Director Option Plan, 150,000 shares underlying
currently exercisable stock options which have been granted to Mr. Appelle
pursuant to his employment agreement, 150,000 restricted shares granted to
Mr. Appelle pursuant to his employment agreement and 69,600 shares of
stock issued to him as part of Fiscal 1997 compensation. The above
includes 20,000 options and excludes 80,000 options issued as part of
Fiscal 1998 compensation and will become exercisable on various dates
through the year 2004. Also includes 135,000 shares held by Mr. Appelle.
(5) Includes 6,000 shares of underlying options which have been granted on
April 19, 1996 to Lynn Siemers-Cross pursuant to the Company's 1992 Stock
Option Plan (excludes 1,500 options, which do not vest until April 19,
2001) and includes 150,000 shares underlying options which have been
granted pursuant to Ms. Siemers-Cross' employment agreement. Also includes
150,000 shares of restricted stock pursuant to Ms. Siemers-Cross'
employment agreement and 25,000 shares of stock issued as part of Fiscal
1997 compensation. The above includes 20,000 options, and excludes 80,000
options issued as part of Fiscal 1998 compensation which will become
exercisable on various dates through the year 2004. Also includes 2,200
shares held by Mrs. Siemers-Cross.
(6) Includes 25,000 shares underlying options which have been granted to
Sheridan C. Biggs pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable. Also includes 1,000
shares held by Mr. Biggs.
(7) Includes 37,500 shares underlying options which have been granted to James
W. Crystal pursuant to the Company's 1994 Non Employee Director Option
Plan. Such options are currently exercisable. Also includes 1,000 shares
held by Mr. Crystal.
(8) Includes 60,000 shares underlying options, which are vested, out of
150,000 underlying options, which have been granted to Beverly Eichel
pursuant to her employment agreement. Does not include 90,000 options of
which, 60,000 will vest in September 2000, and 30,000 will vest in
September 2001.
(9) Includes 32,500 shares underlying options which have been granted to
Harvey Horowitz pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable. Also includes 2,500
shares held by Mr. Horowitz.
(10) Includes 25,000 shares underlying options which have been granted to
Daniel A. Levy pursuant to the Company's 1994 Non-Employee Director Option
Plan. Such options are currently exercisable. Also includes 5,000 shares
held by Mr. Levy. Does not include 150,000 shares underlying stock options
granted as of January 3, 2000 pursuant to the Company's 1992 Stock Option
Plan, 100,000 of which vest on June 30, 2000 and the balance of 50,000,
which will vest on December 31, 2000. Also does not include 150,000 shares
of the Company's Restricted Stock granted as of January 3, 2000 pursuant
to the Company's 1996 Restricted Stock Plan. These restricted shares vest
on December 31, 2002. The foregoing options issued under the Company's
1992 Stock Option Plan and the restricted stock were granted pursuant to
Mr. Levy's employment agreement.
20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Crystal is Chairman and President of Frank Crystal & Co., Inc., which
provides insurance brokerage services to the Company. Frank Crystal & Co., Inc.
received approximately $130,000 in commissions during 1999 for services
rendered to the Company. Mr. Horowitz is of counsel to the law firm of Mintz &
Gold LLP, which provides legal services to the Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the Years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Valuation and Qualifying Accounts
3. The Exhibits, which are listed on the Exhibit Index attached
hereto
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of Fiscal
1999.
21
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DATED: MARCH 30, 2000
DONNKENNY, INC.
BY: /s/ DANIEL H. LEVY
---------------------------------------
DANIEL H. LEVY, CHAIRMAN OF THE BOARD OF
DIRECTORS AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
IN THE CAPACITIES AND ON THE DATES INDICATED.
DATED: MARCH 30, 2000 BY: /s/ DANIEL H. LEVY
---------------------------------------
DANIEL H. LEVY, CHAIRMAN OF THE BOARD OF
DIRECTORS AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ LYNN SIEMERS-CROSS
---------------------------------------
DATED: MARCH 30, 2000 LYNN SIEMERS-CROSS, PRESIDENT AND
CHIEF OPERATING OFFICER
/s/ BEVERLY EICHEL
---------------------------------------
DATED: MARCH 30, 2000 BEVERLY EICHEL, CHIEF FINANCIAL OFFICER,
EXECUTIVE VICE PRESIDENT-FINANCE AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ HARVEY APPELLE
---------------------------------------
DATED: MARCH 30, 2000 HARVEY APPELLE, DIRECTOR
/s/ SHERIDAN C. BIGGS
---------------------------------------
DATED: MARCH 30, 2000 SHERIDAN C. BIGGS, DIRECTOR
/s/ HARVEY HOROWITZ
---------------------------------------
DATED: MARCH 30, 2000 HARVEY HOROWITZ, DIRECTOR
22
EXHIBIT INDEX
Exhibit Description Sequentially
No. of Exhibit Numbered Page
- ------- ---------- -------------
3.1 Amended and Restated Certificate of Incorporation of Donnkenny, Inc.,
dated May 15, 1992.(1)
3.3 Certificate of Ownership and Merger of DHC Holding Corporation into
Donnkenny, Inc.(1)
3.4 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Donnkenny, Inc., dated May 18, 1993.(2)
3.5 By-laws of Donnkenny, Inc., dated May 18, 1993.(2)
4.1 Specimen form of Common Stock Certificate.(4)
10.12 Amended and Restated Donnkenny, Inc. 1992 Stock Option Plan.(9)
10.13 Form of Indemnification Agreement with Directors and Executive
Officers.(2)
10.14 Donnkenny, Inc. Employees Savings 401(k) Plan.(1)
10.28 Asset Purchase Agreement between Oak Hill Sportswear Corporation and
Donnkenny Apparel, Inc., dated as of May 23, 1995,5 together with
Amendment No. 1 thereto, dated as of June 26, 1995.(7)
10.29 Stock Purchase Agreement among Donnkenny Apparel, Inc. and all of the
Shareholders of Beldoch Industries Corporation, dated June 5, 1995.(6)
10.32 Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors.(8)
10.33 Donnkenny, Inc. 1996 Restricted Stock Plan.(9)
10.41 Employment Agreement between Harvey A. Appelle and the Company, dated
April 14, 1997.(10)
10.42 Employment Agreement between Lynn Siemers-Cross and the Company, dated
April 14, 1997.(10)
10.46 Employment Agreement between Beverly Eichel and the Company dated
September 28, 1998.(11)
10.48 Commission's Order Instituting Public Administrative Proceedings, Make
Findings and Instituting a Cease-and-Desist Order and Offer of
Settlement of Donnkenny, Inc. released on February 2, 1999.(12)
10.49 Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries
Corporation, the Guarantors Named therein, the Lenders Named therein
and the CIT Group / Commercial Services, Inc., dated as of June 29,
1999.(13)
10.50 TThe Waiver and First Amendment to Credit Agreement, dated as of
November 11, 1999 among the Company, the Lenders Named therein and the
CIT Group / Commercial Services, Inc.(14)
23
10.51 The Second Amendment Agreement, dated as of December 23, 1999 among
the Company, the Lenders Named therein and the CIT Group / Commercial
Services, Inc.(15)
10.52 Employment agreement between Daniel H. Levy and the Company, dated
January 1, 2000.(15)
10.53 The Third Amendment and Waiver Agreement, dated as of February 29,
2000 among the Company, the Lenders Named therein and the CIT Group /
Commercial Services, Inc.(15)
10.54 The Fourth Amendment and Waiver Agreement, dated as of April 13, 2000
among the Company, the Lenders named therein and the CIT Group /
Commercial Services, Inc.(15)
21 Subsidiaries of the Company.
- ------------------
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (Registration No. 33-48243), as filed with the
Commission on May 29, 1992 (the "Registration Statement").
(2) Incorporated herein by reference to Amendment No. 4 to the
Registration Statement (Registration No. 33-48243), as filed with the
Commission on May 24, 1993.
(3) Incorporated herein by reference to Amendment No. 3 to the
Registration Statement (Registration Statement No. 33-48243), as filed
with the Commission on May 10, 1993.
(4) Incorporated herein by reference to Amendment No. 5 to the
Registration Statement (Registration No. 33-48243), as filed with the
Commission on June 11, 1993.
(5) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 3, 1994.
(6) Incorporated herein by reference to the Company's Report on Form 8-K,
as filed with the Commission on June 2, 1995.
(7) Incorporated herein by reference to the Company's Report on Form 8-K,
as filed with the Commission on August 8, 1995.
(8) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 2, 1995.
(9) Incorporated herein by reference to the Company's 1996 Proxy
Statement, filed March 22, 1996.
(10) Incorporated herein by reference to the Company's Report on Form 10-Q,
filed with the Commission on August 6, 1997.
(11) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 15, 1998.
(12) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
(13) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on August 15, 1999.
(14) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 15, 1999.
(15) Filed herewith.
24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Donnkenny, Inc.
We have audited the accompanying consolidated balance sheets of Donnkenny,
Inc. and subsidiaries as of December 31, 1999 and December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the fiscal years in the three year period ended December 31,
1999. Our audits also included the financial statements schedule listed in the
Index at item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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, such consolidated financial statements present fairly, in
all material respects the financial position of Donnkenny, Inc. at December 31,
1999 and December 31, 1998, and the results of their operations and cash flows
for each of the fiscal years in the three year period ended December 31, 1999
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
March 22, 2000
(March 31, 2000 as to Note 13 and
April 13, 2000 as to Note 6)
F-1
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- --------------------
ASSETS
CURRENT ASSETS:
Cash ........................................................ $ 180 $ 503
Accounts receivable, net of allowances for bad debts
of $382 and $620, respectively ........................... 30,022 29,363
Recoverable income taxes .................................... 304 655
Inventories ................................................. 29,323 21,972
Deferred tax assets ......................................... 2,865 3,080
Prepaid expenses and other current assets ................... 636 1,265
Assets held for sale ........................................ 456 1,799
--------- ---------
Total current assets ........................................ 63,786 58,637
PROPERTY, PLANT AND EQUIPMENT, NET .............................. 5,981 6,337
OTHER ASSETS .................................................... 546 2,327
INTANGIBLE ASSETS ............................................... 31,524 32,914
--------- ---------
TOTAL ........................................................... $ 101,837 $ 100,215
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................... $ 1,168 $ 154
Accounts payable ............................................ 10,351 8,391
Accrued expenses and other current liabilities .............. 3,965 7,431
--------- ---------
Total current liabilities ............................... 15,484 15,976
--------- ---------
LONG-TERM DEBT .................................................. 41,607 31,901
DEFERRED TAX LIABILITIES ........................................ 2,865 3,080
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized 500 shares, issued
none......................................................
Common stock, $.01 par value; authorized 20,000
shares, issued and outstanding 14,230 and
14,170, shares in 1999 and 1998 respectively ............. 142 142
Additional paid-in capital .................................. 47,771 47,595
Issuable shares for litigation settlement ................... 1,875
Retained earnings (deficit) ................................. (7,907) 1,521
--------- ---------
Total stockholders' equity .................................. 41,881 49,258
--------- ---------
TOTAL ........................................................... $ 101,837 $ 100,215
========= =========
See accompanying notes to consolidated financial statements.
F-2
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ -------------
NET SALES .............................................. $ 173,749 $ 197,861 $ 245,963
COST OF SALES .......................................... 138,816 157,069 196,633
------------ ------------ ------------
Gross Profit ................................... 34,933 40,792 49,330
OPERATING EXPENSES:
Selling, general and administrative expenses ...... 33,002 38,221 45,361
Amortization of goodwill and other related
acquisition costs .............................. 1,390 1,321 1,204
Provision for settlement of litigation ............ 5,875
Restructuring charge .............................. -- 1,180 1,723
------------ ------------ ------------
Operating income (loss) ........................ (5,334) 70 1,042
OTHER EXPENSE:
Interest expense (net of interest income of $0,
$10, and $500) .................................. 4,007 4,778 5,461
------------ ------------ ------------
(Loss) before income taxes ..................... (9,341) (4,708) (4,419)
INCOME TAX EXPENSE (BENEFIT) ........................... 87 (644) (1,210)
------------ ------------ ------------
NET (LOSS) ........................................ $ (9,428) $ (4,064) $ (3,209)
============ ============ ============
Basic and diluted (loss) per common share ......... $ (0.66) $ (0.29) $ (0.23)
============ ============ ============
Shares used in the calculation of basic and diluted
(loss) per common share ........................ 14,208,000 14,150,000 14,070,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ISSUABLE
ADDITIONAL SHARES FOR RETAINED TOTAL
PREFERRED COMMON PAID-IN LITIGATION EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL SETTLEMENT (DEFICIT) EQUITY
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 $ -- $ 140 $ 46,344 $ -- $ 8,794 $ 55,278
Issuance of Common Stock .................. -- 1 116 -- -- 117
Tax Benefit attributable to the
exercise of stock options .............. -- -- 900 -- -- 900
Net Loss .................................. -- -- -- -- (3,209) (3,209)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 $ -- $ 141 $ 47,360 $ -- $ 5,585 $ 53,086
Issuance of Common Stock .................. -- 1 235 -- -- 236
Net Loss .................................. -- -- -- -- (4,064) (4,064)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ -- $ 142 $ 47,595 $ -- $ 1,521 $ 49,258
Issuance of Common Stock .................. -- -- 176 -- -- 176
Issuable shares for litigation settlement . -- -- -- 1,875 -- 1,875
Net Loss .................................. -- -- -- -- (9,428) (9,428)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 $ -- $ 142 $ 47,771 $ 1,875 $ (7,907) $ 41,881
-------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements.
F-4
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) .............................................................. $ (9,428) $ (4,064) $ (3,209)
Adjustments to reconcile net cash
(used in) provided by operating activities:
Provision for shares issuable on litigation settlement ............... 1,875 -- --
Deferred income taxes ................................................ (177) (1,247)
Depreciation and amortization of fixed assets ........................ 814 1,687 1,770
Loss on disposal of fixed assets ..................................... 5 506 --
Amortization of intangibles and other assets ......................... 1,390 1,321 1,204
Write down of fixed assets ........................................... -- 907 260
Provision for losses on accounts receivable .......................... (72) (46) 282
Changes in assets and liabilities, net of the effects of acquisitions and
disposals:
(Increase) decrease in accounts receivable ........................... (587) (4,864) 4,986
Decrease in recoverable income taxes ................................. 351 526 7,444
(Increase) decrease in inventories ................................... (7,351) 5,276 19,545
Decrease (increase) in prepaid expenses and other
current assets .................................................... 630 881 (513)
Decrease (increase) in other non-current assets ...................... 1,780 (2,327) --
Decrease in accounts payable ......................................... 1,960 (929) (10,156)
Decrease in accrued expenses and
other current liabilities ......................................... (3,290) (53) (335)
------ -------- --------
Net cash (used in) provided by operating activities ............... (11,923) (1,356) 20,031
------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ................................................ (501) (2,452) (516)
Proceeds from sale of fixed assets ...................................... 1,381 836 640
Increase in intangibles ................................................. -- (1,789) (1,200)
------ -------- --------
Net cash provided by (used in) investing activities ............... 880 (3,405) (1,076)
------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increases (repayments) of long-term debt ............................ 2,346 (5,580) (12,253)
Proceeds of long-term debt .............................................. -- 483 --
Net increases (repayments) under revolving credit line .................. 8,374 10,104 (11,460)
Issuance of Common Stock ................................................ -- -- 117
Tax benefit attributable to exercise of stock options ................... -- -- 900
------ -------- --------
Net cash provided by (used in) financing activities ............... 10,720 5,007 (22,696)
------ -------- --------
NET (DECREASE) INCREASE IN CASH .............................................. (323) 246 (3,741)
CASH, AT BEGINNING OF PERIOD ................................................. 503 257 3,998
------ -------- --------
CASH, AT END OF PERIOD ....................................................... $ 180 $ 503 $ 257
========= ======== ========
Supplemental Disclosures
Income Taxes paid ....................................................... $ 206 $ 72 $ --
========= ======== ========
Interest paid ........................................................... $ 3,438 $ 4,072 $ 5,692
========= ======== ========
Supplemental schedule of non-cash financing
activities
Issuance of common stock ................................................ $ 176 $ 236 $ 117
========= ======== ========
F-5
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999,
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company designs, manufactures, imports and
markets a broad line of moderately priced women's sportswear and operates in
one business segment. The Company's products are primarily sold throughout the
United States by retail chains, department stores and smaller specialty shops.
Principles of Consolidation - The consolidated financial statements
include the accounts of Donnkenny, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Inventories - Inventories are stated at the lower of cost or market using
the first-in, first-out method (FIFO) (see note 2).
Property, Plant and Equipment - Property, plant and equipment are recorded
at cost. Depreciation and amortization are computed on a straight-line basis
over the estimated useful lives of the assets or, where applicable, the term of
the lease, if shorter (see note 3).
Estimated useful lives are as follows:
Buildings 9 to 38 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 7 to 10 years
Leasehold improvements 7 to 10 years
(or lease term if shorter)
Other Assets - Other assets at December 31, 1999 of $546 represent
deferred financing costs which are amortized over the term of the related debt
agreement. In connection with the Company's settlement of litigation, discussed
in Note 13, the Company agreed to pay $5,000 to the Company's insurance carrier
of which $4,375 was paid prior to December 31, 1999. At December 31, 1998,
$2,083 had been deposited and was included in other assets.
Intangible Assets - Goodwill, which represents the excess purchase price
over fair value of net assets acquired relates to the acquisition of the
Company in 1989 following a change in control, and the sportswear division of
Oak Hill Sportswear Corporation ("Oak Hill") and Beldoch Industries Corporation
("Beldoch") in 1995. Goodwill is amortized on a straight-line basis over the
expected periods to be benefited, ranging from 20 to 40 years.
Also included in intangible assets are costs related to licenses acquired
by the Company, which are being amortized using the straight-line method over
20 years (see Note 4).
Assessment of Asset Impairment - The Company periodically assesses the
recoverability of the carrying value of long-lived assets, including
identifiable intangible assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
assessment of recoverability of the carrying amount of an asset is based on
estimated undiscounted future cash flows from the use of the asset and eventual
disposition. If the estimated undiscounted future cash flows are less than the
carrying value, an impairment loss is charged to operations based on the
difference between the carrying amount and the fair value of the asset.
The Company assesses the recoverability of goodwill by determining whether
the amortization of goodwill over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations or assets.
If the estimated cash flows are less than the carrying value, an impairment
loss is charged to operations based on the difference between the carrying
amount and the estimated discounted cash flows.
F-6
Advertising Expense - Advertising costs incurred to produce media
advertising for major new campaigns are expensed in the year in which the
advertising first takes place. Other advertising costs are expensed when
incurred. Net advertising expenses of $572, $606, and $668 were included in the
selling, general and administrative expenses in the Company's Consolidated
Statements of Operations for the years ended December 31, 1999, 1998, and 1997,
respectively.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which is an asset and liability method. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. SFAS No. 109 requires that deferred
tax assets are to be reduced by a valuation allowance if it is more likely than
not that some portion or all of the deferred tax assets will not be realized
(see note 7).
Fair Value of Financial Instruments - The carrying amount of significant
financial instruments, which includes accounts receivable, accounts payable and
accrued expenses, all approximated fair value as of December 31, 1999 and
December 31, 1998 due to their short-term maturities. Long-term debt
approximates fair value due to either its variable interest rate or short term
maturities.
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 reported amounts of assets and
liabilities (such as accounts receivable, inventories, and valuation allowances
for income taxes), and disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications - Certain reclassifications have been made in the 1998
and 1997 financial statements to conform to the 1999 presentation.
2. INVENTORIES
Inventories consisted of the following at December 31, 1999 and December
31, 1998:
1999 1998
---- ----
Raw materials...................... $ 1,548 $ 2,155
Work in process.................... 2,742 4,235
Finished goods..................... 25,033 15,582
------- -------
$29,323 $21,972
======= =======
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31,
1999 and December 31, 1998:
1999 1998
---- ----
Land and land improvements ...... $ 409 $ 410
Buildings and improvements ...... 5,263 6,241
Machinery and equipment ......... 4,645 6,295
Furniture and fixtures .......... 1,727 1,719
------- -------
12,044 14,665
Less accumulated depreciation and
amortization ................. 6,063 8,328
------- -------
$ 5,981 $ 6,337
======= =======
F-7
4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1999 and
December 31, 1998:
1999 1998
---- ----
Goodwill .................... 35,274 $35,274
Licenses .................... 6,325 6,325
------- -------
41,599 41,599
Less accumulated amortization 10,075 8,685
------- -------
$31,524 $32,914
======= =======
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at December 31, 1999 and December 31, 1998:
1999 1998
---- ----
Accrued Salaries, Benefits and Bonus $1,809 $1,995
Accrued Litigation Settlement ...... 625 1,000
Due to Former Owners of Subsidiary -- 880
Accrued Restructuring Expenses -- 548
Other Accrued Expenses ............ 1,531 3,008
------ ------
Total .............................. $3,965 $7,431
====== ======
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1999 and
December 31, 1998:
1999 1998
---- ----
Revolving Credit Borrowings ............. 40,017 $31,644
Senior Term Loan ....................... 2,500 --
Other (a) ............................... 258 411
Total ................................... 42,775 32,055
------- -------
Less current maturities ................. 1,168 154
------- -------
$41,607 $31,901
------- -------
Annual maturities of debt are as follows:
2000 $ 1,168
2001 1,090
2002 40,517
---- ------
$42,775
=======
On June 29, 1999, the Company and its operating subsidiaries signed a new
three year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services to replace the existing $75 million credit facility. The Credit
Agreement provides the Company with a $75 million facility comprised of a $72
million revolver with sublimits up to $52 million for direct borrowings, $35
million for letters of credit, certain overadvances and a $3 million term loan.
Borrowings under the Credit Agreement bear interest at the prime rate plus
one half percent (9.0% at December 31, 1999). The Credit Agreement provides for
advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60%
of eligible inventory plus (iii) up to 60% of the undrawn amount of all
outstanding letters of credit plus (iv) allowable overadvances. The term loan
requires quarterly payments of $250 plus all accrued and unpaid interest
beginning September 30, 1999 through June 30, 2002. The Credit Agreement
expires on June 30, 2002.
F-8
Collateral for the Credit Facility includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc.
and Beldoch Industries Corporation.
The Credit Facility contains numerous financial and operational covenants,
including limitations on additional indebtedness, liens, dividends, stock
repurchases and capital expenditures. In addition, the Company is required to
maintain specified levels of net worth and comply with a maximum cumulative net
loss test and a minimum interest coverage ratio.
Subsequent to June 1999, the Company amended the Credit Agreement. On
February 29, 2000, the Company entered into a Third Amendment and Waiver
Agreement. The Third Amendment and Waiver waived any existing defaults as of
December 31, 1999 and for the End of Month Period for January 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1% above the prime rate effective
February 29, 2000 and the Overadvance Amounts for the Fiscal 2000 were amended
and restated. Certain covenants were also amended for the respective quarter
ends in Fiscal 2000. A fee of $75,000 was paid on February 29, 2000. On April
13, 2000, the Company entered into a Fourth Amendment and Waiver Agreement to
support the Company's 2000 business plan. The Fourth Amendment and Waiver waived
any existing defaults as of the End of Month Period for March 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1.5% above the prime rate effective
April 13, 2000 and the Overadvance Amounts for Fiscal 2000 were amended.
Certain covenants were also amended for the respective quarter ends in Fiscal
2000. A fee of $75,000 is payable for the Fourth Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross sales,
plus certain customary charges.
- --------
(a) Other debt consists of a secured term loan that was entered into on June
30, 1998 in the amount of $483. As of December 31, 1999 the principal
balance of this loan amounted to $258. The interest rate is fixed at 8.75%
and the loan requires monthly principal and interest payments of $15
through June 2001. Software, machinery and equipment secure this
obligation.
7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 is comprised of the following:
1999 1998 1997
---- ---- ----
Current:
Federal ....... $ -- $ -- $(1,537)
State and local 87 (310) 35
Deferred .......... -- (334) 292
------- ------- -------
$ 87 $ (664) $(1,210)
======= ======= =======
A reconciliation of the statutory Federal tax rate and the effective
rate is as follows:
1999 1998 1997
---- ---- ----
Federal statutory tax rate ........................... (34)% (34)% (34)%
State and local taxes, net of federal
income tax benefit ............................... (3) (2) (3)
Losses not providing state and local
tax benefit ...................................... 0 (8) 4
Nondeductible items .................................. 4 7 5
Losses not providing federal tax benefit ............. 2 0 --
Increase of valuation allowance ...................... 32 23 --
Other -- -- 1
--- --- ---
1% (14)% (27)%
=== === ===
F-9
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below:
DECEMBER 31, DECEMBER 31,
1999 1998
---------------- ------------
Deferred tax assets:
Accounts receivable allowances ......... $ 141 $ 232
Inventory valuation .................... 1,139 874
Accrued expenses ....................... 1,449 1,118
Restructuring charges .................. -- 720
State operating loss carryforwards ..... 1,177 848
Federal operating loss carryforwards ... 4,783 2,570
Other .................................. 136 136
------- -------
Total gross deferred tax assets .... 8,825 6,498
------- -------
Deferred tax liabilities:
Property, plant and equipment .......... (1,159) (1,738)
Intangibles ............................ (3,037) (3,182)
------- -------
Total gross deferred tax liabilities (4,196) (4,920)
------- -------
Net deferred tax asset ..................... 4,629 1,578
Less valuation allowance ................... (4,629) (1,578)
------- -------
Net deferred taxes ......................... $ -- $ --
======= =======
As of December 31, 1999 and 1998, the Company recorded a valuation
allowance against the net deferred tax assets due to uncertainty of the
realization of certain net operating loss carryforwards.
As of December 31, 1999, the following Federal and State net operating
loss carryforwards were available:
Net Operating Losses
----------------------------
Expiration Dates Federal State
------- -----
2011 .... $ -- $6,071
2012 .... -- 5,409
2013 .... -- 4,388
2014 .... -- 7,447
2015-2017 -- 1,006
2018 .... 4,463 --
2019 .... 8,599 --
2020-2022 1,006 --
During the years ended December 31, 1999 and 1998, the Company recorded
interest income of $0 and $10 related to prior year carry back claims.
8. COMMITMENTS AND CONTINGENCIES
a. Rental expense for operating leases for the years ended December 31, 1999,
1998, and 1997 approximated $3,223, $4,557, and $4,505, respectively.
Minimum future rental payments as of December 31, 1999 for operating
leases with initial noncancelable lease terms in excess of one year, are
as follows:
Year Ending December 31, Amount
------------------------ ------
2000............................................ $3,123
2001............................................ 2,683
2002............................................ 2,331
2003............................................ 2,191
2004............................................ 2,182
Thereafter...................................... 2,174
-----
$ 14,684
========
F-10
b. At December 31, 1999, the Company was contingently liable for outstanding
letters of credit issued amounting to $17,624.
c. The Company is also party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution
of these proceedings will not, in the aggregate, have a material adverse
effect on the financial condition, results of operations, liquidity or
business of the Company.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors an Employees' Savings 401(k) Plan (the "Plan")
covering substantially all of its employees. Contributions to the Plan are made
by the Company at the discretion of the Board of Directors. The Company matched
the employee contributions for fiscal 1999 in the amount of $55. The Company
did not make contributions to the Plan in fiscal 1998 and 1997 except for the
payment of administrative expenses.
10. EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income or loss
attributable to common stockholders by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock (warrants to
purchase common stock and common stock options using the treasury stock method)
were exercised or converted into common stock. Potentially issuable common
shares in the diluted EPS computation are excluded in net loss periods, as
their effect would be antidilutive.
In the years ended December 31, 1999, 1998 and 1997, the incremental
shares under stock plans of 293,254, 431,250, and 305,000 were not considered
for the diluted earnings per share calculation due to their antidilutive
effect. As such, the amounts reported for basic and diluted earnings per share
are the same.
11. STOCK BASED COMPENSATION
a. Stock Options
The Company has a stock award and incentive program that permits the
issuance of up to 2,000,000 options on terms as determined by the Board of
Directors.
Under the terms of the plan, options granted may be either non-qualified
or incentive stock options and the exercise price, determined by the Stock
Option committee, may not be less than the fair market value of a share on the
date of the grant.
Information regarding the Company's stock option plan is summarized below:
1999 1998 1997
---------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE WEIGHTED- AVERAGE
EXERCISE AVERAGE EXERCISE
OPTIONS PRICE OPTIONS EXERCISE PRICE OPTIONS PRICE
----------- -------------- ---------- --------------- ---------- --------------
Outstanding at beginning
of the year ............. 1,740,150 $ 4.04 1,660,650 $ 5.42 658,800 $ 10.51
Granted ..................... 250,000 1.26 500,000 1.13 1,300,500 3.73
Exercised ................... -- -- -- -- -- --
Cancelled ................... (457,250) 4.52 (420,500) 6.04 (298,650) 9.26
---------- ---------- ---------- ----------- ---------- -----------
Outstanding at end of year .. 1,532,900 3.14 1,740,150 4.04 1,660,650 5.42
========== ========== =========== ========== ===========
Exercisable at end of year .. 685,940 484,160 234,800
========== ========== ==========
Available for grant at
year end .................... 467,100 259,850 339,350
========== ========== ==========
F-11
The options outstanding at December 31, 1999 range in price as follows:
# OF
OPTIONS EXERCISE PRICE
--------- --------------
597,500 $ 0.0000 - 1.8063
424,000 $ 1.8064 - 3.6125
432,500 $ 3,6126 - 5.4188
17,000 $ 7.2251 - 9.0313
61,900 $16.2564 - 18.0625
------
1,532,900
=========
The Company applies Accounting Principles Board Opinion No. 25, and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans
because the exercise price for stock options granted equaled the market price
of the underlying stock at the date of grant. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share for the years ended December 31,
1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated
below:
1999 1998 1997
---- ---- ------
Net (loss)
As reported ........................... $(9,428) $(4,064) $(3,209)
======= ======= =======
Pro forma ............................. $(9,675) $(4,777) $(3,834)
======= ======= =======
Basic and diluted net (loss) per share:
As reported ........................... $ (0.66) $ (0.29) $ (0.23)
======= ======= =======
Pro forma ............................. $ (0.68) $ (0.34) $ (0.27)
======= ======= =======
The weighted average Black-Scholes value of the options granted during
1999, 1998 and 1997 were $1.13, $0.83, and $2.37, respectively. The following
weighted-average assumptions were used in the Black-Scholes option-pricing
model for grants in 1999, 1998 and 1997 respectively: dividend yield of 0% for
all periods, volatility of 119%, 71%, and 55%, risk-free interest rate of
5.35%, 4.82%, and 6.51%, and an expected life of 10, 7 and 7 years.
b. Restricted Stock
In 1996, the Company adopted a plan to issue up to 1,000,000 shares of
restricted stock to employees of the Company. During 1997, 305,000 shares were
granted to employees of the Company at no cost to the employees. Of the total
number of restricted shares granted, 5,000 shares vested and were issued upon
the date of grant at the fair market value of $2.94 per share. The remaining
300,000 restricted shares were granted at a per share price of $2.94 and vest
as follows: 60,000 shares vested and were issued March 31, 1999; 240,000 shares
vest on March 31, 2000. Compensation cost recorded in 1999, 1998 and 1997 were
$261, $328 and $233, respectively, which represents the amortization of the
value of the restricted stock award at the date of grant over the vesting
period.
c. Warrants
On January 14, 1997, the Company issued warrants to purchase 75,000 shares
of Common Stock at $5.00 per share to the principal of a company to rescind an
acquisition transaction. The warrants are immediately exercisable and will
expire July 23, 2004.
d. Stock Bonus
The Company issued 94,600 shares of common stock to certain key employees
during 1998 as payment for 1997 bonuses, which were accrued and recorded as
compensation expense of $236 in the year ended December 31, 1997.
F-12
e. Stock Appreciation Rights
In 1997, the Company awarded stock appreciation rights to two Executive
Officers. These officers will be paid an amount equal to the appreciation over
5 years of 100,000 shares of stock. No compensation expense was recorded for
these stock appreciation rights in 1999, 1998 or 1997.
12. RESTRUCTURING CHARGES
In the fourth quarter of 1998, the Company recorded a restructuring charge
related to the sale of its West Hempstead facility that occurred on February 2,
1999. The charge included $1.2 million related to losses on the sale of
property, plant and equipment, employee severance payments and other incremental
charges directly attributable to the sale of the manufacturing facility. An
additional $0.7 million was charged to cost of goods sold for the write down of
inventory. The $0.6 million accrued restructuring expense balance at December
31, 1998 was utilized in fiscal 1999. At December 31, 1998, assets held for sale
included three facilities, two were sold in Fiscal 1999. At December 31, 1999
assets held for sale included one facility.
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of the Mickey & Co. licensed character product line under
a license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5
million for the write down of merchandise inventories. The $1.7 million
restructuring charge included: payments due under agreements with the licensor;
write-downs of property, plant and equipment; costs related to lease
terminations; employee severance payments; and other incremental charges which
were primarily attributable to discontinuing the licensed character product
lines.
13. PROVISION FOR SETTLEMENT OF LITIGATION
Commencing November 1996, nine class action complaints were filed against
the Company in the United States District Court for the Southern District of
New York. Among other things, the complaints alleged violation of the federal
securities law. By order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and entities who purchased
publicly traded securities or sold put options of the Company between February
14, 1995 and November 1996.
On October 7, 1999, the Company entered into a stipulation of settlement
(the "Settlement") with the class action plaintiffs. In consideration for the
discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million is the Company's share, and the balance is
payable by the Company's insurers; issue 3 million shares of the Company's
common stock, and to pursue litigation against two of the Company's insurers to
recover under its excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all appeals and
reviews. A settlement hearing on the proposed settlement was held on March 31,
2000 and the court orally approved the settlement. A written order should be
signed in due course. In 1999, the Company recorded a charge of $5.9 million,
which represented the cost of the Settlement. The Company had funded its
required cash contribution to the settlement as of December 31, 1999 except for
a) the sum of $0.6 million, which the Company paid during the quarter ended
March, 31, 2000; and b) the cost of the litigation with two of the Company's
insurers which are not expected to be material.
14. BUSINESS CONCENTRATIONS
Substantially all of the Company's sales are made to customers in the
United States. Sales to one chain store retailer accounted for approximately
11%, 13%, and 16% of the Company's sales in 1999, 1998 and 1997, respectively
and accounts receivable from this customer was $3,048 at December 31, 1999.
Sales to one wholesale club were 17%, 15% and 8% in 1999, 1998 and 1997,
respectively and accounts receivable from this customer was $9,914 at December
31, 1999. No other customers accounted for more than eight percent of the
Company's sales in 1999, 1998 and 1997. The Company estimates an allowance for
doubtful accounts based on the creditworthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts.
15. SHAREHOLDERS RIGHTS PLAN
On April 2, 1998, the Company's board of directors authorized a
stockholder rights plan. Under the terms of the plan, stockholders of record at
the close of business on April 13, 1998, received a dividend distribution of
one preferred stock purchase right for each outstanding share of the Company's
common stock held. The rights will become exercisable only in the event, with
certain exceptions, an acquiring party accumulates fifteen percent or more of
the Company's voting stock, or if a party announces an offer to acquire fifteen
percent or more. The rights will expire on April 1, 2008.
F-13
Each right will entitle stockholders to buy one one-hundredth of a share
of a new series of preferred stock at an exercisable price of $14.00. In
addition, upon the occurrence of certain events, holders of the rights will be
entitled to purchase either the Company's stock or shares in an "acquiring
entity" at half of market-value. Further, at any time after a person or group
acquires fifteen percent or more (but less than fifty percent) of the Company's
outstanding voting stock, the Board of Directors may, at its option, exchange
part or all of the rights (other than rights held by the acquiring person or
group, which will become void) for shares of the Company's common stock on a
one-for-one basis. The Company will be entitled to redeem the rights at $0.01
per right at any time until the tenth day following the acquisition of a
fifteen percent position in its voting stock.
16. FACILITY CLOSURES
On March 15, 2000 the Company announced that it will be closing all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. The Company will incur a charge of approximately $0.3
million for employee severance payments and other incremental charges directly
attributable to the sale of the manufacturing facilities. The plant closings
are planned to be completed by mid May of Fiscal 2000.
F-14
DONNKENNY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II Valuation and Qualifying Accounts...............................
SCHEDULE II
DONNKENNY, INC.
Valuation and Qualifying Accounts
For the Years ended
December 31, 1999, 1998 and 1997
BALANCE OF CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF PERIOD
- ---------------------------------------------------------------------------------- -----------------------------------------
Year ended December 31, 1999:
Reserve for bad debts ............. $ 602,000 (173,000) (64,000) $ 365,000
Reserve for discounts ............. 18,000 1,583,000 (1,584,000) 17,000
----------- -----------
Subtotal for accounts receivable $ 620,000 $ 382,000
=========== ===========
Reserve for inventory markdowns ... 1,935,000 1,786,000 (1,800,000) $ 1,921,000
=========== ===========
Year ended December 31, 1998:
Reserve for bad debts ............. $ 511,000 45,000 (46,000) $ 602,000
Reserve for discounts ............. 209,000 1,190,000 1,381,000 18,000
----------- -----------
Subtotal for accounts receivable $ 720,000 $ 620,000
=========== ===========
Reserve for inventory markdowns ... 3,384,000 1,909,000 (3,358,000) $ 1,935,000
=========== ===========
Year ended December 31, 1997:
Reserve for bad debts ............. $ 968,000 (175,000) 282,000 $ 511,000
Reserve for discounts ............. 1,272,000 3,872,000 4,935,000 209,000
----------- -----------
Subtotal for accounts receivable $ 2,240,000 $ 720,000
=========== ===========
Reserve for inventory markdowns ... 11,715,000 6,093,000 (14,424,000) $ 3,384,000
=========== ===========