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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, 2000
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
Over-the-Counter Market on March 9, 2001 of $0.52 per share, was approximately
$2,271,057*. As of March 9, 2001, 4,367,417, 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.
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 broad lines 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 Pierre
Cardin (R) Delta Burke(R), Donnkenny (R), Casey & Max (R), Victoria Jones (R),
Ann Travis(R), and Decade Designs(R).
Pierre Cardin Knits
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., Stein Mart, J.C. Penney and the Chadwick's Catalog. Approximately 80% of
these products are imported, predominately from Hong Kong, the Philippines and
Korea. In addition, it also sells exclusive private label products to such
customers as Saks, Inc. and the Bon Ton.
Pierre Cardin Options
During the third quarter of 2000, the Company launched a new moderately
priced sportswear line called Pierre Cardin Options under the Pierre Cardin
license. This label is sold to department stores including J.C. Penney and
Federated. Approximately 94% of these products are imported predominately from
Hong Kong and the Philippines.
Ann Travis
On July 1, 2000, the Company acquired certain assets of Ann Travis Inc. The
Company produces women's sportswear under the Ann Travis and Decade Designs
trademarks and under the licensed Delta Burke trademark. Major customers include
Brylane, Mervyns, Bedford Fair, J.C. Penney, Fingerhut and the Chadwicks
Catalog. Approximately 63% of Ann Travis products are manufactured domestically.
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, Meijer, Bealls, J.C. Penney and Sears. Donnkenny has been an
established brand name for over 60 years. During 2000, Donnkenny expanded the
sourcing of its products to Guatemala due to the closedown of its domestic
manufacturing facilities in May 2000. Approximately 67% of Donnkenny products
are sourced in this manner. In addition, it also sells exclusive private label
products.
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, Mervyn's, Stein Mart,
J.C. Penney and Sears. The products are marketed for missy, large sizes and
petites. Approximately 98% of these products are imported, predominately from
India, Hong Kong and Morocco. In addition, it also sells exclusive private label
products.
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, Federated, 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 96% of these
products are imported, predominately from China, India, Israel and Hong Kong. In
addition, it also sells exclusive private label products.
2
MANUFACTURING AND IMPORTING
Approximately 11% of the Company's products sold in the year ended December
31, 2000 ("Fiscal 2000") were manufactured in the United States, as compared
with 21% in the year ended December 31, 1999 ("Fiscal 1999"). In Fiscal 2000,
the Company's domestically produced products were chiefly manufactured by
several outside contractors, after the closedown of its owned facilities in May
2000.
The remaining 89% of the Company's products sold in Fiscal 2000 were
produced abroad and imported into the United States, principally from Hong Kong,
India, China, Guatemala, Israel, the Philippines, Korea, Mexico and Thailand.
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. Two foreign contractors accounted for 23% of the Company's
products, but no other domestic or foreign contractor manufactured more than 9%
of the Company's products in Fiscal 2000.
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 also are
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. In order to mitigate this
risk, all of the Company's foreign purchasing is done in U.S. dollars. 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 78% of the products sold by the Company
in Fiscal 2000 were manufactured in Asia.
CUSTOMERS
In Fiscal 2000, the Company shipped orders to approximately 9,700 stores in
the United States. This customer base represents approximately 970 accounts. Of
the Company's net sales for Fiscal 2000, department stores accounted for
approximately 57%, wholesale clubs for approximately 17%, mass merchants for
approximately 9%, catalog customers for approximately 7%, chain stores for
approximately 5%, specialty retailers for approximately 3%, and other customers
for approximately 2%.
The Company markets its products to major department stores, including J.
C. Penney, Dillard's, May Company, Federated, Stein Mart, Kohl's, Goody's, Stage
Stores, Saks, Inc. and 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 Fiscal 2000, sales to Wal-Mart accounted for 16.7% and sales to J.C.
Penney accounted for 13.4% 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 40 of its large customers and, in Fiscal 2000, was
used to place 52% 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.
3
SALES AND MARKETING
At March 9, 2001, the Company had an 11 person sales force, 9 of whom were
Company employees and 2 were independent commissioned sales representatives for
outside buying offices. 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. The Company has begun
sourcing a limited quantity of fabric from overseas.
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: Donnkenny (R), Casey & Max (R), Victoria Jones (R),
Decade Designs(R), Ann Travis(R) and Beldoch Popper (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 2000 surpassed the minimum requirements of this
license, and the Company intends to renew this license for an additional
one-year period. With the acquisition of the Ann Travis assets in July 2000, the
Company was granted the licensing rights to manufacture, import and sell women's
sportswear, knits and sweaters in the United States under the Delta Burke(R)
trademark. The Delta Burke license extends to December 2005, provided net sales
equal specified minimums.
BACKLOG
At March 9, 2001, the Company had unfilled, confirmed customer orders of
approximately $50.4 million, compared to approximately $36.2 million of such
orders at March 10, 2000, 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 9, 2001, the Company had 225 full-time employees, of whom 129
were salaried and 96 were paid on an hourly basis. The Company had 3 part-time
employees, of which 2 worked on an hourly basis and 1 worked on a salary 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.
4
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, 2000. The Company owns
five facilities in Virginia, and leases three additional facilities; one in
Summerville, South Carolina, one in New York State and one in Hong Kong.
Approximate Square Owned or
Location Footage Function Leased
- -------- ------- -------- ------
Floyd, Virginia........................... 79,600 Currently for sale Owned
Independence (Grayson), Virginia.......... 70,350 Currently for sale Owned
Independence (Kendon), Virginia........... 37,550 Company leasing to third party, currently for sale Owned
Rural Retreat, Virginia................... 61,230 Currently for sale Owned
Wytheville, Virginia...................... 161,800 Distribution, administration Owned
Summerville, South Carolina(1)............ 200,000 Distribution center Leased
New York, New York(2)..................... 43,034 Offices and principal showrooms Leased
Hong Kong (Comet Building) (3)............ 2,200 Administration, sourcing, quality control Leased
-------
TOTAL................................. 655,764
=======
- ---------------------
1) This facility is leased, with annual rental payments totaling $473,929, 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 $1,800,000 in the aggregate. 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 were completed at the end of May 2000.
5
ITEM 3. LEGAL PROCEEDINGS
a. 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 750,000 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. An order approving the settlement was signed on
July 12, 2000. 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 March 31, 2000; except for the cost of
litigation with one of the Company's insurers, which is not expected to be
material.
b. On April 27, 1998, Wanda King, a former employee of the Company, commenced an
action against the Company in the United States District Court for the Western
District of Virginia. In her complaint, the Plaintiff seeks damages in excess of
$8.0 million claiming 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. The Company has interposed an answer
to the Complaint denying the material allegations. Pre-trial discovery is now
taking place and trial is scheduled for July 10, 2001.
c. The Company was a party to legal proceedings arising in the ordinary course
of its business involving a claim by a former supplier of the Company.
On July 1, 2000, a settlement of $220,000 was reached with the Plaintiff in that
proceeding. The settlement required two lump sum payments of $62,500 and $27,500
in July and August 2000, respectively. The first payment of the remaining
balance began in September 2000, and will continue in equal monthly payments
until September 1, 2001. Legal costs associated with the settlement were
approximately $129,000.
d. On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to the Company's shareholders a one for four reverse stock split as
part of an effort to maintain continued listing of the Company's common stock on
the NASDAQ Market. The reverse stock split recommendation was approved by the
Company's shareholders at a special meeting held on April 18, 2000. The reverse
split became effective on April 20, 2000. As a result of the split, each four
shares of common stock applicable to shareholders on the effective date of the
split were converted into one share of stock. Prior to the split, the Company
had 14,229,540 shares outstanding. As a result of the split, the Company had
approximately 3,557,385 shares outstanding. Earnings (loss) per share and share
amounts have been restated to reflect the reverse split for all periods
presented. By letter dated May 8, 2000, NASDAQ notified the Company that
although the Company had achieved compliance with the listing requirement of a
closing bid price of at least $1.00, the Company's market capitalization had
fallen below $5.0 million which is an additional requirement for listing on the
NASDAQ National Market. Accordingly, while the Company maintained its listing
with NASDAQ, the Company's securities were transferred from the NASDAQ National
Market to the NASDAQ SmallCap Market effective with the opening of business on
May 11, 2000. By letter dated July 18, 2000, NASDAQ notified the Company that
the Company's stock had failed to maintain the $1.00 minimum bid price over the
last 30 consecutive trading days. The Company was given 90 days to regain
compliance, but failed to do so before the deadline on October 16, 2000. The
Company petitioned the NASDAQ Board of Directors for continued listing. That
request was denied and as of November 15, 2000, the Company's stock was
delisted. The Company's shares are now traded on the Over-the-Counter Market.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of Shareholders will be held on May 10, 2001.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is currently traded on the Over-the-Counter
Market under the symbol "DNKY." The Common Stock began trading on the Nasdaq
National Market on June 17, 1993 and was listed on the NASDAQ Market until
November 15, 2000.
The following table sets forth the quarterly high and low closing
prices of a share of Common Stock for the Company's two most recent fiscal
years, plus the interim period through March 9, 2001.
PERIOD HIGH LOW
- ------ ---- ---
Fiscal 1999
First Quarter............................... $2.06 0.97
Second Quarter............................. 1.69 0.42
Third Quarter.............................. 1.63 0.50
Fourth Quarter............................. 1.25 0.53
Fiscal 2000
First Quarter............................... $1.06 2.62
Second Quarter............................. 3.13 0.50
Third Quarter.............................. 0.75 0.47
Fourth Quarter............................. 0.72 0.19
Fiscal 2001
Ten Weeks Ended March 9, 2001............... 0.59 0.38
On March 9, 2001, the closing price for a share of Common Stock was $.52
per share.
The number of holders of record for Registrant's Common Stock as of March
10, 2001 was 65.
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 credit agreement prohibits the Company from declaring or
paying dividends without the consent of the Company's lenders.
8
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 2000 and 1999
and for each of the years in the three year period ended December 31, 2000 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, 1998, 1997 and 1996 and for the
fiscal years ended December 31, 1997 and 1996 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 31, December 31, December 31, December 31, December 31,
1996 1997 1998 1999 2000
CONSOLIDATED STATEMENT OF (In thousands, except per share data)
OPERATIONS DATA:
Net sales......................... $255,179 $245,963 $197,861 $173,749 $151,055
Cost of sales..................... 202,580 196,633 157,069 138,816 124,073
-------- -------- -------- -------- --------
Gross profit...................... 52,599 49,330 40,792 34,933 26,982
Selling, general and
Administrative expenses.......... 57,370 45,361 38,221 33,002 28,194
Amortization of goodwill and
other related acquisition costs.... 1,449 1,204 1,321 1,390 1,437
Provision for settlement of
litigation......................... - - - 5,875 599
Restructuring Charge............. - 1,723 1,180 500
-------- -------- -------- -------- --------
Operating income (loss).......... (6,220) 1,042 70 (5,334) (3,748)
Interest expense, net............ 5,387 5,461 4,778 4,007 5,097
-------- -------- -------- -------- --------
Loss before income taxes ........ (11,607) (4,419) (4,708) (9,341) (8,845)
Income tax expense (benefit)..... (3,319) (1,210) (644) 87 88
-------- -------- -------- -------- --------
Net loss......................... $(8,288) $(3,209) $(4,064) $(9,428) $(8,933)
======== ======== ======== ======== ========
BASIC LOSS PER COMMON
SHARE (1):
Net loss.......................... $(2.37) $(0.91) $(1.15) $(2.65) $(2.26)
======== ======== ======== ======== ========
Shares used in the calculation of
basic loss per share 3,503 3,518 3,538 3,552 3,957
======== ======== ======== ======== ========
DILUTED LOSS PER
COMMON SHARE (1):
Net loss.......................... $(2.37) $(0.91) $(1.15) $(2.65) $(2.26)
======== ======== ======== ======== ========
Shares used in the calculation of
diluted loss per share 3,503 3,518 3,538 3,552 3,957
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................... $16,917 $38,354 $42,661 $48,302 $39,199
Total assets....................... 139,433 102,460 100,215 101,837 91,343
Long-term debt, including
Current portion................... 50,761 27,048 32,055 42,775 42,147
Stockholders' equity............... 55,278 53,086 49,258 41,881 33,653
- ----------------------------
(1) All per share amounts and the shares used in the calculation of basic and
diluted (loss) per share have been retroactively restated to reflect the
one for four reverse stock split effective April 20, 2000.
9
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 1998 1999 2000
- --------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.4 79.9 82.1
---- ---- ----
Gross profit 20.6 20.1 17.9
Selling, general and administrative expenses 19.3 19.0 18.7
Amortization of goodwill and other related acquisition 0.7 0.8 1.0
costs
Provision for settlement of litigation 0.0 3.3 0.4
Restructuring charges 0.6 0.0 0.3
--- --- ---
Operating income/(loss) (0.0) (3.0) (2.5)
Interest expense, net 2.4 2.3 3.4
--- --- ---
Loss before income taxes (2.4) (5.3) (5.9)
Income tax (benefit) (0.3) 0.1 -
----- --- ---
Net (loss) (2.1%) (5.4%) (5.9%)
===== ====== ======
COMPARISON OF FISCAL 2000 WITH FISCAL 1999
NET SALES
Net Sales decreased by $22.7 million or 13.1% from $173.8 million in Fiscal
1999 to $151.1million in Fiscal 2000. The decline in net sales was due to
decreases in the Donnkenny line of $11.0 million (primarily due to the planned
exit of the coordinate business ), the Victoria Jones line of $19.3 million, and
the Casey & Max line of $5.7 million. The decreases were partially offset by
increases in the Pierre Cardin Knits line of $6.7 million, $1.4 million in sales
of the new Pierre Cardin Options line, and sales of the recently acquired Ann
Travis lines of $5.2 million.
GROSS PROFIT
Gross profit for Fiscal 2000 was $27.0 million, or 17.9 % of net sales,
compared to $34.9 million, or 20.1 % of net sales, for Fiscal 1999. The decrease
in gross profit dollars and as a percentage of net sales was attributable to the
Company's idle domestic plant capacity, the reduced sales levels noted above and
the continued sell off of inventory due to the poor retail climate.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $33.0 million
in Fiscal 1999 to $28.2 million in Fiscal 2000. As a percentage of net sales,
these costs decreased from 19.0% in Fiscal 1999 to 18.7% in Fiscal 2000. The
$4.8 million decline in selling, general and administrative expense was
primarily due to reductions in headcount. These reductions were partially offset
by start-up costs of approximately $1.9 million for a new Pierre Cardin Options
line and operating expenses of $1.1 million associated with the recently
acquired Ann Travis lines.
PROVISION FOR SETTLEMENT OF LITIGATION
In Fiscal 2000 the Company recorded a litigation provision of $599.
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.
10
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 750,000 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. An order approving the settlement was signed on
July 12, 2000. In 1999, the Company recorded a charge of $5.9 million, which
represented the cost of the Settlement. The Company funded its required cash
contribution to the settlement as of March 31, 2000; except for the cost of
litigation with one of the Company's insurers, which is not expected to be
material.
RESTRUCTURING CHARGE
On March 15, 2000 the Company announced it would close all of its domestic
manufacturing plants. These facilities are located in Floyd and Independence,
Virginia. During the first quarter ended March 31, 2000, the Company recorded a
restructuring charge of $0.5 million which included the following:
(i) $0.2 million to write down property, plant and equipment, and (ii)
$0.3 million related to the cost of providing severance payments to
approximately 200 employees terminated as a result of the facility closures
which has been paid out to the employees. The plant closings were completed by
the end of May 2000. The Company has put these facilities up for sale.
LOSS FROM OPERATIONS
In Fiscal 2000, the Company reported a loss from operations of $3.7 million
versus a loss of $5.3 million for Fiscal 1999, which was inclusive of the $5.9
million provision for the settlement of the Consolidated Class Action
litigation.
INTEREST EXPENSE
In Fiscal 2000, interest expense was $5.1 million versus $4.0 million in
1999. The increase was attributable to higher borrowings under the loan
agreement and higher interest rates.
PROVISION FOR INCOME TAXES
The Fiscal 2000 provision for income taxes of $0.88 million reflects
state and local income taxes, versus a provision of $0.87 million in 1999.
NET LOSS
In Fiscal 2000 the Company reported a net loss of $8.9 million, or
($2.26) per share, versus a net loss of $9.4 million, or ($2.65) per share in
Fiscal 1999.
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.
11
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.
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 attributed to the sale of the manufacturing
facility.
LOSS 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
($2.65) per share, versus a net loss of $4.1 million or ($1.15) per share in
Fiscal 1998.
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 $1.1 million for Fiscal 2000 primarily for
computer software and hardware, compared to $0.5 million in Fiscal 1999. In
Fiscal 2000, the Company was permitted to spend up to $2.0 million on capital
investments in accordance with the 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 2000, direct borrowings under the revolving credit
facility were $39.3 million and term loans amounted to $2.8 million.
Additionally, the Company had letters of credit outstanding of $12.0 million,
with unused facility of $23.0 million. At the end of Fiscal 1999, direct
borrowings, term loans and letters of credit outstanding under the credit
facility were $40.0 million, $2.5 million and $17.6 million, respectively.
On June 29, 1999, the Company and its operating subsidiaries signed a
three-year credit agreement (the "Credit Agreement") with CIT
Group/Commercial Services. 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 originally bore interest at the
prime rate plus one half percent. 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 $0.25 million plus all accrued and unpaid interest beginning
September 30, 1999 through June 30, 2002. The Credit Agreement expires on June
30, 2002.
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.
12
The Credit Facility contains several 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 tangible net worth and comply with minimum
earnings before depreciation, amortization, interest, and taxes (EBITDA), and a
minimum interest coverage ratio.
During Fiscal 1999, the Company entered into the First and Second
Amendment and Waiver agreements that waived the existing defaults at September
30,1999 and reset the amount of over advances for December 1999 and January
2000. 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 over advance 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 was paid for the Fourth Amendment and
Waiver.
On July 6, 2000, the Company entered into a Fifth Amendment to finance
the acquisition of the Ann Travis business by the issuance of an additional $1.3
million term loan. The new term loan bears interest at the prime rate plus 1.5 %
(11.0% at December 31, 2000) and is repayable over thirty six months commencing
January 1, 2001. A fee of $100,000 was paid for the Fifth Amendment.
On November 13, 2000, the Company entered into a Sixth Amendment and
Waiver to revise the loan covenants as of September 30, 2000 and for the
remainder of the year and to decrease factoring commissions from 0.45% to 0.35%
effective September 1, 2000. A fee of $39,990 was paid in connection with the
Sixth Amendment.
On March 28, 2001, the Company entered into a Seventh Amendment and
Waiver to extend the Final Maturity Date of the original agreement to June 30,
2004,waive existing events of default under the Credit Agreement as of December
31, 2000 with respect to the Company's non compliance with covenants related to
minimum interest coverage, EBITDA, and tangible net worth, and to amend certain
other provisions of the Credit Agreement including covenants and the level of
allowable overadvances to support the Company's 2001 business plan. Pursuant to
this amendment, the interest rate on borrowings was increased to 2.0% above the
prime rate effective January 1, 2001. A fee of $200,000 will be paid in
connection with the Seventh Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to 0.35% of gross sales,
plus certain customary charges. The factoring agreement expires on December 31,
2001.
During Fiscal 2000, cash provided by operating activities was $2.9
million, principally as the result of decreases in inventory and increases in
accounts payable offset by increases in accounts receivable, prepaid expenses
and other current assets and decreases in accrued expenses and other current
liabilities. 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.
Cash used in investing activities in Fiscal 2000 included $1.5 million
for the acquisition of the Ann Travis business, and $1.1 million for the
purchase of fixed assets, offset by $0.2 million from the sale of fixed assets.
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 financing activities in Fiscal 2000 was $0.6 million which
represents net repayments under the revolver of $0.8 million, repayments of $1.0
million of the term loan, repayments of $0.2 of a secured term loan and net
borrowings of a new term loan of $1.3 million to finance the Ann Travis
acquisition. Cash provided by financing activities in Fiscal 1999 was $10.7
million, which represented net borrowings under the revolving credit line of
$8.4 million and net borrowings of the term loan of $2.3 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.
13
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 continuing 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.
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 order to mitigate
this risk, all of the Company's foreign purchasing in done in U.S. dollars. 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 78% of the products sold by the Company
in Fiscal 2000 were manufactured in Asia.
Facility Closures
On March 15, 2000 the Company announced that it would close all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. During the first quarter ended March 31, 2000, the
Company incurred a restructuring charge of $0.5 which included the following:
(i) $0.3 million related to the cost of providing severance payments to
approximately 200 employees terminated as a result of the facility closures
which has been paid out to employees; (ii) $0.2 million to write down property,
plant, and equipment. The plant closings were completed by end of May 2000. The
Company has put these facilities up for sale.
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.
14
Reverse Stock Split
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to the Company's shareholders a one for four reverse stock split as
part of an effort to maintain continued listing of the Company's common stock on
the NASDAQ Market. 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 during fiscal 2000, the
Company's bid price had fallen below $1.00.
The reverse stock split recommendation was approved by the Company's
shareholders at a special meeting held on April 18th, 2000. The reverse split
became effective on April 20, 2000. As a result of the split, each four shares
of common stock applicable to shareholders on the effective date of the split
were converted into one share of stock. Prior to the split, the Company had
14,229,540 shares outstanding. As a result of the split, the Company had
approximately 3,557,385 shares outstanding. Earnings (loss) per share and share
amounts have been restated to reflect the reverse split for all periods
presented.
By letter dated May 8, 2000, NASDAQ notified the Company that although the
Company had achieved compliance with the listing requirement of a closing bid
price of at least $1.00, the Company's market capitalization had fallen below
$5.0 million which is an additional requirement for listing on the NASDAQ
National Market. Accordingly, while the Company maintained its listing with
NASDAQ, the Company's securities were transferred from the NASDAQ National
Market to the NASDAQ SmallCap Market effective with the opening of business on
May 11, 2000.
By letter dated July 18, 2000, NASDAQ notified the Company that the
Company's stock had failed to maintain the $1.00 minimum bid price over the last
30 consecutive trading days. The Company was given 90 days to regain compliance,
but failed to do so before the deadline on October 16, 2000. The Company
petitioned the NASDAQ Board of Directors for continued listing. That request was
denied and as of November 15, 2000 the Company's stock was delisted. As a
result, the Company's stock is currently traded on the Over-the-Counter Market.
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement addresses
a limited number of issues causing implementation difficulties for entities
applying SFAS No. 133. SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The Company was required to adopt SFAS
No. 133 effective January 1, 2001. Adoption of SFAS No. 133 did not have a
significant impact on the Company's reported results of operations, equity or
financial position, as it does not engage in derivative or hedging transactions.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". This bulletin summarizes certain of the SEC Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases SAB
No. 101A and No. 101B, was effective for registrants no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The adoption
of this SAB did not have a significant impact on the reported results of
operations or equity of the Company.
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.
15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following item 14 of this Annual Report of
Form 10-K
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DANIEL H. LEVY, a director of the Company, became Chairman of the Board and
Chief Executive Officer of the Company on January 1, 2000. Prior thereto, he had
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 57 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 42 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 43 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 66 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 58 years old.
HARRY A. KATZ, a director of the Company, is Managing Partner of Retail
Resources, L.P., a national distributor of supplies for retail chain stores. He
is also Chairman of Mercury Commerce Inc., a computer software consulting
company. Prior thereto, he was Vice President and acting Chief Financial Officer
of Best Products. Mr. Katz is 50 years old.
RICHARD C. RUSTHOVEN, a director of the Company, is a retired retail
Executive with a 35-year career in the retail and apparel business. He was
President and Chief Operating Officer of Stix, Baer and Fuller, a retail
department store in St. Louis, MO. He was also Chairman and Chief Executive
Officer of the Outlet Department Store and Denby Apparel chain store of
Providence, RI. He was President and Chief Executive Officer of T.G&Y stores, a
discount chain store in Oklahoma City, OK. He was President of Gentlemen's
Warehouse, a men's specialty chain in New Bedford, MA and most recently was
Executive Vice President of Apparel for Montgomery Ward & Company, Inc., a
retail sales store in Chicago, IL. Mr. Rusthoven is 60 years old.
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, 2000, all
Section 16(a) reporting requirements applicable to the Company's officers,
directors and greater than ten percent shareholders were in compliance.
17
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years ended
December 31, 2000, December 31, 1999, and December 31, 1998 to those persons who
were, at December 31, 2000 (i) the chief executive officer and (ii) the other
most 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 one for four
reverse stock split effective April 20, 2000.
SUMMARY COMPENSATION TABLE
---------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------------------------
SECURITIES ALL OTHER
RESTRICTED UNDERLYING COMPENSATION
FISCAL STOCK OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS (5) (1)
- --------------------------------------------------------------------------------------------------------------------
Daniel H. Levy (2) 2000 $429,902 $25,000 37,500 2,580
Chairman of the Board and Chief
Executive Officer
Lynn Siemers-Cross (3) 2000 $502,652 600
President and Chief Operating 1999 $502,652 810
Officer 1998 $502,550 25,000 1,020
Beverly Eichel (4) 2000 $327,652 $50,000 600
Executive Vice President and 1999 $275,000 810
Chief Financial Officer 1998 $63,462 $50,000 37,500 255
(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 2000. The
Company paid Mr. Levy a relocation bonus of $25,000 with a gross up for the
tax effect of this bonus.
(3) Bonus for 1998 included the grant of options to purchase 25,000 shares of
common stock
(4) 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.
(5) All options have been retroactively restated to reflect the one for four
reverse stock split effective April 20, 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
gave 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 exercised this
termination right, the Company agreed to pay Mr. Levy severance of three, six
and twelve months respectively. On May 17, 2000 Mr. Levy and the Company waived
their rights to terminate the employment agreement.
Mr. Levy's employment 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, and certain insurance benefits. The Company paid 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 Mr. Levy 37,500 restricted shares of the
Company's stock, which will vest December 31, 2002. The employment agreement
further provides for the issuance of another 37,500 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 37,500 shares of the Company's common stock, at a purchase price of
$2.75 a share. 25,000 of these stock options vested on June 30, 2000 and the
balance of 12,500 vested on December 31, 2000. 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.
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. On February 26, 2001 Mr. Levy's employment agreement was
amended to eliminate the restricted stock award referred to in his original
agreement, and increased his annual base salary to $700,000 effective January 1,
2001.
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, 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 37,500 restricted shares
and options to purchase an aggregate of 37,500 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 12,500 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). On October 11, 2000,
Ms. Siemers-Cross' agreement was extended to December 31, 2002. The extension
agreement grants severance benefits to three times the sum of the annual base
salary in effect on the date of termination, provided that Ms. Siemers-Cross
exercises her termination rights within ninety (90) days following a Change of
Control.
18
Beverly Eichel
On September 28, 1998, Ms. Eichel entered into a two-year employment
agreement with 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 37,500 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.
On June 6, 2000, Ms. Eichel's employment agreement was extended to December
31, 2002 at a base salary of $325,000 per annum. The agreement also provides for
a discretionary performance bonus, as in the original agreement. The agreement
provides that in the event Ms. Eichel's employment is terminated (except in
certain limited circumstances) following a Change in Control of the Company, Ms.
Eichel will have the right to receive severance benefits equal to twice the sum
of the her base salary. If Ms. Eichel provides notice of termination to the
Company within ninety (90) days from the effective date of Change in Control,
she is entitled to receive benefits equal to one and one half times her base
salary in effect on the date of termination.
19
2000 STOCK OPTIONS GRANTS
The Company strives to distribute stock option awards broadly throughout
the organization. Stock option awards are based on the individual's position and
contribution to the Company. The Company's long term performance ultimately
determines compensation from stock options because stock option value is
entirely dependent on the long term growth of the Company's common stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers and
Directors during Fiscal 2000, including information concerning the potential
realizable value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS OPTION TERM (1)
------------------------------------------------------- -----------------------------------
NUMBER OF
SECURITIES % OF TOTAL EXERCISE
UNDERLYING # OF OPTIONS PRICE (3) EXPIRATION
NAME OPTION (#) GRANTED IN 2000 ($/SH) DATE 5% ($) 10% ($)
- ---- ---------- --------------- ------ ---- ------ -------
Daniel H. Levy 37,500 24.79% 2.75 1/1/10 64,875 164,250
Lynn Siemers-Cross - - - - - -
Sheridan C. Biggs - - - - - -
Harvey Horowitz - - - - - -
Harry A. Katz (2) 3,750 2.48% 0.69 3/28/10 1,613 4,125
Richard C. Rusthoven (2) 3,750 2.48% 0.468 9/27/10 1,092 2,817
(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. Katz and Rusthoven 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.
20
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, 2000 DECEMBER 31, 2000 (2)
ON EXERCISE VALUE ----------------- ---------------------
(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--- -------- ----------- ------------- ----------- -------------
Daniel H. Levy (3) 0 0 43,750 0 0 0
Lynn Siemers-Cross (4) 0 0 49,000 15,375 0 0
Sheridan C. Biggs 0 0 6,250 0 0 0
Harvey Horowitz 0 0 11,875 0 0 0
Harry A. Katz 0 0 3,750 0 0 0
Richard C. Rusthoven 0 0 3,750 0 0 0
Beverly Eichel (5) 0 0 30,000 7,500 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 Over-the-Counter Market on
December 31, 2000 $.33 per share.
(3) Represents 6,250 options granted to him under the Company's 1994
non-employee director option plan, 37,500 options granted to him in
connection with the execution of his employment agreement.
(4) Represents 1,875 options granted to her under the Company's 1992 Stock
Option Plan, 37,500 options granted in connection with the execution of her
employment agreement and 25,000 options granted as part of her Fiscal 1998
compensation.
(5) Represents 37,500 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 22, 2001,
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 22, 2001 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 and a one-for-four reverse stock
split effective April 20, 2000. 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
- ------------------- --------------------- ----------------
Daniel H. Levy 1,388,638 (2) 31.8%
Putnam Investments, Inc. 299,813 (3) 6.86%
1 Post Office Square
Boston, MA 02109
Bruce Galloway 285,650 (4) 6.54%
1325 Avenue of the Americas
New York, NY 10019
Lynn Siemers-Cross 43,750 (5) 1.0%
Sheridan C. Biggs 36,500 (6) *
Harvey Horowitz 8,750 (7) *
Harry A. Katz (2) *
Richard C. Rusthoven 3,750 (8) *
Beverly Eichel 30,000 (9) *
21
All directors and officers as a group (7 persons)
- -------
* Less than 1%.
(1) Percentage to be based on the number of shares of Common Stock outstanding
as of March 22, 2001.
(2) Based on the Company's records and information filed in Schedule 13D/A
filed with the Company on February 27, 2001, Daniel H. Levy is the
beneficial owner of 1,388,638 shares of Common Stock, or 32.2% of the
outstanding common stock, consisting of 671,819 shares of Common Stock
owned directly by Mr. Levy, 43,750 shares of Common Stock which Mr. Levy
has a right to acquire pursuant to presently exercisable stock options
which were issued to Mr. Levy pursuant to the Company's 1994 Non- Employee
Director Option Plan and 669,319 shares of Common Stock owned by Harry A.
Katz, a Director of the Company, which Mr. Levy has the right to direct the
vote of pursuant to a certain Letter Agreement between Mr. Katz and Mr.
Levy dated January 8, 2001, and 3,750 shares of Common Stock which Mr. Katz
has a right to acquire pursuant to presently exercisable stock options
which, upon Mr. Katz's exercise, Levy would have the right to direct the
vote of pursuant to the Letter Agreement between Mr., Katz and Mr., Levy.
As mentioned above, Harry A. Katz is the record owner of 669,319 shares of
Common Stock owned directly and 3,750 shares of Common Stock underlying
options which were issued to Mr. Katz pursuant to the Company's 1994 Non-
Employee Director Option Plan. Such options are currently exercisable.
(3) Based on information contained in Schedule 13G/A filed with the Company on
February 17, 2000. Includes shares held by Putman Investment Management,
Inc. and Putman Advisory Company, Inc.
(4) Based on information contained in Schedule 13G/A filed with the Company on
January 17,2001.
(5) Includes 1,875 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, 10,000 shares underlying options issued as part pursuant to
Ms. Siemers-Cross' Fiscal 1998 compensation and 37,500 shares underlying
options which were granted pursuant to Ms. Siemers-Cross employment
agreement 37,500 restricted shares granted to Ms. Siemers-Cross pursuant to
her employment agreement and 6,250 shares of stock issued as part of her
Fiscal 1997 compensation. Not included are 15,000 shares underlying options
issued as part of Fiscal 1998 compensation, which are exercisable in 2002,
2003 and 2004.
(6) Includes 10,250 shares owned by Sheridan C. Biggs and 26,250 shares
underlying options, which have been granted to Mr. Biggs pursuant to the
Company's 1994 Non-Employee Director Option Plan. Such options are
currently exercisable.
(7) Includes 625 shares owned by Harvey Horowitz and 8,125 shares underlying
options which have been granted to Mr. Horowitz pursuant to the Company's
1994 Non- Employee Director Option Plan. Such options are currently
exercisable.
(8) 3,750 shares underlying options were granted to Richard C. Rusthoven
pursuant to the Company's 1994 Non- Employee Director Option Plan. Such
options are currently exercisable.
(9) Includes 30,000 shares underlying options, which are vested, out of 37,500
underlying options, which have been granted to Beverly Eichel pursuant to
her employment agreement. The balance of 7,500 options vested in September
2001.
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Horowitz is of counsel to the law firm of Mintz & Gold LLP, which
provides legal services to the Company. Mintz and Gold received approximately
$150,000 in fees during 2000 for legal services rendered to the Company. On June
13, 2000, the Company engaged Gayle Hanley as a merchandising and design
consultant. Ms. Hanley, who has been engaged in the consulting/retail business
for 30 years, is the wife of Daniel H. Levy, Chairman and CEO of the Company.
Her consulting compensation was $90,675. From October 16, 2000 to March 2, 2001,
Ms. Hanley was employed full time as EVP Merchandising and Design for the
Company at an annual salary of $300,000. Since March 2, she has not performed
any further services for 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, 2000 and 1999
Consolidated Statements of Operations for the Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998
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
2000.
23
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, 2001
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.
/S/ DANIEL H. LEVY
--------------------------------------------
DATED: MARCH 30, 2001 DANIEL H. LEVY, CHAIRMAN OF THE BOARD OF
DIRECTORS AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/S/ LYNN SIEMERS-CROSS
--------------------------------------------
DATED: MARCH 30, 2001 LYNN SIEMERS-CROSS, PRESIDENT AND CHIEF
OPERATING OFFICER
/S/ BEVERLY EICHEL
DATED: MARCH 30, 2001 --------------------------------------------
BEVERLY EICHEL, CHIEF FINANCIAL OFFICER,
EXECUTIVE VICE PRESIDENT-FINANCE AND SECRETAR
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/S/ SHERIDAN C. BIGGS
--------------------------------------------
DATED: MARCH 30, 2001 SHERIDAN C. BIGGS, DIRECTOR
/S/ HARRY A. KATZ
--------------------------------------------
DATED: MARCH 30, 2001 HARRY A. KATZ, DIRECTOR
/S/ HARVEY HOROWITZ
--------------------------------------------
DATED: MARCH 30, 2001 HARVEY HOROWITZ, DIRECTOR
/S/ RICHARD C. RUSTHOVEN
--------------------------------------------
DATED: MARCH 30, 2001 RICHARD C. RUSTHOVEN, DIRECTOR
24
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 The 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)
10.51 The Second Amendment Agreement, dated as of December 23, 1999
25
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)
10.55 Asset Purchase Agreement between Ann Travis Inc. and DonnKenny
Apparel, Inc. dated as of June 1, 2000.(16)
10.56 The Fifth Amendment and Waiver Agreement, dated as of July 6,
2000 among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc.(16)
10.57 The First Amendment to the Employment Agreement between Daniel
H. Levy and the Company dated May 17, 2000.(16)
10.58 Employment Agreement between Beverly Eichel and the Company
dated June 6,2000.(16)
10.59 The Sixth Amendment and Waiver Agreement, dated as of November
13, 2000, among the Company, the Lenders Named therein and the
CIT Group/Commercial Services, Inc.(17)
10.60 Employment Agreement between Lynn Siemers-Cross and the Company
dated October 11, 2000.(17)
10.61 Amendment to Rights Agreement dated January 4, 2001 between
DonnKenny, Inc. and Mellon Investor Services.(18)
10.62 The Second Amendment to the Employment Agreement between Daniel
H. Levy and the Company dated February 26, 2001.(19)
10.63 The Seventh Amendment and Waiver Agreement dated as of March 28,
2001, among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc.(19)
21 Subsidiaries of the Company.
26
- -----------------
(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) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
(16) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on August 25, 2000.
(17) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 14, 2000.
(18) Incorporated herein by reference to the Company's Report on Form 8-K
filed with the Commission on January 10, 2001.
(19) Filed herewith.
27
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Subsidiary Jurisdiction of Incorporation
Christiansburg Garment Company Delaware
Donnkenny Apparel, Inc. Delaware
Beldoch Industries Corporation Delaware
H Squared Dispositions, Inc. New York
28
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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the fiscal years in the three year period then ended. Our audits also
included the financial statement 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial position of Donnkenny, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the fiscal years in the three year
period then ended in conformity with accounting principles generally accepted in
the United States of America. 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 21, 2001
(March 28, 2001 as to Note 6)
F-1
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 2000
---------------------------------------
ASSETS
CURRENT ASSETS:
Cash................................................ $ 65 $ 180
Accounts receivable, net of allowances for bad debts
of $109 and $382, respectively................... 30,968 30,022
Recoverable income taxes............................ 155 304
Inventories......................................... 19,730 29,323
Deferred tax assets................................. 1,482 2,865
Prepaid expenses and other current assets........... 1,177 636
Assets held for sale................................ 1,206 456
---------------- ----------------
Total current assets ............................... 54,783 63,786
PROPERTY, PLANT AND EQUIPMENT, NET ..................... 5,076 5,981
OTHER ASSETS ........................................... 430 546
INTANGIBLE ASSETS ...................................... 31,054 31,524
---------------- ----------------
TOTAL .................................................. $ 91,343 $ 101,837
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................. $ 1,523 $ 1,168
Accounts payable ................................... 11,751 10,351
Accrued expenses and other current liabilities ..... 2,310 3,965
---------------- ----------------
Total current liabilities ...................... 15,584 15,484
---------------- ----------------
LONG-TERM DEBT ......................................... 40,624 41,607
DEFERRED TAX LIABILITIES ............................... 1,482 2,865
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 4,367 and
3,557 shares in 2000 and 1999 respectively 44 36
Additional paid-in capital ......................... 50,449 47,877
Issuable shares for litigation settlement .......... - 1,875
Deficit ............................................ (16,840) (7,907)
---------------- ----------------
Total stockholders' equity ......................... 33,653 41,881
---------------- ----------------
TOTAL .................................................. $ 91,343 $ 101,837
================ ================
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,
2000 1999 1998
----------------------------------------------------------------
NET SALES ............................................. $ 151,055 $ 173,749 $ 197,861
COST OF SALES ......................................... 124,073 138,816 157,069
---------------- ---------------- ----------------
Gross Profit ................................... 26,982 34,933 40,792
OPERATING EXPENSES:
Selling, general and administrative expenses ...... 28,194 33,002 38,221
Amortization of goodwill and other related
acquisition costs .............................. 1,437 1,390 1,321
Provision for settlement of litigation ............ 599 5,875 -
Restructuring charge .............................. 500 - 1,180
---------------- ---------------- ----------------
Operating (loss) income ........................ (3,748) (5,334) 70
OTHER EXPENSE:
Interest expense 5,097 4,007 4,778
---------------- ---------------- ----------------
Loss before income taxes ....................... (8,845) (9,341) (4,708)
INCOME TAX EXPENSE (BENEFIT) .......................... 88 87 (644)
---------------- ---------------- ----------------
NET LOSS .......................................... $ (8,933) $ (9,428) $ (4,064)
================ ================ ================
Basic and diluted (loss) per common share ......... $ (2.26) $ (2.65) $ (1.15)
================ ================ ================
Shares used in the calculation of basic and diluted
(loss) per common share ........................ 3,956,679 3,552,000 3,537,500
================ ================ ================
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, 1997 $ - $ 35 $47,466 $ - $ 5,585 $ 53,086
Issuance of Common Stock ................... - 1 235 - - 236
Net Loss ................................... - - - - (4,064) (4,064)
-------- --------- ---------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 1998 $ - $ 36 $47,701 $ - $ 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 $ - $ 36 $47,877 $ 1,875 $ (7,907) $ 41,881
Issuance of Common Stock ................... - - 705 - - 705
Issuance of shares for litigation settlement - 8 1,867 (1,875) - -
Net Loss ................................... - - - (8,933) (8,933)
-------- --------- ---------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 2000 $ - $ 44 $50,449 $ - $(16,840) $ 33,653
======== ========= ========== =========== ========== ==========
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,
2000 1999 1998
----------------- ----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (8,933) $ (9,428) $ (4,064)
Adjustments to reconcile net cash
provided by (used in) operating activities:
Provision for shares issuable on litigation settlement .. - 1,875 -
Deferred income taxes ................................... - - (177)
Depreciation and amortization of fixed assets ........... 820 814 1,687
Loss on disposal of fixed assets ........................ - 5 506
Amortization of intangibles and other assets ............ 1,437 1,390 1,321
Write down of fixed assets .............................. 200 - 907
Provision for losses on accounts receivable ............. 22 (72) (46)
Changes in assets and liabilities, net of the effects
of acquisitions and disposals:
(Increase) decrease in accounts receivable .............. (968) (587) (4,864)
Decrease in recoverable income taxes .................... 149 351 526
(Increase) decrease in inventories ...................... 10,144 (7,351) 5,276
Decrease (increase) in prepaid expenses and other
current assets ....................................... (541) 630 881
Decrease (increase) in other non-current assets 116 1,780 (2,327)
(Decrease) increase in accounts payable ................. 1,400 1,960 (929)
Decrease in accrued expenses and
other current liabilities ............................ (950) (3,290) (53)
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities.. 2,896 (11,923) (1,356)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ................. (1,054) (501) (2,452)
Proceeds from sale of property, plant and equipment ....... 189 1,381 836
Acquisition of business ................................... (1,518) - -
Increase in intangibles ................................... - - (1,789)
---------------- ---------------- ----------------
Net cash (used in) provided by investing activities .. (2,383) 880 (3,405)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increases (repayments) of long-term debt .............. (1,168) 2,346 (5,580)
Proceeds of long-term debt ................................ - - 483
Borrowings for acquisition 1,300 - -
Net increases (repayments) under revolving credit line .... (760) 8,374 10,104
Net cash (used in)provided by financing activities .. (628) 10,720 5,007
---------------- ---------------- ----------------
NET (DECREASE) INCREASE IN CASH ............................... (115) (323) 246
CASH, AT BEGINNING OF PERIOD .................................. 180 503 257
---------------- ---------------- ----------------
CASH, AT END OF PERIOD ........................................ $ 65 $ 180 $ 503
================ ================ ================
Supplemental Disclosures
Income Taxes paid ......................................... $ 61 $ 206 $ 72
================ ================ ================
Interest paid ............................................. $ 4,527 $ 3,438 $ 4,072
================ ================ ================
Supplemental schedule of non-cash financing
activities ................................................
Issuance of common stock $ 705 $ 176 $ 236
================ ================ ================
See accompanying notes to consolidated financial statements.
F-5
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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, 2000 and 1999 of $430 and $546,
respectively, represent deferred financing costs, which are amortized over the
term of the related debt agreement.
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, the sportswear division of Oak Hill
Sportswear Corporation ("Oak Hill"), Beldoch Industries Corporation ("Beldoch")
in 1995, and Ann Travis in 2000 (see note 17). Goodwill is amortized on a
straight-line basis over the expected periods to be benefited, ranging from 10
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 $815, $572, and $606 were included in the
selling, general and administrative expenses in the Company's Consolidated
Statements of Operations for the years ended December 31, 2000, 1999, and 1998,
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, 2000 and
December 31, 1999 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.
Recent Accounting Pronouncements - In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." This statement addresses a limited number of issues causing
implementation difficulties for entities applying SFAS No. 133. SFAS No. 133
requires that an entity recognize all derivative instruments as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company was required to adopt SFAS No. 133 effective January 1, 2001.
Adoption of SFAS No. 133 did not have significant impact on the Company's
reported results of operations, equity or financial position, as it does not
engage in derivative or hedging transactions.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". This bulletin summarizes certain of the SEC Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases SAB
No. 101A and No. 101B, was effective for registrants no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The adoption
of this SAB did not have a significant impact on the reported results of
operations or equity of the Company.
Reclassifications - Certain reclassifications have been made in 1999 and
1998 financial statements to conform to the 2000 presentation.
2. INVENTORIES
Inventories consisted of the following at December 31, 2000 and December
31, 1999:
2000 1999
---- ----
Raw materials...................... $ 1,719 $1,548
Work in process.................... 936 2,742
Finished goods..................... 17,075 25,033
------- -------
$19,730 $29,323
======= =======
F-7
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31,
2000 and December 31, 1999:
2000 1999
---- ----
Land and land improvements......... $213 $ 409
Buildings and improvements......... 4,634 5,263
Machinery and equipment............ 4,371 4,645
Furniture and fixtures............. 1,736 1,727
------- --------
10,954 12,044
Less accumulated depreciation and
amortization.................... 5,878 6,063
======= ========
$5,076 $5,981
======= ========
4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2000 and
December 31, 1999:
2000 1999
---- ----
Goodwill............................... $36,241 $35,274
Licenses............................... 6,325 6,325
-------- --------
42,566 41,599
Less accumulated amortization.......... 11,512 10,075
======== ========
$31,054 $31,524
======== ========
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at December 31, 2000 and December 31, 1999:
2000 1999
---- ----
Accrued Salaries, Benefits and Bonus $515 $1,809
Accrued Litigation Settlement.......... - 625
Other Accrued Expenses................. 1,795 1,531
------ ------
Total ................................ $2,310 $3,965
====== ======
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2000 and December
31, 1999:
2000 1999
---- ----
Revolving Credit Borrowings.............. $39,258 $40,017
Senior Term Loans........................ 2,800 2,500
Other (a)................................ 89 258
------- -------
Total .................................. $42,147 $42,775
Less current maturities.................. 1,523 1,168
------- -------
$40,624 $41,607
======= =======
Annual maturities of long-term debt are
as follows:
2001 $ 1,523 $ 1,168
2002 933 1,090
2003 433 $40,517
2004 $39,258 -
------- -------
$42,147 $42,775
======= =======
F-8
On June 29, 1999, the Company and its operating subsidiaries signed a three
year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services. 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 originally bore interest at the prime
rate plus one half percent (9% 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.
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 tangible net worth and comply with a minimum
earnings before depreciation, amortization, interest and taxes (EBITDA) and a
minimum interest coverage ratio.
During Fiscal 1999, the Company entered into the First and Second Amendment
and Waiver Agreements that waived existing defaults at September 30, 1999 and
reset the amounts Overadvances for December 1999 and January 2000. 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 and the term loan was increased to 1.5% above
the prime rate (11% of December 31, 2000) 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 was
paid for the Fourth Amendment and Waiver.
On July 6, 2000, the Company entered into a Fifth Amendment to finance the
acquisition of the Ann Travis business (see note 17) by the issuance of an
additional $1.3 million term loan. The new term loan bears interest at the prime
rate plus 1.5 % (11.0% at December 31, 2000) and is repayable over thirty six
months commencing January 1, 2001. A fee of $100,000 was paid for the Fifth
Amendment.
On November 13, 2000, the Company entered into a Sixth Amendment and Waiver
to revise the loan covenants as of September 30, 2000 and for the remainder of
the year and decrease the factoring commission from 0.45% to 0.35% effective
September 1, 2000. A fee of $39,990 was paid in connection with the Sixth
Amendment.
On March 28, 2001, the Company entered in to a Seventh Amendment and Waiver
to extend the Final Maturity Date of the original agreement to June 30, 2004;
waive existing events of default under the Credit Agreement as of December 31,
2000 with respect to the Company's non-compliance with covenants related to
minimum interest coverage, EBITDA and Tangible Net Worth; and to amend certain
other provisions of the Credit Agreement including covenants and the level of
allowable overadvances to support the Company's 2001 business plan. Pursuant to
this amendment, the interest rate on borrowings was increased to 2.0% above the
prime rate effective January 1, 2000. A fee of $200,000 will be paid in
connection with the Seventh 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. On November 27, 2000, the factoring agreement was amended to
lower the commission rate effective September 1, 2000 to .35% of gross sales and
to extend the agreement through December 31, 2001.
F-9
At December 31, 2000 the Company was contingently liable for outstanding
letters of credit issued amounting to $11,821.
- --------
(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, 2000 the principal
balance of this loan amounted to $89. 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, 2000, 1999
and 1998 and is comprised of the following:
2000 1999 1998
---- ---- ----
Current:
Federal...................... $ - $ - $ -
State and local.............. 88 87 (310)
Deferred......................... - - (334)
------ ------- -------
$ 88 $ 87 $ (644)
====== ======= =======
A reconciliation of the statutory Federal tax rate and the effective
rate is as follows:
2000 1999 1998
---- ---- ----
Federal statutory tax rate................ (34)% (34)% (34)%
State and local taxes, net of federal
income tax benefit.................... (2) (3) (2)
Losses not providing state and local
tax benefit........................... - - (8)
Nondeductible items....................... 12 4 7
Losses not providing federal tax benefit - 2 -
Increase of valuation allowance........... 25 32 23
Other..................................... - - -
----- ------ -----
1% 1% (14)%
===== ====== =====
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,
2000 1999
------------ ------------
Deferred tax assets:
Accounts receivable allowances........ $ 36 $ 141
Inventory valuation................... 832 1,139
Accrued expenses...................... 472 1,449
State operating loss carryforwards.... 1,573 1,177
Federal operating loss carryforwards 7,696 4,783
Other................................. 141 136
---------- ----------
Total gross deferred tax assets... 10,750 8,825
---------- ----------
Deferred tax liabilities:
Property, plant and equipment......... (1,159) (1,159)
Intangibles........................... (2,843) (3,037)
---------- ----------
Total gross deferred tax
liabilities (4,002) (4,196)
---------- ----------
Net deferred tax asset.................... 6,748 4,629
Less valuation allowance.................. (6,748) (4,629)
---------- ----------
Net deferred taxes ....................... $ - $ -
========== ==========
F-10
As of December 31, 2000 and 1999, the Company recorded a valuation
allowance against the net deferred tax assets due to uncertainty of the
realization of net operating loss carryforwards.
The Company has estimated Federal net operating loss carryforwards of
approximately $22,635 and state and local net operating loss carryforwards of
approximately $34,039 as of December 31, 2000. Net operating loss carryforwards,
which if unused, will expire from 2011 through 2022.
8. LEASES
Rental expense for operating leases for the years ended December 31, 2000,
1999, and 1998 approximated $3,296 $3,223, and $4,557, respectively. Minimum
future rental payments as of December 31, 2000 for operating leases with initial
noncancelable lease terms in excess of one year, are as follows:
Year Ending December 31, Amount
------------------------
2001................................................ $3,026
2002................................................ 2,606
2003................................................ 2,305
2004................................................ 2,231
2005................................................ 2,231
Thereafter 2,231
-----
$14,630
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 2000 and 1999 in the amounts of $43 and
$55, respectively. The Company did not make contributions to the plan in Fiscal
1998 except for the payment of administrative expenses.
10. EARNINGS PER SHARE
Basic EPS 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. See note 16 regarding the reverse stock spilt.
In the years ended December 31, 2000, 1999 and 1998, the incremental shares
under stock plans of 0, 73,314, and 107,813, 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.
F-11
11. STOCK BASED COMPENSATION
a. Stock Options
The Company has a stock award and incentive program that permits the
issuance of up to 500,000 options on terms as determined by the Board of
Directors. Effective April 20, 2000, the Company had a one for four reverse
stock split (see note 16).
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 the Company's Common
Stock on the date of the grant.
Information regarding the Company's stock option plan is summarized below:
2000 1999 1998
---------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE PRICE EXERCISE
OPTIONS PRICE OPTIONS OPTIONS PRICE
----------- -------------- ---------- --------------- ---------- --------------
Outstanding at beginning
Of the year............... 383,225 12.56 435,038 $ 16.16 415,163 $21.68
Granted....................... 151,250 1.52 62,500 5.04 125,000 4.52
Exercised..................... - - - - - -
Cancelled..................... 130,345 14.43 (114,313) 18.08 (105,125) 24.16
----------- -------------- ---------- --------------- ---------- --------------
Outstanding at end of year ... 404,130 9.85 383,225 12.56 435,038 16.16
=========== ========== ==========
Exercisable at end of year ... 212,701 171,485 121,040
=========== ========== ==========
Available for grant at
year end...................... 95,870 116,775 64,962
=========== ========== ==========
The options outstanding at December 31, 2000 range in price as follows:
# OF
OPTIONS EXERCISE PRICE
------- --------------
183,125 $ 0.00 - 3.88
66,250 $ 4.00 - 8.00
47,851 $10.00 - 13.50
78,751 $15.75 - 17.75
28,153 $26.75 - 72.25
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
(loss) and earnings/(loss) per share for the years ended December 31, 2000, 1999
and 1998 would have been adjusted to the pro forma amounts indicated below:
2000 1999 1998
---- ---- ----
Net(loss):
As reported............................... $(8,933) $(9,428) $(4,064)
======== ======== ========
Pro forma............................... $(9,717) $(9,675) $(4,777)
======== ======== ========
Basic and diluted net (loss) per share: $ (2.26) $ (2.65) $ (1.15)
======== ======== ========
As reported...............................
Pro forma ............................... $ (2.46) $ (2.72) $ (1.35)
======== ======== ========
F-12
The weighted average Black-Scholes value of the options granted during
2000, 1999 and 1998 were $1.47, $1.13, and $0.83, respectively. The following
weighted-average assumptions were used in the Black-Scholes option-pricing model
for grants in 2000, 1999 and 1998 respectively: dividend yield of 0% for all
periods, volatility of 130%, 119%, and 71%, risk-free interest rate of 5.24%,
5.35%, and 4.82%, and an expected life of 10, 10 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
vested on March 31, 2000 and 60,000 shares (as a result of the reverse stock
split) were issued in fiscal 2000. In January 2000, 150,000 shares of restricted
stock were granted to an executive of the Company in connection with his
employment agreement at no cost to him. The executive's employment agreement was
amended effective January 1, 2001 to rescind the 150,000 restricted stock grant.
Compensation cost recorded in 2000, 1999 and 1998 were $94, $261, and $328,
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 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 2000, 1999 or 1998.
12. RESTRUCTURING CHARGES
On March 15, 2000 the Company announced that it would close all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. During the first quarter ended March 31,2000, the
Company recorded a restructuring charge of $0.5 million which included the
following: (i) $ 0.2 million to write down property, plant and equipment; and
(ii) $0.3 million related to the cost of providing severance payments to
approximately 200 employees terminated as a result of the facility closures,
which has been paid out to employees. The plant closings were completed by end
of May 2000. The Company has put these facilities up for sale. As of December
31, 2000, assets held for sale included a total of three facilities.
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. 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.
13 COMMITMENT AND CONTINGENCIES
a. 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.
F-13
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
(which when issued in the fourth quarter of fiscal 2000 was 750,000 shares as a
result of the reverse stock split), and to pursue litigation against two of the
Company's insurers to recover under its excess insurers' policies. An order
approving the settlement was signed on July 12, 2001. 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
March 31, 2000; except for the cost of the litigation with one of the Company's
insurers, which is not expected to be material.
b. 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 seeks damages in
excess of $8.0 million claiming that she was constructively discharged by reason
of the fact that she resigned from her position rather than followed alleged
improper and illegal instructions from her supervisors and superiors. The
Company denied the allegations contained in the Complaint. The Company has
interposed an answer to the Complaint denying the material allegations.
Pre-trial discovery is now taking place and a trial is scheduled for July 10,
2001
c. The Company is a party to legal proceedings arising in the ordinary course of
its business. Management believes that the ultimate resolution of these
proceedings and the proceeding mentioned in Item b above, will not, in the
aggregate, have a material adverse effect on the financial condition, results of
operations, liquidity or business of the Company. The Company has recorded a
litigation provision of $599,000 in Fiscal 2000.
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
13%, 11%, and 13%, of the Company's sales in 2000, 1999 and 1998, respectively
and accounts receivable from this customer was $3,365 at December 31, 2000.
Sales to one wholesale club were 17%, 17%, and 15% in 2000, 1999, and 1998,
respectively and accounts receivable from this customer was $12,978 at December
31, 2000. No other customers accounted for more than 8% of the Company's sales
in 2000, 1999, and 1998. 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.
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.
As of January 4, 2001, the Company amended its Rights Agreement to change
the definition of "Exempt Person." The definition of an Exempt Person now
includes a group consisting of an executive and director of the Company and
their affiliates, but only to the extent that such group does not become a
beneficial owner of an additional 1% or more of the voting stock of the Company.
16. REVERSE STOCK SPLIT
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to the Company's shareholders a one for four reverse stock split as
part of an effort to maintain continued listing of the Company's common stock on
the NASDAQ Market.
F-14
The reverse stock split recommendation was approved by the Company's
shareholders at a special meeting held on April 18 2000. The reverse split
became effective on April 20, 2000. As a result of the split, each four shares
of common stock applicable to shareholders on the effective date of the split
were converted into one share of stock. 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 during
fiscal 2000, the Company's bid price had fallen below $1.00.
Prior to the split, the Company had 14,229,540 shares outstanding. As a
result of the split, the Company had approximately 3,557,385 shares outstanding.
Earnings (loss) per share and share amounts have been restated to reflect the
reverse split for all periods presented.
By letter dated May 8, 2000, NASDAQ notified the Company that although the
Company had achieved compliance with the listing requirement of a closing bid
price of at least $1.00, the Company's market capitalization had fallen below
$5.0 million which is an additional requirement for listing on the NASDAQ
National Market. Accordingly, while the Company maintained its listing with
NASDAQ, the Company's securities were transferred from the NASDAQ National
Market to the NASDAQ SmallCap Market effective with the opening of business on
May 11, 2000. By letter dated July 18,2000,NASDAQ notified the Company that the
Company's stock had failed to maintain the $1.00 minimum bid price over last 30
consecutive trading days. The Company was given 90 days to regain compliance,
but failed to do so before the deadline on October 16,2000. The Company
petitioned the NASDAQ Board of Directors for continued listing. That request was
denied and as of November 15, 2000, the Company's stock was delisted. The
Company's shares are now traded on the Over-the-Counter Market.
17. ANN TRAVIS ACQUISITION
On July 1, 2000 the Company acquired certain assets of Ann Travis Inc.
("Ann Travis") for $1.5 million, including costs incurred in the acquisition of
$.3 million. Ann Travis designs, imports, and markets women's sportswear. Assets
acquired included $.5 million of certain merchandise inventory, the Ann Travis
and Decade Designs trademarks and the license rights for sales of women's
apparel under the Delta Burke trademark. The purchase was funded by CIT under a
new $1.3 million term loan which requires payment in equal installments over
three years commencing January 1, 2001 (see note 6). Goodwill of $1.0 million
was recorded in connection with this acquisition and will be amortized over ten
years. The acquisition was accounted for as a purchase.
The following unaudited pro-forma net sales information combines financial
information of the Company with Ann Travis for Fiscal 2000 and 1999 assuming the
acquisition had occurred as of January 1, 1999:
Net Sales 2000 1999
----------- ------------
$ 161,400 $189,500
The pro-forma net loss for fiscal 2000 and 1999 for this acquisition, had
the acquisition occurred at the beginning of 1999, is not significant, and
accordingly, is not presented. The unaudited pro-forma combined net sales
information is not necessarily indicative of the results of operations of the
combined companies, had the acquisition occurred on the dates specified above,
nor is it indicative of future results of operations.
F-15
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, 2000, 1999 and 1998
BALANCE OF CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------- ------------- ----------- ---------------
Year ended December 31, 2000
Reserve for bad debts $ 365,000 (22,000) (250,000) $ 93,000
Reserve for discounts 17,000 1,930,000 (1,931,000) 16,000
--------------- -------------
Subtotal for accounts receivable $ 382,000 $ 109,000
=============== =============
Reserve for inventory markdowns $ 1,921,000 4,290,000 (4,527,000) $ 1,684,000
=============== =============
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 bad 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
=============== =============