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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
the fiscal year ended December 31, 2001
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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
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 790-3900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
---- ----
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
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(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 25, 2002 of $1.17 per share, was
approximately $5,109,877*. As of March 25, 2002, 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.
PRODUCTS
The Company designs, 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) and Harve Benard
(R). In 2001 the Company's products were marketed through the following
divisions: Pierre Cardin Knits, Pierre Cardin Options, Ann Travis, Donnkenny,
Casey & Max and Victoria Jones.
Pierre Cardin Knits
The division produces women's knitwear pursuant to a license. It also
produces knitwear under a license agreement with Harve Benard. The products are
sold to knitwear departments of department and specialty stores. Its major
customers include Federated, Chadwick's Catalog, Stein Mart, Sam's Club,
Marshalls and Newton Buying. In addition, it sells exclusive private label
products to such customers as Saks, Inc. and the Bon Ton. Approximately 90% of
these products are imported, predominately from Hong Kong, China, Korea,
Thailand and the Philippines.
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. Its major customers include J.C. Penney, Army Air Force Exchange, and
Goody's. Approximately 76% of these products are imported predominately from
China, India, and Hong Kong. In 2001, based on Management's evaluation of the
performance of the Pierre Cardin Options line, the Company decided to
consolidate the line under the Pierre Cardin division.
Ann Travis
On July 1, 2000, the Company acquired certain assets of Ann Travis Inc.
The Company produces women's sportswear under the licensed Delta Burke
trademark and a line of women's dresses under the Decade Designs trademark.
Major customers include Chadwick's Catalog, Mervyns, J.C. Penney, Bedford Fair
and Goody's. Approximately 48% of Ann Travis products are manufactured
domestically, 33% are sourced in Central America, and the balance is sourced
in the Far East. Based on Management's evaluation of the performance of the
Decade Designs line, the Company decided to exit the women's dress business in
October 2001. The Company continues to sell sportswear under the Delta Burke
trademark.
Donnkenny
Donnkenny imports moderately priced women's career and casual pants for
missy, petites and large sizes. Its major customers include J.C. Penney, Sears,
Ames, Fred Meyer and Stage Stores. Donnkenny has been an established brand name
for over 60 years. In addition, it sells exclusive private label products.
During 2000, Donnkenny expanded the sourcing of its products to Guatemala due to
the closedown of its domestic manufacturing facilities. Approximately 50% of its
products are sourced in Central America. Approximately 36% are sourced in the
Far East; the balance is produced domestically.
Casey & Max
Casey & Max imports novelty woven tops and sportswear. The line consists of
moderately priced products sold to department stores, specialty stores and
chains including Mervyns, Catherine's, Kohl's, Goody's, Carson Pirie Scott,
Foleys, Stein Mart and May Company. The products are marketed for missy,
2
large sizes and petites. In addition, it sells exclusive private label products.
Approximately 99% of these products are imported, predominately from India and
Hong Kong.
Victoria Jones
The Victoria Jones label represents moderately-priced women's knit and
sweater products which are sold to department stores, specialty stores and
chains including May Company, Mervyn's, Catherine's, Kmart, Federated, Macys
West, J.C. Penney and Sam's Club. Its products are marketed for missy, large
sizes and petites. All of these products are imported, predominately from China,
Hong Kong, India and Bangladesh. In addition, it sells exclusive private label
products.
MANUFACTURING AND IMPORTING
Approximately 10% of the Company's products sold in the year ended December
31, 2001 ("Fiscal 2001") were manufactured in the United States, as compared
with 11% in the year ended December 31, 2000 ("Fiscal 2000"). Beginning 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 90% of the Company's products sold in Fiscal 2001 were
produced abroad and imported into the United States, principally from Hong Kong,
India, China, Guatemala, Korea, Thailand, Bangladesh and the Philippines.
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 long-term, formal
arrangements with the suppliers which manufacture its products. The Company
continually seeks additional suppliers throughout the world for its sourcing
needs. Two foreign contractors accounted for 22% of the Company's purchases,
but no other domestic or foreign contractor manufactured more than 9% of the
Company's purchases in Fiscal 2001.
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 the majority of 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 difficult for the Company to purchase additional goods
for the same selling season. The Company's relationships with foreign
suppliers also are subject to the 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 is 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. Approximately 76% of the products sold by
the Company in Fiscal 2001 were manufactured in Asia.
CUSTOMERS
In Fiscal 2001, the Company shipped orders to approximately 8,800 stores in
the United States. This customer base represents approximately 700 accounts. Of
the Company's net sales for Fiscal 2001, department stores accounted for
approximately 50%, wholesale clubs approximately 26%, catalog
3
customers approximately 10%, mass merchants approximately 6%, chain stores
approximately 5%, specialty retailers approximately 2%, and other customers
approximately 1%.
The Company markets its products to major department stores, including J.
C. Penney, May Company, Federated, Stein Mart, Kohl's, Goody's, Stage Stores,
Saks, Inc. and Sears, as well as wholesale clubs including Sam's, catalog
customers including Chadwick's of Boston and mass merchants including K-Mart.
The Company also sells exclusive private label products to catalog specialty
retailers and suppliers.
In Fiscal 2001, sales to Sam's accounted for 24%, sales to J.C. Penney
accounted for 18% and sales to Chadwick's of Boston accounted for 9% 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 54 of its large customers and, in Fiscal 2001, was
used to place 60% of the Company's order dollars. The Company is also linked by
EDI to several of its major fabric suppliers, which allows the Company to review
purchase orders for fabric on a weekly basis.
SALES AND MARKETING
At March 8, 2002, the Company had a 9 person sales force; 7 of them were
Company employees and 2 were independent commissioned sales representatives. 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. In 2001, 23% of
all goods produced were manufactured using domestic raw materials. 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 sources 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 under the Pierre
Cardin(R) trademark, including sweaters, pants, skirts, knitwear, jeans,
swimwear and activewear. The 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 2001 surpassed the minimum requirements of this
license, and the Company intends to continue this license for an additional
one-year period. On January 1, 2001 the Company signed a three-year agreement
with Harve Benard to produce and sell a knitwear line. The Company began
shipments in the fourth quarter of 2001. The agreement is renewable for an
additional three-year term provided net sales equal specified minimums. 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.
4
BACKLOG
At March 8, 2002, the Company had unfilled, confirmed customer orders of
approximately $31.2 million, compared to approximately $50.4 million of such
orders at March 9, 2001, 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. Generally, a comparison of unfilled orders from period
to period is not necessarily meaningful and may not be indicative of eventual
actual shipments. Some decline in orders is attributed to the decision to
discontinue the Pierre Cardin cashmere sweater program, to exit the women's
dress business, and the fact that the retailers are ordering closer to need due
to current business conditions. 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 19, 2002 the Company had 203 full-time employees, of whom 115
were salaried and 88 were paid on an hourly basis. The Company had 5 part-time
employees, of whom 4 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.
ITEM 2. PROPERTIES
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The following table indicates the facilities owned or leased at December 31,
2001. The Company owns four facilities in Virginia, and leases three additional
facilities; one in Summerville, South Carolina, one in New York State and one in
Hong Kong.
Approximate Owned or
Location Square Footage Function Leased
- -------- -------------- -------- ------
Floyd, Virginia.................... 79,600 Currently for sale Owned
Independence (Grayson), Virginia 70,350 Currently for sale Owned
Rural Retreat, Virginia............ 61,230 Sold March 7, 2002 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
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TOTAL.......................... 618,214
=======
- --------------------
1) This facility is leased, with annual rental payments totaling $477,405, 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 2003.
5
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
Independance and Floyd Virginia. The closings were completed at the end of May
2000.
ITEM 3. LEGAL PROCEEDINGS
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a. 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 sought
damages in excess of $8.0 million claiming that she was constructively
discharged by the Company. The Company interposed an Answer to the amended
Complaint denying the material allegations asserted in the Complaint and
brought a motion for summary judgement to dismiss the case. By Order dated
February 25, 2002, the United States District Judge granted the Company's
motion for summary judgement and the case was dismissed. The Plaintiff
has appealed this dismissal to the United States Court of Appeals for the
Fourth Circuit.
b. The Company is also a party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse
effect on financial condition, results of operations, liquidity or business
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's annual meeting of Shareholders will be held on May 23, 2002.
PART II
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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 8, 2002.
PERIOD HIGH LOW
- ------ ---- ---
Fiscal 2000
First Quarter................................ $ 2.62 1.06
Second Quarter ............................. 3.13 0.50
Third Quarter................................ 0.75 0.47
Fourth Quarter ............................. 0.72 0.19
Fiscal 2001
First Quarter................................ $ 0.59 0.38
Second Quarter ............................. 0.99 0.34
Third Quarter................................ 1.10 0.66
Fourth Quarter ............................. 0.90 0.41
Fiscal 2002
Ten Weeks Ended March 8, 2002............... 1.35 0.84
On March 25, 2002, the closing price for a share of Common Stock was $1.17
per share.
The number of holders of record for Registrant's Common Stock as of March
25, 2002 was 70.
6
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.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected consolidated financial data as of December 31, 2001 and 2000
and for each of the years in the three year period ended December 31, 2001 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 theron is also included herein. The selected
consolidated financial data as of December 31, 1999, 1998 and 1997 and for the
fiscal years ended December 31, 1998 and 1997 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
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December 31, December 31, December 31, December 31, December 31,
1997 1998 1999 2000 2001
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(In thousands, except per share data)
Consolidated Statement of Operations
Data:
Net sales ................................... $ 245,963 $ 197,861 $ 173,749 $ 151,055 $ 152,180
Cost of sales ............................... 196,633 157,069 138,816 124,073 117,497
--------- --------- --------- --------- ---------
Gross profit ................................ 49,330 40,792 34,933 26,982 34,683
Selling, general and
Administrative expenses ..................... 45,361 38,221 33,002 28,194 28,367
Amortization of goodwill and
other related acquisition costs ............ 1,204 1,321 1,390 1,437 1,489
Provision for settlement of litigation ...... -- -- 5,875 599 --
Restructuring Charge ........................ 1,723 1,180 -- 500 300
--------- --------- --------- --------- ---------
Operating income (loss) ..................... 1,042 70 (5,334) (3,748) 4,527
Interest expense, net ....................... 5,461 4,778 4,007 5,097 4,703
--------- --------- --------- --------- ---------
Loss before income taxes .................... (4,419) (4,708) (9,341) (8,845) (176)
Income tax expense (benefit) ................ (1,210) (644) 87 88 (220)
--------- --------- --------- --------- ---------
Net income (loss) ........................... $ (3,209) $ (4,064) $ (9,428) $ (8,933) $ 44
========= ========= ========= ========= =========
BASIC INCOME (LOSS) PER COMMON SHARE (1):
Net income (loss) ........................... $ (0.91) $ (1.15) $ (2.65) $ (2.26) $ 0.01
========= ========= ========= ========= =========
Shares used in the calculation of
basic income (loss) per share ............... 3,518 3,538 3,552 3,957 4,367
========= ========= ========= ========= =========
DILUTED INCOME (LOSS) PER COMMON SHARE (1):
Net income (loss) ........................... $ (0.91) $ (1.15) $ (2.65) $ (2.26) $ 0.01
========= ========= ========= ========= =========
Shares used in the calculation of
diluted income (loss) per share ............. 3,518 3,538 3,552 3,957 4,388
========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
Working capital ............................. $ 38,354 $ 42,661 $ 48,302 $ 39,199 $ 34,891
Total assets ................................ 102,460 100,215 101,837 91,343 82,400
Long-term debt, including current portion ... 27,048 32,055 42,775 42,147 35,777
Stockholders' equity ........................ 53,086 49,258 41,881 33,653 33,697
- -------------------
(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.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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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 1999 2000 2001
- -------------------------------------------------------------------------------------------------
Net sales ........................................................ 100.0% 100.0% 100.0%
Cost of sales .................................................... 79.9 82.1 77.2
----- ----- -----
Gross profit ..................................................... 20.1 17.9 22.8
Selling, general and administrative expenses ..................... 19.0 18.7 18.6
Amortization of goodwill and other related acquisition ........... 0.8 1.0 1.0
costs
Provision for settlement of litigation ........................... 3.3 0.4 0.0
Restructuring charge ............................................. 0.0 0.3 0.2
----- ----- -----
Operating income/(loss) .......................................... (3.0) (2.5) 3.0
Interest expense, net ............................................ 2.3 3.4 3.1
----- ----- -----
Loss before income taxes ......................................... (5.3) (5.9) (0.1)
Income tax (benefit) ............................................. 0.1 0.0 (0.1)
----- ----- -----
Net income/(loss) ................................................ (5.4%) (5.9%) 0.0%
===== ===== =====
COMPARISON OF FISCAL 2001 WITH FISCAL 2000
NET SALES
Net Sales increased by $1.1 million or 0.7% from $151.1 million in Fiscal
2000 to $152.2 million in Fiscal 2001. The increase in net sales was due to
increases in the Donnkenny line of $6.8 million, the Pierre Cardin Knits line
of $11.9 million, the Pierre Cardin Options line of $5.3 million and the Ann
Travis line of $5.8 million. The increases were partially offset by declines in
the Victoria Jones line of $7.2 million and $21.5 million in the Casey & Max
line.
GROSS PROFIT
Gross profit for Fiscal 2001 was $34.7 million, or 22.8% of net sales,
compared to $27.0 million, or 17.9% of net sales, for Fiscal 2000. The increase
in gross profit dollars and as a percentage of net sales was attributable to the
Company's Pierre Cardin Knits, Donnkenny Apparel and Victoria Jones lines,
decreases in the sales of non-current inventory due to lower non-current
inventory levels on hand, the favorable impact of the plant closures in Fiscal
2000 and improved sourcing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $28.4 million in
Fiscal 2001 from $28.2 million in Fiscal 2000. As a percentage of net sales,
these costs decreased from 18.7% in Fiscal 2000 to 18.6% in Fiscal 2001.
RESTRUCTURING CHARGE
In the fourth quarter of 2001, the Company recorded a charge of $0.3
million related to the writedown of assets held for sale.
INCOME FROM OPERATIONS
In Fiscal 2001, the Company reported income from operations of $4.5 million
versus a loss of $3.7 million for Fiscal 2000.
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INTEREST EXPENSE
In Fiscal 2001, interest expense was $4.7 million versus $5.1 million in
2000. The decrease was attributable to lower borrowings under the loan agreement
and a decrease in the Company's interest rate.
PROVISION FOR INCOME TAXES
In Fiscal 2001, the IRS Joint Committee completed its audit of the
Company's amended prior year tax returns. As a result, the Company will
receive net refunds of approximately $0.2 million.
The Company recorded a provision for state and local income taxes of $0.1
million in 2001 and 2000.
NET INCOME (LOSS)
In Fiscal 2001 the Company reported net income of $44,000 or $0.01 per
share, versus a net loss of $8.9 million, or ($2.26) per share in Fiscal 2000.
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 $151.1 million 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 a 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 $0.6 million
relative to certain lawsuits which were subsequently settled or dismissed.
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.
9
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 was not material.
RESTRUCTURING CHARGE
The restructuring charge of $0.5 million in 2000 is related to the
Company's closure of its domestic manufacturing facilities. The $0.5 million
included $0.2 million to writedown property plant and equipment and $0.3 million
related to the cost of employee severance which has been paid to the employees.
The plant closings were completed at the end of May 2000. The facilities were
put 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 $88,000 reflects state and
local income taxes, versus a provision of $87,000 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.
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 $1.4 million for Fiscal 2001, primarily for
computer software and hardware compared to $1.1 million in Fiscal 2000. In
Fiscal 2001, the Company was permitted to spend up to $2.0 million on capital
investments in accordance with the Credit Agreement described below.
At the end of Fiscal 2001, direct borrowings under the revolving credit
facility were $34.4 million and term loans amounted to $1.4 million.
Additionally, the Company had letters of credit outstanding of $9.0 million,
with an unused facility of $26.0 million. At the end of Fiscal 2000, direct
borrowings, term loans and letters of credit outstanding under the credit
facility were $39.3 million, $2.8 million and $12.0 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
10
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 as amended (see below) bore interest
at the prime rate plus two percent (6.75% at December 31, 2001). 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 as amended expires on June 30, 2004.
Collateral for the Credit Agreement 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 its operating subsidiaries, Donnkenny Apparel, Inc. and
Beldoch Industries Corporation.
The Credit Agreement 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, based upon the annual business plan approved by
the lender.
During Fiscal 1999 and Fiscal 2000, the Company entered into various
amendments and agreements to waive the Company's noncompliance with financial
covenants on certain dates and to reset overadvanced amounts and covenants.
These amendments and agreements also increased the interest rate on borrowings.
On July 6, 2000, the Company entered into an 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 2.0% and is repayable over thirty six months commencing January 1,
2001. A fee of $100,000 was paid for the Amendment.
On March 28, 2001, the Company entered into an Amendment and Waiver
Agreement to extend the Final Maturity Date of the original agreement to June
30, 2004, to 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 was paid
in connection with the Amendment and Waiver.
Effective January 1, 2002, the Company established covenants and the level
of allowable overadvances with the lender to support its 2002 business plan.
This Amendment and Waiver Agreement also amended the interest rate on the
revolving credit borrowings to the prime rate plus one and three quarters
percent (6.50% at January 1, 2002). No fee was paid in connection with the
Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .35% of gross sales, plus
certain customary charges. The agreement is in effect through December 31, 2002.
During Fiscal 2001, cash provided by operating activities was $7.7 million,
principally as the result of decreases in inventory and accounts receivable and
increases in accrued expenses and other current liabilities offset by decreases
in accounts payable. 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
11
by increases in accounts receivable, prepaid expenses and other current assets
and decreases in accrued expenses and other current liabilities
Cash used in investing activities in Fiscal 2001 included $1.4 million for
the purchase of fixed assets, principally computer equipment and related
software, offset by $0.1 million from the sale of fixed 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 used in financing activities in Fiscal 2001 was $6.4 million which
represents net repayments under the revolver of $4.8 million, repayments of $1.4
million of the term loan, and repayments of $0.1 million of a secured term loan.
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, and repayments of $0.2 million of a secured term loan
offset by net borrowings of a new term loan of $1.3 million to finance the Ann
Travis acquisition.
The Company believes that cash flows from operations and amounts available
under the revolving credit agreement will be sufficient for its needs for the
foreseeable future.
OTHER ITEMS AFFECTING THE COMPANY
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line wholesalers (such as the Company) and a
larger number of specialty manufacturers. The Company faces substantial
competition in its markets 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. Retailers are now placing smaller
orders and ordering closer to need. To the extent that these current market
conditions continue, there can be no assurance that the Company's financial
condition and results of operations will 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
12
operations. In order to mitigate this risk, all of the Company's foreign
purchasing in done in U.S. dollars. Some of the Company's imported merchandise
is subject to United States Customs duties. In addition, bilateral agreements
between the major exporting countries and the United States impose quotas, which
limit the amount of certain categories of merchandise that may be imported into
the United States. Any material increase in duty levels, material decrease in
quota levels or material decrease in available quota allocation could adversely
affect the Company's operations. Approximately 76% of the products sold by the
Company in Fiscal 2001 were manufactured in Asia.
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, import and market apparel.
Reverse Stock Split
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to its 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 3,557,385 shares outstanding. Earnings
(loss) per share and share amounts have been restated to reflect the reverse
split for all periods presented.
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ( "FASB") issued
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 June 2001, the FASB issued two new pronouncements: SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16 "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations within the scope of this Statement are
to be accounted for using one method: the purchase method. SFAS 141 is effective
as follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The Company has determined that the adoption of this
statement will not have an impact on the consolidated financial statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, "Intangible
Assets". It changes the accounting for goodwill from an amortization method to
an impairment only approach. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
in an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The Company will cease the
13
amortization of goodwill, which was recorded in past business combinations on
December 31, 2001 as required by SFAS No. 142. Amortization expense was $1.5
million during Fiscal 2001 and $1.4 million during Fiscal 2000 and 1999. The
Company will adopt this pronouncement in the first quarter of 2002, and
estimates that adopting this pronouncement will result in the write-off of
substantially all of the goodwill recorded in its consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Early adoption is encouraged. The Company will adopt this pronouncement on
January 1, 2002, and does not believe that there will be any material impact on
its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company will adopt this
pronouncement on January 1, 2002, and does not believe that there will be any
material impact on its consolidated financial statements.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described in
Note 1 to the consolidated financial statements. Certain of the Company's
accounting policies require the application of significant judgement by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgements are subject to an inherent degree
of uncertainty. These judgments are based on historical experience,
observation of trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. Significant
accounting policies include:
Revenue Recognition - The Company recognizes sales upon shipment of
-------------------
products to customers since title passes upon shipment. Provisions for
estimated uncollectible accounts, discounts and returns and allowances are
provided when sales are recorded based upon historical experience and current
trends . While such amounts have been within expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same rates as in the past.
Inventories - Inventory is stated at the lower of cost or market, cost
-----------
being determined on the first-in, first-out method. Reserves for slow moving
and aged merchandise are provided based on historical experience and current
product demand. The Company evaluates the adequacy of the reserves quarterly.
While markdowns have been within expectations and the provisions established,
the Company cannot guarantee that it will continue to experience the same
level of markdowns as in the past.
Valuation of Long-Lived Assets - The Company periodically reviews the
------------------------------
carrying value of its long-lived assets for continued appropriateness. This
review is based upon projections of anticipated future undiscounted cash
flows. While the Company believes that its estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially
affect evaluations.
14
Income Taxes - Currently, the Company provides for income taxes only to
------------
the extent that it expects to pay cash taxes (primarily state and local
taxes). This is due to the Company's cumulative net operating loss (NOL)
carryforward of $19.7 million for federal income taxes and $30.8 million for
state income taxes, which have generated estimated tax benefits of $8.1
million as of December 31, 2001. In accordance with generally accepted
accounting principles, the Company has not recognized in income any of this
tax benefit due to the size of the NOL carryforward and the Company's history
of unprofitable operations. However, should the Company conclude that future
profitability is assured, the estimated net realizable value of the deferred
tax asset would be partially or fully credited to net income. Subsequent
revisions to the estimated net realizable value of the deferred tax asset
could cause the Company's provision for income taxes to vary from period to
period; cash payments would remain unaffected until the benefit of the NOL is
utilized.
Forward Looking Statements
This Form 10-K (including but not limited to the sections hereof entitled
"Business" and "Management's Discussion and Analysis") contains or incorporates
by reference forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that assumed facts or bases
almost always vary from the actual results, and the differences between assumed
facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, there can be
no assurance that the statement of the expectation or belief will result, or be
achieved or accomplished. The words "believe", "expect", "estimate", "project",
"seek", "anticipate" and similar expressions may identify forward-looking
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Financial Statements following item 14 of this Annual Report of Form
10-K
15
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
DANIEL H. LEVY, a director of the Company since 1997, 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 58 years old.
LYNN SIEMERS, a director of the Company since 1997, 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 is 43 years old.
HARRY A. KATZ, a director of the Company since 2000, joined the Company in
June 2001 as its Executive Vice President and Chief Administrative Officer. He
is also Managing Partner of Retail Resources, L.P., a national distributor of
supplies for retail chain stores. Prior thereto, he was Vice President and
acting Chief Financial Officer of Best Products. Mr. Katz is 51 years old.
MAUREEN D. SCHIMMENTI, has been Vice President and Chief Financial Officer
of the Company since June 2001. She joined the Company in May 2000 as its
Corporate Controller. Prior thereto, she was the Executive Vice President and
Corporate Controller of the Anne Klein Company from 1986 to 2000. Ms. Schimmenti
also serves as Secretary of the Company. Ms. Schimmenti is 50 years old.
SHERIDAN C. BIGGS, a director of the Company since 1997, 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 67 years
old.
HARVEY HOROWITZ, a director of the Company since 1994, 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 59 years old.
RICHARD C. RUSTHOVEN, a director of the Company since 2000, 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, Missouri. He was also Chairman and Chief
Executive Officer of the Outlet Department Store and Denby Apparel chain store
of Providence, Rhode Island. He was President and Chief Executive Officer of
TG&Y stores, a discount chain store in Oklahoma City, Oklahoma. He was President
of Gentlemen's Warehouse, a men's specialty chain in New Bedford, Massachusetts
and most recently was Executive Vice President of Apparel for Montgomery Ward &
Company, Inc., a retail sales store in Chicago, Illinois. Mr. Rusthoven is 61
years old.
ROBERT A. KASENTER, a director of the Company since 2001, is the President
and Chief Executive Officer of Strategic Executive Actions, a consulting firm
specializing in human resources crisis management issues. Prior to that, he was
the Executive Vice President, Human Resources & Corporate Communication for
Montgomery Ward. He was employed by Montgomery Ward from June, 1968 until May,
1999 in various field and corporate positions. Mr. Kasenter is 55 years old.
16
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, 2001, all
Section 16(a) reporting requirements applicable to the Company's officers,
directors and greater than ten percent shareholders were in compliance.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth compensation paid for the fiscal years ended
December 31, 2001, December 31, 2000, and December 31, 1999 to those persons who
were, at December 31, 2001 (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
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------------------------------------------
SECURITIES
UNDERLYING ALL OTHER
FISCAL RESTRICTED OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS (7) (1)
- ---------------------------------------------------------------------------------------------------------------------------
Daniel H. Levy (2) 2001 $715,928 $200,000 2,580
Chairman of the Board and 2000 $429,902 $25,000 37,500 2,580
Chief Executive Officer
Lynn Siemers 2001 $517,487 $50,000 600
President and Chief Operating 2000 $502,652 600
Officer 1999 $502,652 810
Harry A. Katz (5) (6) 2001 $185,389 739
Executive Vice President and
Chief Administrative Officer
Maureen d. Schimmenti (5) 2001 $204,039 $10,000 1,104
Vice President and Chief
Financial Officer
Beverly Eichel (3) (4) 2001 $183,989 $25,000 600
Executive Vice President and 2000 $327,652 $50,000 600
Chief Financial Officer 1999 $275,000 810
(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 in 2000 with a gross-up
for the tax effect of this bonus.
(3) 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.
17
(4) Compensation for 2001 represents salary through June 30, 2001, the date of
Ms. Eichel's resignation.
(5) This individual became an Executive Officer in June 2001.
(6) Annual compensation represents prorated compensation from date of hire in
June 2001.
(7) 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
On June 12, 1997, Ms. Siemers 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 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' employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Siemers will have the right to receive severance
benefits equal to three times the sum of the last annual salary inclusive of
performance
18
bonus (but not incentive bonus). On October 11, 2000, Ms. Siemers' 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 exercises her termination rights within
ninety (90) days following a change of control.
2001 STOCK OPTIONS GRANTS
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 2001, 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 2001 ($/SH) DATE 5% ($) 10% ($)
---- ---------- --------------- ------ ---- ------ -------
Sheridan C. Biggs (2) 20,000 37.2% 0.5625 01/16/11 7,075 17,930
Sheridan C. Biggs (2) 1,250 2.3% 0.9000 05/10/11 708 1,793
Harvey Horowitz (2) 1,250 2.3% 0.9000 05/10/11 708 1,793
Harry A. Katz (2) 1,250 2.3% 0.9000 05/10/11 708 1,793
Richard C. Rusthoven (2) 1,250 2.3% 0.9000 05/10/11 708 1,793
Robert A. Kasenter (2) 3,750 7.0% 0.9000 08/08/11 2,123 5,379
- ---------------
(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 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.
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, 2001 DECEMBER 31, 2001 (2)
ON EXERCISE VALUE ----------------- ---------------------
(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--- -------- ----------- ------------- ----------- -------------
Daniel H. Levy (3) -- -- 43,750 -- -- --
Lynn Siemers (4) -- -- 49,375 15,000 -- --
Sheridan C. Biggs -- -- 27,500 -- $16,800 --
Harvey Horowitz -- -- 9,375 -- -- --
Harry A. Katz -- -- 5,000 -- -- --
Richard C. Rusthoven -- -- 5,000 -- $3,150 --
Robert A. Kasenter -- -- 3,750 -- -- --
Maureen d. Schimmenti (5) -- -- 2,000 8,000 $1,680 $6,720
- -------------
(1) All options were granted at an exercise price equal to market value of the
common stock on the date of grant.
(2) Amount reflects the market value of the underlying shares of common stock
at the closing sales price reported on the Over-the-Counter Market on
December 31, 2001 ($.84 per share).
19
(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 10,000 options granted in pursuant to her employment under the
Company's 1992 Stock Option Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information, as of March 25, 2002,
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 as of March 25, 2002 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 PERCENTAGE OWNED (1)
- ------------------- ------------------ --------------------
Daniel H. Levy 715,569 (2) 16.38%
Bruce Galloway 285,650 (3) 6.54%
1325 Avenue of the Americas
New York, NY 10019
Lynn Siemers 189,225 (4) 4.34%
Sheridan C. Biggs 37,750 (5) *
Harvey Horowitz 10,000 (6) *
Harry A. Katz 674,319(7) 15.44%
Robert A. Kasenter 7,250(8) *
Richard C. Rusthoven 14,500 (9) *
Maureen d. Schimmenti 2,000 (10) *
All directors and officers as a group (8 persons) 1,650,613 37.8%
- -------
* Less than 1%.
(1) Percentage to be based on the number of shares of Common Stock outstanding
as of March 25, 2001.
(2) Based on the Company's records and information filed in Schedule 13D/A
filed with the Company on March 13, 2002, Daniel H. Levy is the beneficial
owner of 715,569 shares of Common Stock, or 16.38% of the outstanding
common stock, consisting of 671,819 shares of Common Stock owned directly
by Mr. Levy, and 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.
(3) Based on information contained in Schedule 13G/A filed with the Company on
January 17,2001.
(4) Includes 96,100 shares owned by Ms. Siemers, 1,875 shares of underlying
options which were granted on April 19, 1996 to Lynn Siemers pursuant to
the Company's 1992 Stock Option Plan, 10,000 shares underlying options
issued as part pursuant to Ms. Siemers' Fiscal 1998 compensation, and
37,500 shares underlying options which were granted pursuant to Ms.
Siemers employment agreement 37,500 restricted shares granted to Ms.
Siemers 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 and 100,000 shares
underlying options which were granted in March 2002, which are
exercisable in December 2002, 2003, 2004, 2005 and 2006.
20
(5) Includes 10,250 shares owned by Sheridan C. Biggs and 27,500 shares
underlying options, which were granted to Mr. Biggs pursuant to the
Company's 1994 Non-Employee Director Option Plan. Such options are
currently exercisable.
(6) Includes 625 shares owned by Harvey Horowitz and 9,375 shares underlying
options, which were granted to Mr. Horowitz pursuant to the Company's
1994 Non-Employee Director Option Plan. Such options are currently
exercisable.
(7) Includes 669,319 shares owned by Harry A. Katz and 5,000 shares underlying
options, which were granted to Mr. Katz pursuant to the Company's 1994
Non-Employee Director Plan. Such options are currently exercisable.
(8) Includes 3,500 shares owned by Robert A. Kasenter and 3,750 shares
underlying options, which were granted to Mr. Kasenter pursuant to the
Company's 1994 Non-Employee Director Option Plan. Such options are
currently exercisable.
(9) Includes 9,500 shares owned by Richard C. Rusthoven and 5,000 shares
underlying options, which were granted to Richard C. Rusthoven pursuant
to the Company's 1994 Non-Employee Director Option Plan. Such options
are currently exercisable.
(10) Includes 2,000 shares underlying options granted to Maureen d. Schimmenti
pursuant to her employment under the Company's 1992 Stock Option Plan. Not
included are 8,000 shares underlying options issued pursuant to her
employment, which are exercisable in 2002, 2003, 2004 and 2005, and
25,000 underlying options which were granted in March 2002, which are
exercisable in December 2002, 2003, 2004, 2005 and 2006.
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 & Gold LLP received $166,686 in
fees during 2001 for legal services rendered to the Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Operations for the Years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999
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
2001.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: MARCH 25, 2002
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 25, 2002 Daniel H. Levy, Chairman of the Board of
Directors and Chief Executive Officer
(Principal Executive Officer)
/s/ Lynn Siemers
------------------------------------------
Dated: MARCH 25, 2002 Lynn Siemers, President and Chief
Operating Officer
/s/ Maureen d. Schimmenti
------------------------------------------
Dated: MARCH 25, 2002 Maureen d. Schimmenti, Chief Financial
Officer, Vice President-Finance and
Secretary (Principal Financial and
Accounting Officer)
/s/ Sheridan C. Biggs
------------------------------------------
Dated: MARCH 25, 2002 Sheridan C. Biggs, Director
/s/ Harry A. Katz
------------------------------------------
Dated: MARCH 25, 2002 Harry A. Katz, Executive Vice President
and Chief Administrative Officer
/s/ Harvey Horowitz
------------------------------------------
Dated: MARCH 25, 2002 Harvey Horowitz, Director
/s/ Richard C. Rusthoven
------------------------------------------
Dated: MARCH 25, 2002 Richard C. Rusthoven, Director
/s/ Robert A. Kasenter
------------------------------------------
Dated: MARCH 25, 2002 Robert A. Kasenter, Director
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 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
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).
23
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 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)
10.64 The Eighth Amendment and Waiver agreement dated as of March 13,
2002, among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc.(20)
21 Subsidiaries of the Company.
- -------------
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (Registration No. 33-48243), as filed with the Commission on
May 29, 1992 (the "Registration Statement").
(2) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on
May 24, 1993.
(3) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement (Registration Statement No. 33-48243), as filed with the
Commission on May 10, 1993.
(4) Incorporated herein by reference to Amendment No. 5 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on
June 11, 1993.
24
(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) Incorporated herein by reference to the Company's Report on Form 10-K
for the fiscal year ended December 31, 2000.
(20) Filed herewith.
25
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
26
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, 2001 and 2000, 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, 2001 and 2000, 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 25, 2002
F-1
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------------------------
ASSETS
CURRENT ASSETS:
Cash ......................................................... $ 39 $ 65
Accounts receivable, net of allowances for bad debts
of $116 and $109, respectively ............................ 25,225 30,968
Recoverable income taxes ..................................... 381 155
Inventories .................................................. 17,773 19,730
Deferred tax assets .......................................... 1,662 1,482
Prepaid expenses and other current assets .................... 1,220 1,177
Assets held for sale ......................................... 788 1,206
---------------- ----------------
Total current assets ......................................... 47,088 54,783
PROPERTY, PLANT AND EQUIPMENT, NET ............................... 5,379 5,076
OTHER ASSETS ..................................................... 368 430
INTANGIBLE ASSETS ................................................ 29,565 31,054
---------------- ----------------
TOTAL. ........................................................... $ 82,400 $ 91,343
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 933 $ 1,523
Accounts payable ............................................. 7,760 11,751
Accrued expenses and other current liabilities ............... 3,504 2,310
---------------- ----------------
Total current liabilities ................................ 12,197 15,584
---------------- ----------------
LONG-TERM DEBT ................................................... 34,844 40,624
DEFERRED TAX LIABILITIES ......................................... 1,662 1,482
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 ...................... 44 44
Additional paid-in capital ................................... 50,449 50,449
Accumulated Deficit .......................................... (16,796) (16,840)
---------------- ----------------
Total stockholders' equity ................................... 33,697 33,653
---------------- ----------------
TOTAL ............................................................ $ 82,400 $ 91,343
================ ================
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,
2001 2000 1999
--------------- ---------------- ----------------
NET SALES .................................................... $ 152,180 $ 151,055 $ 173,749
COST OF SALES ................................................ 117,497 124,073 138,816
--------------- ---------------- ----------------
Gross Profit .......................................... 34,683 26,982 34,933
OPERATING EXPENSES:
Selling, general and administrative expenses ............. 28,367 28,194 33,002
Amortization of goodwill and other related
acquisition costs ..................................... 1,489 1,437 1,390
Provision for settlement of litigation ................... - 599 5,875
Restructuring charge ..................................... 300 500 -
--------------- ---------------- ----------------
Operating income (loss) ............................... 4,527 (3,748) (5,334)
OTHER EXPENSE:
Interest expense ......................................... 4,703 5,097 4,007
--------------- ---------------- ----------------
Loss before income taxes .............................. (176) (8,845) (9,341)
INCOME TAX EXPENSE (BENEFIT) ................................. (220) 88 87
--------------- ---------------- ----------------
NET INCOME (LOSS) ........................................ $ 44 $ (8,933) $ (9,428)
=============== ================ ================
Basic income (loss) per common share ..................... $ 0.01 $ (2.26) $ (2.65)
=============== ================ ================
Shares used in the calculation of basic
income (loss) per common share ........................ 4,367,417 3,956,679 3,552,000
=============== ================ ================
Diluted income (loss) per common share ................... $ 0.01 $ (2.26) $ (2.65)
=============== ================ ================
Shares used in the calculation of diluted
income (loss) per common share ........................ 4,387,685 3,956,679 3,552,000
=============== ================ ================
See accompanying notes to consolidated financial statements.
F-3
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ISSUABLE
ADDITIONAL SHARES FOR RETAINED TOTAL
PREFERRED COMMON PAID-IN LITIGATION EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL SETTLEMENT (DEFICIT) EQUITY
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ 0 $ 36 $ 47,701 $ 0 $ 1,521 $ 49,258
Issuance of Common Stock ......................... 0 0 176 0 0 176
Issuable shares for litigation settlement ........ 0 0 0 1,875 0 1,875
Net Loss ......................................... 0 0 0 0 (9,428) (9,428)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 ........................... $ 0 $ 36 $ 47,877 $ 1,875 ($ 7,907) $ 41,881
Issuance of Common Stock ......................... 0 0 705 0 0 705
Issuance of shares for litigation settlement...... 0 8 1,867 (1,875) 0 0
Net Loss ......................................... 0 0 0 0 (8,933) (8,933)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 ........................... $ 0 $ 44 $ 50,449 $ 0 ($16,840) $ 33,653
Net Income ....................................... 0 0 0 0 44 44
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 ........................... $ 0 $ 44 $ 50,449 $ 0 ($16,796) $ 33,697
======== ======== ======== ======== ======== ========
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,
2001 2000 1999
------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 44 $ (8,933) $ (9,428)
Adjustments to reconcile net cash
provided by (used in) operating activities:
Provision for shares issuable on litigation settlement ...... - - 1,875
Depreciation and amortization of fixed assets ............... 1,140 820 814
Loss on disposal of fixed assets ............................ 3 - 5
Amortization of intangibles and other assets ................ 1,489 1,437 1,390
Write down of fixed assets .................................. 300 200 -
Provision for losses on accounts receivable ................. 20 22 (72)
Changes in assets and liabilities, net of the effects
of acquisitions and disposals:
(Increase) decrease in accounts receivable .................. 5,723 (968) (587)
(Increase) decrease in recoverable income taxes ............. (226) 149 351
(Increase) decrease in inventories .......................... 1,957 10,144 (7,351)
Decrease (increase) in prepaid expenses and other
current assets ........................................... (43) (541) 630
Decrease in other non-current assets ........................ 62 116 1,780
(Decrease) increase in accounts payable ..................... (3,991) 1,400 1,960
(Decrease) increase in accrued expenses and
other current liabilities ................................ 1,194 (950) (3,290)
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities ..... 7,672 2,896 (11,923)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ..................... (1,395) (1,054) (501)
Proceeds from sale of property, plant and equipment ........... 67 189 1,381
Acquisition of business ....................................... - (1,518) -
---------------- ---------------- ----------------
Net cash (used in) provided by investing activities ...... (1,328) (2,383) 880
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increases (repayments) of long-term debt .................. (1,523) (1,168) 2,346
Borrowings for acquisition .................................... - 1,300 -
Net increases (repayments) under revolving credit line ........ (4,847) (760) 8,374
---------------- ---------------- ----------------
Net cash (used in) provided by financing activities ...... (6,370) (628) 10,720
---------------- ---------------- ----------------
NET DECREASE IN CASH .............................................. (26) (115) (323)
CASH, AT BEGINNING OF PERIOD ...................................... 65 180 503
---------------- ---------------- ----------------
CASH, AT END OF PERIOD ............................................ $ 39 $ 65 $ 180
================ ================ ================
Supplemental Disclosures
Income Taxes paid. ............................................ $ 78 $ 61 $ 206
================ ================ ================
Interest paid. ................................................ $ 4,722 $ 4,527 $ 3,438
================ ================ ================
Supplemental schedule of non-cash financing
activities
Issuance of common stock ...................................... $ - $ 705 $ 176
================ ================ ================
See accompanying notes to consolidated financial statements.
F-5
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company designs, 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, 2001 and 2000 of $368 and $430,
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 was amortized on a
straight-line basis over the expected periods to be benefited, ranging from 10
to 40 years. In 2002, the Company will adopt Statement of Financial Accounting
Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets", which changes
the accounting for goodwill to an impairment only approach. The Company will
cease the amortization of goodwill (see "Recent Accounting Pronouncements").
Also included in intangible assets are costs related to licenses acquired
by the Company, which are being amortized on a straight-line basis 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 undiscounted cash flows.
F-6
Revenue Recognition - The Company recognizes sales upon shipment of
products to customers since title passes upon shipment. Provisions for
estimated uncollectible accounts, discounts and returns and allowances are
provided when sales are recorded based upon historical experience and current
trends.
Advertising Expense - Advertising costs are expensed when incurred. Net
advertising expenses of $953, $815, and $572 were incurred in the Company's
Consolidated Statements of Operations for the years ended December 31, 2001,
2000, and 1999, respectively.
Income Taxes - The Company accounts for income taxes in accordance with 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. The deferred tax assets are 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, 2001 and
December 31, 2000 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 (" FASB") issued 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 an
impact on the Company's reported results of operations, equity or financial
position, as it does not engage in derivative or hedging transactions.
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16 "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". All business combinations in the scope of this Statement are to be
accounted for using one method: the purchase method. SFAS 141 is effective as
follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS 141
also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The Company has determined that the adoption of this
statement will not have an impact on the consolidated financial statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, "Intangible
Assets". It changes the accounting for goodwill from an amortization method to
an impairment only approach. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
in an entity's statement of financial position at that date, regardless of when
those assets were initially recognized. The Company will cease the amortization
of goodwill, which was recorded in past business combinations on December 31,
2001 as required by SFAS No. 142. Amortization expense was $1.5 million during
Fiscal 2001 and $1.4 million in Fiscal 2000 and 1999. The Company will adopt
this pronouncement in the first quarter of 2002, and estimates that the
F-7
adoption of this pronouncement will result in the write-off of substantially
all of the goodwill recorded in its consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Early adoption is encouraged. The Company will adopt this pronouncement on
January 1, 2002, and does not believe that there is any material impact on its
consolidated financial statements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Adoption of SFAS No. 144 on January
1, 2002 will not have an impact on the Company's reported results of operations,
equity or financial position.
Reclassifications - Certain reclassifications have been made in 2000 and
1999 financial statements to conform to the 2001 presentation.
2. INVENTORIES
Inventories consisted of the following at December 31, 2001 and December
31, 2000:
2001 2000
------- -------
Raw materials...................... $ 840 $ 1,719
Work in process.................... 331 936
Finished goods..................... 16,602 17,075
------- -------
$17,773 $19,730
======= =======
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2001 and December 31, 2000:
2001 2000
------ -------
Land and land improvements......... $ 179 $ 213
Buildings and improvements......... 4,512 4,634
Machinery and equipment............ 5,678 4,371
Furniture and fixtures............. 1,216 1,736
--------------------
11,585 10,954
Less accumulated depreciation
and amortization................. 6,206 5,878
--------------------
$ 5,379 $ 5,076
====================
F-8
4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2001 and
December 31, 2000:
2001 2000
------- -------
Goodwill............................ $ 36,241 $ 36,241
Licenses............................ 6,325 6,325
-------- --------
42,566 42,566
Less accumulated amortization....... 13,001 11,512
-------- --------
$ 29,565 $ 31,054
======== ========
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at December 31, 2001 and December 31, 2000:
2001 2000
------- -------
Accrued Salaries, Benefits and Bonus..... $ 2,032 $ 515
Other Accrued Expenses................... 1,472 1,795
------- -------
Total.................................... $ 3,504 $ 2,310
======= =======
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2001 and December
31, 2000:
2001 2000
-------- --------
Revolving Credit Borrowings............. $ 34,411 $ 39,258
Borrowings
Senior Term Loans....................... 1,366 2,800
Other (a)............................... -- 89
-------- --------
Total................................... $ 35,777 $ 42,147
-------- --------
Less current maturities................. $ 933 $ 1,523
-------- --------
$ 34,844 $ 40,624
======== ========
Annual maturities of long-term debt are as follows:
2002.................... $ 933
2003..................... 433
2004..................... 34,411
--------
$ 35,777
========
(a) Other debt consisted of a secured term loan that was entered into on June
30, 1998 in the amount of $0.5 million. As of December 31, 2000 the principal
balance of this loan amounted to $89. The interest rate was fixed at 8.75% and
the loan required monthly principal and interest payments of $15 through June
2001. Software, machinery and equipment secured this obligation.
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
F-9
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 as amended (see below) bore interest
at the prime rate plus two percent (6.75% at December 31, 2001). 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 as amended expires on June 30, 2004.
Collateral for the Credit Agreement 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 Agreement 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, based upon the annual business plan approved by
the lender.
During Fiscal 1999 and Fiscal 2000, the Company entered into various
amendments and agreements to waive the Company's noncompliance with financial
covenants on certain dates and to reset overadvanced amounts and covenants.
These amendments and agreements also increased the interest rate on borrowings.
On July 6, 2000, the Company entered into an 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 2.0% and is repayable over thirty-six months commencing January 1,
2001. A fee of $100,000 was paid for the Amendment.
On March 28, 2001, the Company entered into an Amendment and Waiver
Agreement to extend the Final Maturity Date of the original agreement to June
30, 2004, to 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 was paid
in connection with the Amendment and Waiver.
Effective January 1, 2002, the Company established covenants and the level
of allowable overadvances with the lender to support its 2002 business plan.
This Amendment and Waiver Agreement also amended the interest rate on the
revolving credit borrowings to the prime rate plus one and three quarters
percent (6.50% at January 1, 2002). No fee was paid in connection with the
Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .35% of gross sales, plus
certain customary charges. The agreement is in effect through December 31, 2002.
At December 31, 2001, the Company was contingently liable for outstanding
letters of credit issued amounting to $9.0 million.
F-10
7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2001, 2000
and 1999 and is comprised of the following:
2001 2000 1999
------ ------ ------
Current:
Federal................. $ (277) $ - $ -
State and local......... 57 88 87
Deferred.................. - - -
------ ------ ------
$ (220) $ 88 $ 87
====== ====== ======
In Fiscal 2001, the IRS Joint Committee completed its audit of amended
prior year tax returns. As a result, the Company will receive net refunds of
approximately $219,000.
A reconciliation of the statutory Federal tax rate and the effective rate
is as follows:
2001 2000 1999
------ ------ ------
Federal statutory tax rate..................... (34)% (34)% (34)%
State and local taxes, net of federal
income tax benefit......................... 28 (2) (3)
Federal tax benefit of amended returns and
other....................................... (157) - -
Nondeductible items............................ 207 12 4
Losses not providing federal tax benefit....... - - 2
(Decrease)/Increase of valuation allowance..... (169) 25 32
------ ------ ------
(125)% 1% 1%
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
DECEMBER DECEMBER
31, 2001 31, 2000
------------ ----------
Deferred tax assets:
Accounts receivable allowances ............ $ 40 $ 36
Inventory valuation ....................... 688 832
Accrued expenses .......................... 837 472
State operating loss carryforwards ........ 1,425 1,573
Federal operating loss carryforwards ...... 6,702 7,696
Other ..................................... 97 141
------------ ----------
Total gross deferred tax assets ....... 9,789 10,750
------------ ----------
Deferred tax liabilities:
Property, plant and equipment ............. (1,147) (1,159)
Intangibles ............................... (2,195) (2,843)
------------ ----------
Total gross deferred tax liabilities... (3,342) (4,002)
------------ ----------
Net deferred tax asset ........................ 6,447 6,748
Less valuation allowance ...................... (6,447) (6,748)
------------ ----------
Net deferred taxes ............................ $ -- $ --
------------ ----------
F-11
As of December 31, 2001 and 2000, the Company recorded a valuation
allowance against the net deferred tax assets due to uncertainty of the
realization of net operating loss carryforwards.
As of December 31, 2001, the following Federal and State net operating
loss carryforwards were available:
Net Operating Losses
--------------------
Expiration Dates Federal State
----------- ----------
2011................................. $ - $ 4,456
2012................................. - 5,409
2013................................. - 4,388
2014................................. - 2,616
2015................................. - 13,315
2016-2017............................ - 670
2018................................. 3,108 -
2019................................. 2,616 -
2020................................. 13,315 -
2021-2022............................ 670 -
8. LEASES
Rental expense for operating leases for the years ended December 31, 2001,
2000, and 1999 approximated $3,226, $3,296, and $3,223, respectively. Minimum
future rental payments as of December 31, 2001 for operating leases with initial
noncancelable lease terms in excess of one year, are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
2002 ............................... $2,932
2003 ............................... 2,523
2004 ............................... 2,419
2005 ............................... 2,384
2006 ............................... 1,592
Thereafter............................... 1,329
-------
$13,179
=======
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 2001, 2000 and 1999 in cash in the amounts
of $44, $43 and $55 respectively.
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 year ended December 31, 2001, incremental shares under stock plans
of 20,268 were included in the diluted earnings per share calculation. In the
years ended December 31, 2000 and 1999 the incremental
F-12
shares under stock plans of 0 and 73,314 were not considered for the diluted
earnings per share calculation due to their antidilutive effect. Accordingly,
the amounts reported for basic and diluted earnings per share are the same for
those years.
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 to employees on terms as determined by the
Board of Directors. In addition, the Company has an award program that permits
option grants to Directors up to a maximum of 75,000 shares. 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:
2001 2000 1999
--------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------------------------------------------------------------------------
Outstanding at beginning of the
year .......................... 404,130 $ 9.85 383,225 $ 12.56 435,038 $ 16.16
Granted ....................... 53,750 0.54 151,250 1.52 62,500 5.04
Exercised ..................... -- -- -- -- -- --
Cancelled ..................... (163,627) 8.44 (130,345) 14.43 (114,313) 18.08
-------------------------------------------------------------------------------
Outstanding at end of year .... 294,253 $ 8.58 404,130 $ 9.85 383,225 $ 12.56
======= ======= =======
Exercisable at end of year .... 212,603 212,701 171,485
======= ======= =======
Available for grant at year
end ........................... 180,922 71,045 91,950
======= ======= =======
The options outstanding at December 31, 2001 range in price as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF EXERCISE OUTSTANDING AS REMAINING CONTRACTUAL WEIGHTED-AVERAGE EXERCISABLE AS OF WEIGHTED-AVERAGE
PRICES OF 12/31/2001 LIFE EXERCISE PRICE 12/31/2001 EXERCISE PRICE
------ ------------- ---- -------------- ---------- --------------
0.00 - 7.23 179,625 8.0 $ 1.99 108,375 $ 2.17
7.23 - 14.45 43,726 5.3 $ 11.77 43,326 $ 11.78
14.45 - 21.68 57,501 5.5 $ 15.95 47,501 $ 15.99
21.68 - 36.13 2,000 3.3 $ 33.25 2,000 $ 33.25
36.13 - 50.58 3,751 2.3 $ 44.25 3,751 $ 44.25
50.58 - 72.25 7,650 4.3 $ 72.25 7,650 $ 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
---------------------------------------
F-13
income (loss) and earnings/(loss) per share for the years ended December 31,
2001, 2000 and 1999 would have been adjusted to the pro forma amounts indicated
below:
2001 2000 1999
---- ---- ----
Net income/(loss):
As reported............................... $44 $(8,933) $(9,428)
=== ======= ========
Pro forma................................. $(534) $(9,717) $(9,675)
====== ======= ========
Basic and diluted net income/(loss) per
share:
As reported............................... $ 0.01 $ (2.26) $ (2.65)
====== ======= ========
Pro forma ................................ $(0.12) $ (2.46) $ (2.72)
====== ======= ========
The weighted-average Black-Scholes value of the options granted during
2001, 2000 and 1999 which were used to calculate the pro-forma losses were
$0.54, $1.47 and $1.13, respectively. The following weighted-average assumptions
were used in the Black-Scholes option-pricing model for grants in 2001, 2000 and
1999 respectively: dividend yield of 0% for all periods, volatility of 246%,
130% and 119%, risk-free interest rate of 4.05%, 5.24% and 5.35%, and an
expected life of 5, 10 and 10 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, 37,500 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 37,500 restricted stock grant.
Compensation cost recorded in 2001, 2000 and 1999 were $0, $94 and $261
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 an Executive
Officer. This officer will be paid an amount equal to the appreciation over a
5-year period of 12,500 shares of stock. No compensation expense was recorded
for these stock appreciation rights in 2001, 2000 and 1999.
12. RESTRUCTURING CHARGES
Fiscal 2001 - Write-down of Assets Held for Sale
In the fourth quarter of 2001, the Company recorded an additional charge of
$0.3 million related to the writedown of assets held for sale. As of
December 31, 2001, assets held for sale included a total of three facilities.
One of these facilities was sold on March 7, 2002.
F-14
Fiscal 2000 - Restructuring Charge
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 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.
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.
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
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 was not material.
c. 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 sought
damages in excess of $8.0 million claiming that she was constructively
discharged by the Company. The Company interposed an Answer to the amended
Complaint denying the material allegations asserted in the Complaint and
brought a motion for summary judgement to dismiss the case. By Order dated
February 25, 2002, the United States District Judge granted the Company's
motion for summary judgement and the case was dismissed. The Plaintiff has
appealed this dismissal to the United States Court of Appeals for the
Fourth Circuit.
d. The Company is also a party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse
effect on financial condition, results of operations, liquidity or business
of the Company.
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
18%, 13% and 11%, of the Company's sales in 2001, 2000 and 1999, respectively
and accounts receivable from this customer was $3.1 million at December 31,
2001. Sales to one wholesale club were 24%, 17% and 17% in 2001, 2000 and
1999 respectively and accounts receivable from this customer were $12.6 million
at December 31, 2001. Sales to one catalog customer accounted for 9%, 6% and 3%
of the Company's sales in 2001, 2000 and 1999 respectively and accounts
receivable were $2.5 million at December 31, 2001. No other customers accounted
for more than 8% of the Company's sales in 2001, 2000 and 1999. The terms of
the Company's factoring agreement require the lender to approve the credit
worthiness of the Company's customers. The Company records an allowance for
doubtful accounts for those customers where it has recourse on the receivable.
F-15
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 its 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 3,557,385 shares outstanding. Earnings
(loss) per share and share amounts have been restated to reflect the reverse
split for all periods presented.
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
$0.3 million. Ann Travis designs, imports, and markets women's sportswear.
Assets acquired included $0.5 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 acquisition was accounted for as a
purchase. 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 was being amortized over ten years. See Note 1 - "Recent
Accounting Pronouncements". The Company will cease the amortization of goodwill
in 2002 upon the adoption of SFAS No. 142.
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
------ ------
$ 161,000 $ 190,000
F-16
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-17
DONNKENNY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS .....................
F-18
SCHEDULE II
DONNKENNY, INC.
Valuation and Qualifying Accounts
For the Years ended
December 31, 2001, 2000 and 1999
BALANCE OF CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ----------- ----------- -----------
Year ended December 31, 2001
Reserve for bad debts $ 93,000 20,000 (9,000) $ 104,000
Reserve for discounts 16,000 (1,569,000) 1,565,000 12,000
----------- -----------
Subtotal for accounts receivable $ 109,000 $ 116,000
=========== ===========
Reserve for inventory markdowns $ 1,684,000 3,590,000 (4,167,000) $ 1,107,000
=========== ===========
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
=========== ===========
[EXECUTION FINAL]
EIGHTH AMENDMENT TO CREDIT AGREEMENT
EIGHTH AMENDMENT TO CREDIT AGREEMENT, dated as of March 13, 2002 (this
"Amendment"), to the Credit Agreement dated as of June 29, 1999 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement")
among DONNKENNY APPAREL, INC. a Delaware corporation ("DKA"), BELDOCH INDUSTRIES
CORPORATION, a Delaware corporation ("BIC"; together with DKA, and severally,
the "Borrowers"), the Guarantors party thereto, the Lenders party thereto and
THE CIT GROUP/COMMERCIAL SERVICES, INC. as agent for the Lenders (in such
capacity, the "Agent").
The Borrowers, the Guarantors, the Lenders and the Agent are parties to
the Credit Agreement.
The Borrowers have requested that the Lenders (a) amend the Interest
Rate applicable to Revolving Credit Loans and (b) agree to continue providing
Overadvances to Borrowers during Borrowers' 2002 Fiscal Year.
The Lenders are willing to (a) amend the Interest Rate applicable to
Revolving Credit Loans and (b) continue providing Overadvances to Borrowers, and
in addition, Borrowers, Lenders and Agent have agreed to amend certain of the
financial covenants provided for in the Credit Agreement, all upon the terms and
subject to the conditions set forth in this Amendment.
Accordingly, in consideration of the mutual agreements set forth
herein, and for good and other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Defined Terms. Initially capitalized terms used and not otherwise
defined herein shall have their respective meanings as defined in the Credit
Agreement.
2. Increase in Interest Rate. (a) The definition of Interest Rate set
forth in the Credit Agreement is hereby amended and restated in its entirety to
read as follows:
"Interest Rate" shall mean, from and after January 1, 2002, (a) as to
the Term Loan and the Supplemental Term Loan, a rate of two (2%) percent per
annum in excess of the Prime Rate and (b) as to Revolving Credit Loans, a
rate of one and three-quarters (1.75%) percent per annum in excess of the
Prime Rate (the "Revolving Credit Interest Rate"); provided, that:
(i) the Interest Rate shall be increased by two (2%) percent per
annum in excess of the Interest Rate otherwise in effect, at Agent's
option, without notice, (A)for the period on and after (1) the date
of termination hereof and until such time as all Obligations are paid
in full (notwithstanding entry of any judgment against Borrowers) or
(2) the date of the occurrence of any Event of Default and for so
long as such Event of Default is continuing, and (B) on the Revolving
Credit Loans at any time outstanding in excess of the Availability
(whether or not such excess(es) arise or are made with or without
Agent's knowledge or consent (but expressly excluding Overadvances
that are made and are permitted to be outstanding pursuant to Section
2.01(c) of this Agreement), and whether made before or after an Event
of Default),
(ii) effective from and after June 30, 2002, the Revolving Credit
Interest Rate shall be decreased by one-quarter of one percent (0.25%)
per annum below the Revolving Credit Interest Rate
2
otherwise in effect if (A) based upon the financial statements that
Borrowers are required to deliver to Agent pursuant to Section 6.05(b)
of the Credit Agreement for Borrowers' fiscal quarter ended June 30,
2002, Parent and its Subsidiaries shall have achieved EBITDA on a
Consolidated basis for the four (4) consecutive fiscal quarters then
ended, of at least $5,850,000 and the aggregate value (computed at the
lower of cost (on a FIFO basis) and current market value) of Borrowers'
Inventory existing as at June 30, 2002 does not exceed $38,220,000, and
(B) the aggregate amount of Overadvances outstanding as of June 30,
2002 does not exceed $12,400,000; and
(iii) if (and only if) a decrease in the Revolving Credit Interest Rate
occurred as of June 30, 2002 pursuant to clause (ii) immediately above,
effective from and after December 31, 2002, the Revolving Credit
Interest Rate shall be increased by one-quarter of one (0.25%) percent
per annum above the Revolving Credit Interest Rate otherwise then in
effect if (A) based upon the financial statements that Borrowers' are
required to deliver to Agent pursuant to Section 6.05(a) of the Credit
Agreement for Borrowers' Fiscal Year ended December 31, 2002, Parent
and its Subsidiaries shall have failed to achieve EBITDA on a
Consolidated basis, for the four (4) consecutive fiscal quarters then
ended, of at least $6,400,000 and the aggregate value (computed at the
lower of cost (on a FIFO basis) and current market value) of Borrowers'
Inventory existing as at December 31, 2002 exceeds $30,870,000, and (B)
the aggregate amount of Overadvances outstanding as of December 31,
2002 exceeds $5,150,000."
3
(b) For the avoidance of doubt, and confirming and restating the
agreement of Borrowers, Lenders and Agent set forth in the Fourth Amendment to
Credit Agreement and Waiver, dated as of April 13, 2000, notwithstanding
anything to the contrary contained in the Credit Agreement or in any of the Loan
Documents, Borrowers have no right to request or receive, and Agent and Lenders
shall not make, any Eurodollar Rate Loans.
3. Overadvances During 2002 Fiscal Year. Borrowers have previously
delivered to Agent Borrowers' budget for their 2002 Fiscal Year, dated December
11, 2001 (the "2002 Budget"), in contemplation of the making of this Amendment.
Borrowers have advised Agent that, in order to achieve the results of operations
projected by the 2002 Budget, Borrowers contemplate requesting Agent to make
Overadvances from time to time, as detailed in the 2002 Budget. Borrowers have
therefore requested that Agent and Lenders amend Section 2.01(c) to continue
providing Overadvances during Borrowers' 2002 Fiscal Year, based on the
Overadvance amounts set forth in the 2002 Budget, and Agent and Lenders have
agreed to amend Section 2.01(c) as set forth hereinbelow; provided, however,
that Borrowers understand and expressly acknowledge and agree that,
notwithstanding that the amendment and restatement of Section 2.01(c) set forth
hereinbelow is based on the Overadvance amounts contained in the 2002 Budget,
such amendment and restatement of Section 2.01(c) shall not be deemed and does
not in any manner constitute a commitment by Agent and/or Lenders to make any
Overadvances whatsoever. Subject to the foregoing, Section 2.01(c) of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:
"(c) Notwithstanding anything to the contrary contained in this
Agreement or any of the other Loan Documents, at the request of the
Borrowers at any time during Borrowers' 2002 Fiscal Year, the Agent may, in
its sole and absolute discretion, subject to the Total Revolving Credit
Commitment, make Revolving Credit Loans and issue Letter of Credit
Guarantees to the Borrowers on behalf of the Lenders in excess of the
Availability ("Overadvance"), which Overadvance shall be repayable on
demand; provided, however, if the Overadvance is not sooner
4
demanded and if Borrowers shall have failed to deliver to Agent on or
before January 2, 2003 the summary of business plans and financial
operations projections that Borrowers are obligated to deliver to Agent for
Borrowers' 2003 fiscal year pursuant to Section 6.05 of the Credit
Agreement, then the Overadvance shall be repayable without notice or demand
no later than January 2, 2003. Each Lender shall be obligated to pay the
Agent the amount of its ratable share of any such additional Revolving
Credit Loans or Letter of Credit Guaranties. Provided no Event of Default
shall have occurred and be continuing, notwithstanding anything to the
contrary contained in the Credit Agreement, Overadvances shall not bear
interest at the applicable Interest Rate set forth in clause (i) of the
proviso in the definition of Interest Rate (the "Default Rate"). Any
Overadvance not repaid on demand or when otherwise due and payable shall,
however, without waiving any Event of Default which has occurred thereby,
bear interest at the Default Rate. The making of an Overadvance by the
Agent shall in no way limit, waive or otherwise affect the Agent's right
with respect to the making of any additional Overadvance."
4. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is
amended and restated in its entirety to read as follows:
"Section 7.10 Minimum Interest Coverage Ratio. Permit the Interest
Coverage Ratio of the Parent and its Subsidiaries on a Consolidated basis
for the trailing four (4) fiscal quarters ending on the last day of each of
the fiscal quarters set forth below to be less than the ratio set forth
below opposite such fiscal quarter:
Minimum Interest
Quarterly Period Ending Coverage Ratio
----------------------- --------------
March 31, 2002 1.20 to 1:00
June 30, 2002 1.40 to 1:00
September 30, 2002 1.60 to 1:00
5
December 31, 2002 1.80 to 1.00"
5. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
"Section 7.11 EBITDA. Permit EBITDA of the Parent and its Subsidiaries
(in each case computed and calculated in accordance with GAAP) on a
Consolidated basis for the trailing four (4) fiscal quarters ending on the
last day of each of the fiscal quarters set forth below to be less than the
amount set forth below opposite each such fiscal quarter:
Quarterly Period Ending EBITDA
----------------------- ------
March 31, 2002 $5,050,000
June 30, 2002 $5,234,000
September 30, 2002 $5,287,000
December 31, 2002 $5,679,000"
6. Amendment of Section 7.12A. Section 7.12A of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
"Section 7.12A Tangible Net Worth. Permit the Tangible Net Worth of the
Parent and its Subsidiaries (in each case computed and calculated in
accordance with GAAP) on a Consolidated basis as of the end of each of the
fiscal quarters set forth below to be less than the amount set forth below
opposite each such fiscal quarter:
Quarterly Period Ending Tangible Net Worth
----------------------- ------------------
March 31, 2002 $3,306,000
June 30, 2002 $2,919,000
September 30, 2002 $4,357,000
6
December 31, 2002 $5,039,000"
7. Future Amendment of Financial Covenants. Agent, Lenders and Borrowers
agree that, for each year for which financial covenants have been provided for
under the Credit Agreement, on or before March 15 of the year immediately
following such year, the parties will agree upon further amendment of Sections
7.11 (EBITDA), 7.10 (Minimum Interest Coverage Ratio) and 7.12A (Tangible Net
Worth) of the Credit Agreement for Borrowers' next fiscal year, based upon the
summary of business plans and financial operations projections that Borrowers
are obligated to deliver to Agent for each such subsequent fiscal year pursuant
to Section 6.05 of the Credit Agreement. Such further amendments will be
calculated by Agent in a manner consistent with the calculation of the revisions
to such financial covenants provided for in this Amendment.
8. Representations and Warranties. Borrowers hereby represent and warrant
to Lenders that the representations and warranties set forth in Article IV of
the Credit Agreement are true on and as of the date hereof, as if made on and as
of the date hereof, after giving effect to this Amendment, except to the extent
that any such representation or warranty expressly relates to a prior date, and
breach of any of the representations and warranties made in this paragraph 8
shall constitute an Event of Default under Article VIII(a) of the Credit
Agreement. Borrowers further represent and warrant that, after giving effect to
this Amendment, no Event of Default or event which, with the lapse of time or
the giving of notice or both, would become an Event of Default has occurred and
is continuing.
9. Effectiveness. This Amendment shall become effective on the date Agent
shall have received counterparts of this Amendment duly executed and delivered
by each of the parties hereto.
10. Continuing Effect of Credit Agreement. This Amendment shall not
constitute a waiver or amendment of any provision of the Credit Agreement not
expressly referred to herein and shall not be construed as a consent to any
further or future action on the part of either of the Borrowers that would
require consent of Lenders. Except as expressly amended by this Amendment, the
provisions of the Credit Agreement are and shall remain in full force and
effect.
7
11. Applicable Law. This Amendment shall be construed in accordance with
and governed by the laws of the State of New York (other than the conflicts of
law principles thereof).
12. Counterparts; Facsimile Signature. This Amendment may be executed in
counterparts, each of which shall constitute and original and all of which when
taken together shall constitute but one contract. Delivery of an executed
counterpart of the signature page of this Amendment by facsimile shall be
effective as delivery of a manually executed signature page hereto.
[SIGNATURE PAGE FOLLOWS]
8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective authorized officers as of the
day and year first above written.
- --------------------------------------------------------------------------------
DONNKENNY APPAREL, INC., as BELDOCH INDUSTRIES CORPORATION,
a Borrower and a Guarantor as a Borrower and a Guarantor
By: By:
------------------------------ ------------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
--------------------------- ---------------------------
- --------------------------------------------------------------------------------
CHRISTIANSBURG GARMENT H SQUARED DISPOSITIONS, INC.,
COMPANY, INCORPORATED, as a as a Guarantor
Guarantor
By: By:
------------------------------ ------------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
--------------------------- ---------------------------
- --------------------------------------------------------------------------------
THE CIT GROUP/COMMERCIAL THE CIT GROUP/COMMERCIAL
SERVICES, INC., as Agent SERVICES, INC., as a Lender
By: By:
------------------------------ ------------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
--------------------------- ---------------------------
- --------------------------------------------------------------------------------
CENTURY BUSINESS CREDIT
CORPORATION, as a Lender
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
- --------------------------------------------------------------------------------
9