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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 0-21940
DONNKENNY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-022889
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1411 BROADWAY
NEW YORK, NEW YORK 10018
(Address of principal executive offices) (Zip Code)
(212) 730-7770
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, based on a closing sale price of the Common
Stock on the Nasdaq National Market on March 31, 1997 of $2.75 per share, was
approximately $38,409,635 (1). As of March 31, 1997, 14,069,940 shares of
Common Stock of Registrant were outstanding.
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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 I
ITEM 1. BUSINESS
Donnkenny, Inc. (together with its subsidiaries, "Registrant" or the
"Company") was incorporated in Delaware in 1978 and is a holding company with
four subsidiaries, three of which are operating subsidiaries, Donnkenny
Apparel, Inc. ("Donnkenny Apparel"), Beldoch Industries Corporation
("Beldoch") and MegaKnits, Inc. ("MegaKnits"). The Company designs,
manufactures, imports and markets a broad line of moderately priced women's
sportswear and sleepwear. In addition, the Company manufactures, imports and
markets men's, women's and children's sportswear and intimate apparel
featuring various licensed cartoon character images.
The fiscal year of the Company ended December 31, 1996 ("Fiscal 1996")
covers the fifty-two weeks then ended.
SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS
Regulatory Reviews and Investigations
SEC
By letter dated August 15, 1996, the Company was notified by the
Securities and Exchange Commission (the "SEC") that it was the subject of an
informal investigation concerning alleged inaccuracies in the reporting of
revenues and expenses by the Company for certain reporting periods. On or
about November 10, 1996, the Company learned that the SEC had entered a
formal order of investigation in the matter. The Company is cooperating fully
with the SEC's ongoing investigation.
The Nasdaq Stock Market, Inc.
On December 6, 1996, the Company received notification that the Nasdaq
Stock Market, Inc. (the "NASD") was commencing a review of the Company's
eligibility for continued listing on the Nasdaq Stock Market. On February 13,
1997, a hearing was held by a Nasdaq Listing Qualifications Panel (the
"Panel"). By letter dated February 28, 1997, the Company was notified that
the Panel determined to allow the Company to remain listed on the Nasdaq
Stock Market pending the completion of (i) audits of the Company's financial
statements for the 1994 through 1996 fiscal years by the Company's auditors
and (ii) an internal investigation which had been commenced by the Audit
Committee of the Company's Board of Directors. See "Certain Company
Activities" infra. The Company was directed to provide the NASD with
additional information, including information concerning the results of the
above-mentioned audits as well as restated financial statements for certain
reporting periods, on or before March 31, 1997. The Panel recommended that in
the event the Company fails to provide such information, the Company be
delisted.
On March 31, 1997, the Company supplied the NASD with a report containing
certain information which the NASD had requested. The report stated, among
other things, that the audits had not yet been completed and that the
restated financial statements would be contained in the Company's Annual
Report on Form 10-K, a copy of which would be provided to the NASD on or
before April 15, 1997. On April 1, 1997, the NASD notified the Company that
due to the Company's failure to provide certain requested information,
including the results of the audits, the common stock of the Company would be
removed from the Nasdaq Stock Market on April 8, 1997. On April 2, 1997, the
Company requested that the NASD hold an oral hearing with respect to its
decision to delist the Company. That hearing will be held on April 23, 1997.
The common stock of the Company will remain listed on the Nasdaq National
Market pending the outcome of the hearing.
On April 10, 1997, the Company was notified that the Nasdaq Hearing Review
Committee (the "Review Committee") has called for review of the Panel's
February 28, 1997 decision. The Review Committee's decision will be made on
the basis of the written record. No oral hearing will be held with respect
thereto. The Review Committee has indicated that its decision will be issued
subsequent to the next general meeting of the NASD Board of Governors, which
is currently scheduled for June 26, 1997.
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Certain Company Activities
On August 20, 1996, the Company's Board of Directors authorized its Audit
Committee to commence an investigation into the issues raised by the SEC's
informal investigation. The Board also authorized the Audit Committee to
retain independent legal counsel and a financial adviser in connection with
the investigation.
In September, 1996, the Company announced that it was changing its fiscal
year from one ending on the first Saturday of each year on or after November
30 to a fiscal year ending on December 31 of each year.
In September, 1996, the Company announced that it would be restating its
quarterly reports for the first, second and third quarters of fiscal 1995 and
the first and second quarters of fiscal 1996 to correct the recording of
revenues and income for those periods.
In October, 1996, the Company announced that previously issued financial
statements covering its 1994 and 1995 fiscal years should no longer be relied
on and that the Company would be amending its Annual Report on Form 10-K for
those years.
On or about November 4, 1996, based on preliminary findings and
recommendations of the Audit Committee, the Company relieved Edward Creevy,
Ronald Hollandsworth and Kym Kulis, who were Chief Financial Officer,
Corporate Controller and Assistant Corporate Controller, respectively, of
their financial duties for the Company. On that same date, Stuart S. Levy was
appointed the new Chief Financial Officer of the Company.
On November 4, 1996, the Company's then auditors, KPMG Peat Marwick LLP
("KPMG"), informed the Company that they were resigning. They informed the
Company that they would no longer be able to rely on representations of
financial management and that they did not have access to sufficient,
credible information from others within the Company to enable them to
continue as auditors. The Company thereafter engaged Deloitte & Touche LLP to
serve as its new auditors.
On December 17, 1996, the Company's Audit Committee reported its final
findings and recommendations to the Company's Board of Directors. Based on
these findings and recommendations, the Board concluded that Messrs. Creevy
and Hollandsworth and Ms. Kulis should no longer be employees of the Company.
The Board also requested Mr. Richard Rubin's resignation from the Board of
Directors and as an officer of the Company.
On December 18, 1996, at a continuation of the December 17 Board of
Directors meeting, Mr. Rubin's resignation was tendered and was accepted by
the Board. Harvey Appelle was then appointed Chairman of the Board and Chief
Executive Officer of the Company.
On December 18, 1996, the Company and Mr. Rubin entered into a Settlement
Agreement in settlement of any claims which Mr. Rubin may have had in
connection with his employment agreement. Such employment agreement was
scheduled to run through December 1, 1998. Pursuant to the Settlement
Agreement, the Company agreed to make payments to Mr. Rubin, for the period
of time from January 1, 1997 through December 31, 1997, totalling $660,000,
plus a $15,000 non-accountable expense allowance. The Company also agreed,
for a limited period of time, to provide to Mr. Rubin certain benefits,
including certain life, health, dental, medical, hospitalization and
disability insurance benefits. In consideration for such payments and
benefits, Mr. Rubin agreed to provide consulting services to the Company
during the aforementioned period.
On April 14, 1997, Lynn Siemers-Cross was elected as a director and as
President and Chief Operating Officer of the Company.
New Credit Facility
The Facility
On April 15, 1997, the Company received a signed commitment letter (the
"Commitment Letter") for a new credit facility (the "Facility") to amend its
existing credit facility. The Facility would be extended
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to Donnkenny Apparel, Beldoch and MegaKnits, as borrowers, and would consist
of a term loan (the "Term Loan"), a revolving credit (the "Revolving
Credit"), and a factoring facility (the "Factoring Facility"). The purpose of
the Facility would be to continue to finance the acquisition of the stock of
Beldoch and the purchase of certain assets of Oak Hill Sportswear Corp. and
for general working capital purposes including the issuance of letters of
credit. The Facility would expire on March 31, 1999. Under the Facility, The
Chase Manhattan Bank would serve as agent (and would hold a 35.0762%
interest), The CIT Group/Commercial Services Inc. would serve as collateral
agent (and hold a 14.8148% interest), and each of Fleet Bank, N.A. and The
Bank of New York would be co-lenders (each holding a 25.0545% interest). The
definitive agreements relating to the Facility have not yet been finalized.
The Term Loan
The Term Loan would be continued at its current balance at April 1, 1997
of $16,250,000. The interest rate would be equal to the prime rate plus 1
1/2% per annum. The amortization schedule calls for quarterly payments of
$1,250,000. A balloon payment of $7,500,000 would be due on March 31, 1999.
An excess cash flow recapture would be payable annually within 15 days after
receipt of the Company's audited fiscal year-end financial statements. In
addition, any tax refunds received in excess of $2,000,000 applicable to
Fiscal 1996 or prior fiscal years would be applied to reduce the balloon
payment. The default interest rate would be equal to 2% above the otherwise
applicable rate. The Term Loan would not carry any prepayment penalty.
The Revolving Credit
The commitment under the Revolving Credit would be $85,000,000, with
sublimits of $70,000,000 for direct debt and $35,000,000 for letters of
credit. The interest rate would be equal to the prime rate plus 1 1/2% per
annum. Borrowings in excess of an allowable overadvance would bear interest
at the prime rate plus 3 1/2% per annum. Advances and letters of credit (in
the aggregate) would be limited to (i) up to 85% of eligible accounts
receivable of the borrowers plus (ii) up to 60% of eligible inventory of the
borrowers, plus (iii) an allowable overadvance. The default interest rate
would be equal to 2% above the otherwise applicable rate.
The Factoring Facility
The factoring commission would be equal to 0.45% of the gross amount of
sales, plus certain customary surcharges and 0.20% on takeover accounts
receivable. One collection day would be charged at a per annum rate equal to
the prime rate plus 1 1/2% on all factored transactions.
Collateral; General Covenants and Conditions
Collateral for the Facility includes (i) a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles, inventory
and factor credit balances, (ii) a first mortgage on all real property, (iii)
a pledge of the Company's stock in Beldoch, and (iv) a pledge of the
Company's stock in Donnkenny Apparel and MegaKnits. The Facility would be
guaranteed by the Company and each of its subsidiaries. The Facility would
(i) require the Company to make usual and customary representations and
warranties, (ii) provide for certain standard events of default, (iii)
provide certain affirmative covenants, and (iv) provide certain negative
covenants, including limitations on debt, liens, restricted payments,
dividends, mergers, acquisitions, consolidations, asset sales, and other
usual and customary negative covenants.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and note 8 to the Consolidated Financial Statements of
the Company and its Subsidiaries.
PRODUCTS
The Company designs, manufactures, imports and markets a broad line of
moderately priced sportswear and sleepwear for women under the Victoria
Jones, Casey & Max(Registered Trademark), Beldoch Popper(Registered
Trademark), Pierre Cardin(Registered Trademark), Donnkenny Classics, Mickey &
Co.(Registered Trademark), and Lewis Frimel(Registered Trademark) brand
names. The Company also manufactures, or contracts for the manufacture of,
and markets certain items of women's, men's and children's sportswear and
women's and girls' sleepwear featuring various licensed cartoon character
images.
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Oak Hill Sportswear Division
The Company acquired its Oak Hill Sportswear product line in 1995. Oak
Hill Sportswear manufactures and imports novelty woven shirts, sweaters,
cotton knits and sportswear under the brand names Casey & Max and Victoria
Jones. The Casey & Max label represents novelty woven tops and sportswear.
The Victoria Jones label represents novelty sweaters, cotton knits and
sportswear as well as all special size product. These moderate-priced
products are sold to department stores, specialty stores and chains including
Belk, Mercantile, Kohl's, Dillard's, Federated, Profitt's, Stage Stores,
Catherine's, J.C. Penney and Sears. The division's products are marketed for
missy, large sizes and petites. Approximately 90% of these products are
imported, predominately from Hong Kong, China and India.
Beldoch Industries
The Beldoch division of the Company manufactures and imports knitwear
selling to moderately priced department and specialty stores across the
nation. The Beldoch Popper division, within the Beldoch division, sells
sweaters and cut and sewn women's sportswear to stores such as J.C. Penney,
Belk, Macy's, Mercantile, Dillards, Frederick Atkins and Carson Pirie Scott.
The Knitmaker's division, within the Beldoch division, is a private label
division selling exclusive private label products to QVC, J.C. Penney and
Spiegel. A vast majority of the Knitmaker's products are manufactured in the
Company's facility located in West Hempstead, New York. The Beldoch division
also manufactures women's wear under the Pierre Cardin label pursuant to a
license. The Pierre Cardin product is sold to the better knitwear departments
of department stores and specialty stores. Its major accounts include
Federated Stores, Macy's, Belk, Mercantile, Yonkers and Frederick Atkins
stores and the Spiegel and Chadwick's Catalogs.
Donnkenny Classics
Donnkenny Classics are fabricated predominantly from synthetic/natural
fiber blends and 100% synthetic materials and are manufactured in petite,
missy and large sizes. The market for these products is primarily women over
the age of 35. Donnkenny has been an established brand name for over 60
years.
The Donnkenny Classics label represents all of the Company's core products
for career and casual coordinated merchandise as well as fashion products
including (i) pull-on stretch gabardine pants and skirts and coordinated
gabardine jackets, which are manufactured year round in both basic and
fashion colors with coordinated blouses, and which except for color
selection, remain substantially unchanged from season to season, and (ii)
tops, blouses, pants, skirts and jackets in styles which vary from season to
season.
Mickey & Co.(Registered Trademark)
Pursuant to non-exclusive licenses granted the Company by Disney
Enterprises, Inc. ("Disney"), the Company manufactures, produces and sells a
Mickey & Co.(Registered Trademark) line of sportswear collections for women,
men and children and other product classifications including sweat shirts,
tee shirts, jackets, activewear, novelty bottoms and tops, sweaters and bras
and underpants. The products produced under these Disney licenses are both
domestically manufactured and imported and are imprinted, embroidered or
appliqued with the standard Disney characters, including Mickey
Mouse(Registered Trademark), Minnie Mouse(Registered Trademark), Donald
Duck(Registered Trademark), Daisy Duck(Registered Trademark),
Pluto(Registered Trademark) and Goofy(Registered Trademark) and the Mickey &
Co.(Registered Trademark) trademark. In 1996, The Walt Disney Company Asia
Pacific Ltd granted the Company a non-exclusive license, which the Company
has sublicensed to a third party, to manufacture a product line and
distribute the product in the Peoples' Republic of China. Pursuant to the
terms of the Company's sublicense agreement, the Company will not realize any
income from sales activities until the sublicensee recoups initial
expenditures. The Company does not anticipate it will receive income under
this arrangement through the end of the term of the license which is
scheduled to expire in August, 1997. The Company does not intend to seek
renewal of the China license.
Lewis Frimel/Flirts
The Company acquired its Lewis Frimel/Flirts product line in 1977. During
1996, the product line consisted of women's intimate apparel products,
including sleepwear, dorm shirts, boxer shorts, pajamas, panties and bras
with various character images licensed to the Company. Sales of the Lewis
Frimel/Flirts
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product line was primarily to the mass merchant market. Licensed images used
on this product line included characters in the Garfield comic strip, Peanuts
characters, classic muppet characters and various Looney Tunes characters.
Gross sales for this product line in 1996 were $16,256,500. Most of the
licenses for the characters mentioned above expire during 1997. The Company
is in the process of seeking additional licenses to add to its product line.
Custom and Private Label Products
The Company also manufactures products on a contract basis utilizing the
Company's manufacturing facilities. The customers include, among others,
Cross Creek, Basset Walker and Tultex.
MANUFACTURING AND IMPORTING
Approximately 46% of the Company's products sold in Fiscal 1996 were
manufactured in the United States, as compared with 51% in the Company's
fiscal year ended December 2, 1995 ("Fiscal 1995"). The Company's
domestically produced products are manufactured at the Company's production
facilities in Virginia and West Hempstead, New York and at other facilities
by several outside contractors.
The Company's Electronic Data Interchange computer system ("EDI") connects
the Company to approximately 33 of its large customers and, in Fiscal 1996,
was used to place approximately 34% of the Company's orders. Through EDI, the
Company has established a "quick response" program to shorten its lead and
response times for production and delivery of its domestically manufactured
women's sportswear lines. The Company is also linked by EDI to several of its
major suppliers, which allows the Company to review purchase orders for
fabric on a weekly basis.
The remaining 54% of the Company's products sold in Fiscal 1996 were
produced abroad and imported into the United States, principally from China,
India, Guatemala, Turkey and Bangladesh. Such products include some or all of
the Company's products sold under the brand names Victoria Jones, Casey &
Max, Beldoch Popper, Lewis Frimel/Flirts, panties and boxer shorts featuring
Looney Tunes characters, underpants and underpant sets featuring Disney
characters, and certain of the Company's products which have ornamental
design requirements. The percentage of the Company's products which are
manufactured in the United States is expected to decrease further during the
Company's 1997 fiscal year ("Fiscal 1997").
The Company's purchases from its foreign suppliers are effected through
individual purchase orders specifying the price and quantity of the items to
be produced. Generally, the Company does not have any long-term, formal
arrangements with any of the suppliers which manufacture its products. The
Company continually seeks additional suppliers throughout the world for its
sourcing needs. No one domestic or foreign contractor manufactured more than
10% of the Company's products in Fiscal 1996.
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 up to six months in advance of its selling
season, usually before the Company has received its orders from its
customers. Thus, there exists the risk that the purchase orders by the
Company's customers will be less than the amount manufactured. The Company
believes that this risk is outweighed by the cost savings to the Company by
manufacturing such products abroad. Conversely, in the event there exists
excess demand for the Company's products, the lengthy production time for
imported goods makes it impossible for the Company to return to the market to
purchase additional goods for the same selling season. The Company's
arrangements with foreign suppliers are also subject to the additional risks
of doing business abroad, including currency fluctuations and revaluations,
restrictions on the transfer of funds and in certain parts of the world,
political instability. The Company's operations have not been materially
affected by any of such factors to date. However, due to the large portion of
the Company's products
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which are produced abroad, any substantial disruption of its relationships
with its foreign suppliers could have a material adverse effect on the
Company's operations and financial condition.
CUSTOMERS
In Fiscal 1996, the Company shipped orders to approximately 23,500 stores
in the United States. This customer base represents approximately 8,300
accounts. Of the Company's net sales for Fiscal 1996, chain stores accounted
for approximately 26.3%, specialty retailers for approximately 32.7%,
department stores for approximately 20.4%, mass merchants for approximately
11.2%, catalogue customers for approximately 3.8%, and other customers for
approximately 5.6%.
The Company markets its Oak Hill Sportswear division products to major
department stores, including Dillard's, Federated Stores, May Company, J. C.
Penney and Sears and to specialty retailers. Beldoch Popper products are sold
to department stores, chain stores and specialty retailers, including J. C.
Penney, Belk and Frederick Atkins. Knitmaker's, Beldoch's private label
division, sells exclusive products to catalog and specialty retailers
including QVC and Spiegel. Pierre Cardin products are sold to department and
specialty stores and catalogs, including Federated Stores, Macy's, Frederick
Atkins, Mercantile Stores, Spiegel and Chadwick's of Boston. Donnkenny
Classics markets its moderately priced related separates to departments
stores, specialty stores and a variety of catalog retailers, including J. C.
Penney, Sears, Stage Stores, Frederick Atkins, Catherines, Lane Bryant Direct
and Roamans. In addition, the Company manufactures products exclusively for
J. C. Penney under its D.K. Gold label. The Lewis Frimel/Flirts products are
marketed to mass merchant retailers including Wal-Mart, K-mart and Target
Stores. The Mickey & Co.(Registered Trademark) product line is distributed to
J. C. Penney, selected specialty retailers including Mercantile Stores,
department stores including Dillard's, Dayton-Hudson and May Department
Stores, novelty stores and Disney theme parks.
In Fiscal 1996, consolidated net sales to J.C. Penney accounted for 19.4%
of the Company's net sales. The loss of, or significantly decreased sales to,
this customer could have a material adverse effect on the Company's
consolidated financial condition.
In Fiscal 1996, the Company experienced a seasonal sales peak during the
third and fourth quarters of Fiscal 1996. The Company expects the bulk of its
business during Fiscal 1997 also to be during the third and fourth quarters.
SALES AND MARKETING
At March 15, 1997, the Company had a 91 person sales force, of whom 32
were Company employees and 60 were independent commissioned sales
representatives. These sales representatives are located in 43 cities and
provide nationwide coverage to retailers ranging from individual specialty
shops to national chain stores and catalogues.
The Company's principal showrooms are in New York City. In addition, the
Company's sales representatives operate showrooms in Atlanta, Charlotte,
Dallas, Denver, Elmont (NY), Chicago, Los Angeles, Miami, Minneapolis and
Seattle.
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 fabrics and
trim for its production of certain styles, the Company is a major customer of
several of the larger synthetic textile producers. The Company typically
experiences little difficulty in obtaining 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.
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(Registered Trademark), Victoria
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Jones(Registered Trademark), Victoria Sport(Registered Trademark), Casey &
Max(Registered Trademark), Beldoch Popper(Registered Trademark), Lewis
Frimel(Registered Trademark), Flirts(Registered Trademark),
Knitmaker's(Registered Trademark), Private Stock(Registered Trademark) and
Alberoy(Registered Trademark). Upon compliance with the trademark statutes of
the United States and the relevant foreign jurisdictions, these trademark
registrations may be renewed.
The Company holds licensing rights to manufacture, import and sell women's
sportswear in the United States and the U.S. Virgin Islands with the Pierre
Cardin trademark, including sweaters, pants, skirts, knitwear, jeans,
swimwear and activewear. Such license currently is automatically continued
from year to year at the Company's option provided net sales equal specified
minimums. The Company's sales during Fiscal 1996 surpassed the minimum
requirements of this license, and the Company intends to renew this license
for an additional one year period.
The Company holds license rights to manufacture and market products with
recognizable character images. The Company has rights to use the Mickey &
Co.(Registered Trademark) trademark and certain Walt Disney characters
including Mickey Mouse(Registered Trademark), Minnie Mouse(Registered
Trademark), Donald Duck(Registered Trademark), Daisy Duck(Registered
Trademark), Pluto(Registered Trademark) and Goofy(Registered Trademark) on
certain products. The Company also has license rights to manufacture and
market certain products using fictional character images and trade names,
including, but not limited to, various Looney Tunes characters, Garfield, the
Peanuts characters and the Muppets.
Under the current term of the material licenses, such licenses will expire
during 1997 and 1998. The Company has the option to renew certain of its
licenses, while other licenses do not have renewal options as explicit
contractual provisions. The Company believes it has satisfied the
requirements of its licenses; however, no assurance can be given that the
Company will be able to renew any of the licenses on commercially acceptable
terms. The Company is in the process of seeking additional licenses.
The licenses generally require the Company to make minimum annual royalty
payments and provide for maintenance of quality control. Furthermore, the
licenses give the licensor the right to approve products offered by the
Company using its characters and to terminate the license if the Company does
not satisfy its contractual obligations in any material respect. Pursuant to
the licenses, royalties range up to 16% of net sales of products sold.
BACKLOG
At March 15, 1997, the Company had unfilled, confirmed customer orders of
approximately $64 million, compared to approximately $42 million of such
orders at March 15, 1996, with such orders generally scheduled for delivery
within three to six months of confirmation, although some extend until the
end of the fiscal year. The amount of unfilled orders at a particular time is
affected by a number of factors, including the scheduling of the production
and shipment of garments, which in some instances may be delayed or
accelerated at the customer's request. Accordingly, a comparison of unfilled
orders from period to period is not necessarily meaningful and may not be
indicative of eventual actual shipments. There can be no assurance that
cancellations, rejections and returns will not reduce the amount of sales
realized from the backlog of orders.
COMPETITION
The women's apparel business is highly competitive and consists of many
manufacturers and distributors, none of which accounts for a significant
percentage of total sales in the overall market, but many of which are larger
and have substantially greater resources than the Company. The Company
competes with both domestic manufacturers and importers, primarily on an
item-by-item basis, with respect to brand name recognition, price, quality
and availability.
EMPLOYEES
As of March 15, 1997, the Company had 1,566 full-time employees, of whom
242 were salaried and 1,324 were paid on an hourly basis. As of March 15,
1997, the Company had 37 part time employees, all of whom work on an hourly
basis.
The Company's hourly labor force is non-union. The Company believes
relations with its employees are good.
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ENVIRONMENTAL MATTERS
The Company believes that it is in material compliance with all applicable
federal, state and local environmental laws. The Company does not currently
anticipate the need to make material capital expenditures to remain in
compliance with applicable federal, state and local environmental laws.
ITEM 2. PROPERTIES
The Company currently operates ten facilities in Virginia, one in
Charleston, South Carolina, two in New York state and one in Hong Kong.
APPROXIMATE OWNED OR
LOCATION SQUARE FOOTAGE FUNCTION LEASED
- ------------------------------- -------------- --------------------------------- ----------
Christiansburg, Virginia ...... 109,000 Finishing Owned
Dryden, Virginia ............... 28,850 Sewing Owned
Floyd, Virginia ................ 79,600 Fabric warehouse, cutting Owned
Floyd, Virginia ................ 12,200 Sewing Owned
Haysi, Virginia(1) ............. 30,200 Sewing Leased
Christiansburg, Virginia(1) ... 66,000 Imperial warehouse Leased
Independence Grayson, Virginia 70,350 Sewing, warehouse Owned
Independence Kendon, Virginia . 37,550 Warehouse, distribution Owned
Rural Retreat, Virginia ........ 61,230 Sewing, distribution Owned
Wytheville, Virginia ........... 161,800 Distribution, administration Owned
Charleston, South Carolina(2) . 200,000 Distribution center Leased
West Hempstead, New York ...... 150,000 Distribution, knitting and sewing Leased
New York, New York(3) .......... 62,500 Offices and principal showrooms Leased
Medallion Heights, Hong Kong .. 1,000 Administration and sourcing Leased
--------------
TOTAL........................... 1,070,280
==============
- ------------
(1) The Company owns all of its facilities in Virginia other than the Haysi
and Christianburg facilities. With respect to the Haysi facility, the
Company has entered into a lease purchase agreement with the Industrial
Development Authority of Dickenson County, Virginia and The County of
Dickenson, Virginia pursuant to which the Company is making monthly
payments of $4,241.75 until September 1, 2012, at which time the
Company will be entitled to purchase the Haysi facility for a nominal
purchase price. With respect to the Christianburg facility, the annual
rental payments are $44,400, and the lease expires in August 1997.
(2) This facility is leased, with annual rental payments totaling $450,000,
and is subject to a 3% annual rental escalation, until March 19, 2006,
at which time the lease expires.
(3) Annual rental payments for the New York office/showroom space are
approximately $2,200,000 in the aggregate. The leases for the New York
office/showrooms expire in 2000, 2006 and 2008.
Management believes that its current facilities are sufficient to meet its
needs for the foreseeable future.
RETAIL OUTLETS
The Company operates 12 outlet stores in which it markets out-of-season
and irregular merchandise in order to reduce its exposure to excess inventory
and limit brand name deterioration as a result of sales to off-price
retailers. The outlet stores are located primarily in Virginia, with
additional locations in Alabama, Florida, North Carolina and Tennessee. Five
of these stores are adjacent to the Company's manufacturing facilities, while
the remaining seven stores are generally located in areas in which the
Company's customers do not sell its products. The size of these stores ranges
from 1,600 to 3,500 square feet. The annual minimum rental payments range
from approximately $15,000 to $45,000, and the leases
8
terminate between 1997 and 1998. The Company expects to be able to renew or
replace each of these leases upon its expiration on terms comparable to the
existing terms. The Company is currently considering the desirability of
continuing to sell products through its own outlet stores.
ITEM 3. LEGAL PROCEEDINGS
IN RE DONNKENNY, INC. SECURITIES LITIGATION, 96 Civ. 8452 (MGC): Beginning
in November 1996, ten putative class action complaints were filed in the
United States District Court for the Southern District of New York. The
complaints name as defendants the Company, as well as Edward T. Creevy,
Ronald Hollandsworth and Richard Rubin, all of whom are former officers
and/or directors of the Company. The complaints allege that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by failing to disclose, among other things,
that the Company's financial statements for certain reporting periods
allegedly overstated sales and revenues. The complaints seek compensatory
damages, prejudgment interest, attorneys' fees and costs.
In December 1996 and January 1997, several groups of plaintiffs and
putative class members filed motions for (i) consolidation of the
aforementioned actions and (ii) the appointment of one or more lead
plaintiffs pursuant to the Private Securities Litigation Reform Act of 1995.
On January 31, 1997, the court issued an Order that the actions be
consolidated. Pursuant to the Order, the plaintiffs have until May 17, 1997
in which to file a consolidated complaint or designate one of the existing
complaints as the operative complaint. In addition, the defendants' time to
answer or otherwise respond to the complaints has been extended until after
the time that a previously designated complaint is designated as the
operative complaint or a consolidated complaint is filed.
On April 2, 1997, the Court appointed Emanon Partners, L.P. ("Emanon") as
the lead plaintiff in the action and ruled that Emanon may select the law
firms of Wolf Popper, LLP and Milberg Weiss Bershad Hynes & Lerach, LLP as
co-lead counsel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of Fiscal 1996.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the Nasdaq National Market under
the symbol "DNKY." The Common Stock began trading on the Nasdaq National
Market on June 17, 1993.
In November 1995, the Board of Directors of the Company declared a
two-for-one stock split to all holders of its common stock in the form of a
100% stock dividend payable to stockholders of record on December 4, 1995.
Additional shares reflecting the stock split were distributed on December 18,
1995.
The following table sets forth the quarterly high and low closing prices
of a share of Common Stock as reported by the Nasdaq National Market for the
period commencing with the trading of the Common Stock on December 4, 1993
and ending on March 31, 1997. Information with respect to periods prior to
December 19, 1995 has been retroactively restated to reflect the
above-described stock split.
PERIOD HIGH LOW
- ------------------- -------- -------
Fiscal 1994
First Quarter ..... 9 15/16 8 13/16
Second Quarter ... 11 7/8 9 5/16
Third Quarter ..... 13 1/8 11 1/8
Fourth Quarter ... 12 13/16 6 1/16
Fiscal 1995
First Quarter ..... 9 1/16 6 3/4
Second Quarter ... 9 5/8 7 9/16
Third Quarter ..... 14 5/16 9 17/32
Fourth Quarter ... 17 1/8 12 25/32
Fiscal 1996
First Quarter ..... 18 10 1/8
Second Quarter ... 20 5/8 13 3/4
Third Quarter ..... 21 3/8 16
Fourth Quarter ... 17 1/8 3 5/8
Fiscal 1997
First Quarter ..... 5 3/8 2 1/8
On March 31, 1997, the closing price for a share of Common Stock, as
reported by the Nasdaq National Market, was $2.75.
The number of holders of record for Registrant's Common Stock as of March
15, 1997 was 96 and the approximate number of beneficial holders of the
Common Stock was 2,500.
The Company paid a $3.0 million cash dividend to its stockholders in
February 1992. The Company currently anticipates that it will retain all its
earnings for use in the operation and expansion of its business and,
therefore, does not anticipate that it will pay any cash dividends in the
foreseeable future. In addition, the Company's existing credit facilities and
the proposed facility each prohibit the Company from declaring or paying
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 3, 1994, December
2, 1995 and December 31, 1996 and for the years then ended have been derived
from the Company's consolidated financial statements included elsewhere in
this Form 10-K which have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is also included herein. The selected
consolidated financial data as of December 4, 1993 and December 5, 1992 and
for the years then ended have been derived from the Company's consolidated
financial statements, which are not included herein, and were audited by
other auditors. 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.
10
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 5, DECEMBER 4, DECEMBER 3, DECEMBER 2, DECEMBER 31,
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- --------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA(1):
Net sales .................. $126,490 $144,080 $151,147 $193,306 $255,179
Cost of sales .............. 88,052 100,321 106,389 142,128 202,580
------------- ------------- ------------- ------------- --------------
Gross profit ............... 38,438 43,759 44,758 51,178 52,599
Selling, general and
administrative expenses .. 22,480 25,298 26,772 34,000 57,603
Amortization of goodwill
and other related
acquisition costs ......... 1,412 1,317 1,145 985 1,449
Restructuring Charge ....... -- -- -- 2,815 --
Gain on sale of license ... -- -- (1,116) -- --
------------- ------------- ------------- ------------- --------------
Operating profit ........... 14,546 17,144 17,957 13,378 (6,453)
Interest expense ........... (6,943) (5,312) (2,870) (4,135) (5,154)
------------- ------------- ------------- ------------- --------------
Income before income taxes
and extraordinary charge . 7,603 11,832 15,087 9,243 (11,607)
Income taxes ............... 3,090 4,615 6,034 3,996 (3,319)
------------- ------------- ------------- ------------- --------------
Income before extraordinary
charge .................... 4,513 7,217 9,053 5,247 (8,288)
Extraordinary charge
related to early
extinguishment of debt,
net of taxes .............. -- 453 295 -- --
------------- ------------- ------------- ------------- --------------
Net income ................. $ 4,513 $ 6,764 $ 8,758 $ 5,247 $ (8,288)
============= ============= ============= ============= ==============
INCOME (LOSS) PER COMMON
SHARE(4):
Income before extraordinary
charge..................... $ .61(2) $ .74 $ .68 $ .38 $ .59
Extraordinary item ......... -- $ (.05) $ (.02) -- --
------------- ------------- ------------- ------------- --------------
Net income.................. $ .61 $ .69 $ .66 $ .38 $ (.59)
============= ============= ============= ============= ==============
Cash dividend paid per
common share .............. $ .40(3) -- -- -- --
============= ============= ============= ============= ==============
Weighted average shares
outstanding................ 7,468 9,816 13,330 13,910 14,012
============= ============= ============= ============= ==============
CONSOLIDATED BALANCE SHEET
DATA:
Working capital ............ $ 24,103 $ 28,814 $ 54,292 $ 80,357 $ 16,917
Total assets ............... 79,669 93,112 109,179 157,664 139,549
Long-term debt, including
current portion ........... 57,882 32,110 28,315 62,611 50,761
Stockholders' equity ....... 3,361 39,782 57,826 65,234 55,278
- ------------
(1) References herein to years through fiscal 1995 are to the Company's
52-or 53-week fiscal year. Data for the fiscal years ended November 30,
1991, December 5, 1992, December 4, 1993, December 3, 1994 and December
2, 1995 include the results of operations for 52, 53, 52, 52 and 52
weeks, respectively.
11
(2) Earnings per share would have approximated $.48 if the Offering had
taken place at the beginning of the fiscal year ended December 5, 1992.
(3) In February, 1992, the Company paid a cash dividend of $3.0 million.
(4) All per share amounts and the weighted average shares outstanding of
the Company's common stock have been retroactively restated to reflect
the stock split.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In the fall of fiscal 1996, the Company announced that it would be
restating its financial statements for fiscal 1994 and fiscal 1995. The
discussion below, and information contained elsewhere in this Form 10-K with
respect to fiscal 1994 and fiscal 1995, reflect the restated amounts for
those periods.
RESULTS OF OPERATIONS
The following table sets forth selected operating data of the Company as a
percentage of net sales, for the periods indicated below:
FISCAL YEAR ENDED 1996 1995 1994 1993
- ------------------------------------------ -------- -------- -------- --------
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........................ 79.4 73.5 70.4 69.6
Gross profit............................... 20.6 26.5 29.6 30.4
Selling, general and administrative ....... 22.6 17.6 17.7 17.6
Amortization of goodwill and other related
acquisition costs ........................ 0.6 0.5 0.8 0.9
Restructuring charge....................... -- 1.5 -- --
Gain on sale of license.................... -- -- 0.7 --
Operating Income/(Loss).................... (2.5) 6.9 11.9 11.9
Interest expense........................... 2.0 2.1 1.9 3.7
Income/(Loss) before income taxes and
Extraordinary Item........................ (4.5) 4.8 10.0 8.2
Income tax provision (Benefit)............. (1.3) 2.1 4.0 3.2
Income/(Loss) before
Extraordinary Item......................... (3.2) 2.7 6.0 5.0
Extraordinary Item......................... -- -- 0.2 0.3
Net Income/(Loss) ......................... (3.2%) 2.7% 5.8% 4.7%
COMPARISON OF FISCAL 1996 WITH FISCAL 1995
Net Sales
Net sales increased by $61.9 million, or 32.0%, from $193.3 million in
fiscal 1995 to $255.2 million in fiscal 1996. Fiscal 1996 includes net sales
for Beldoch and Oak Hill for a full year as compared to net sales for six
months and five months, respectively, in fiscal 1995. The inclusion of first
half sales from these two divisions accounted for $52.2 million of the
increase. The balance of the net sales increase was achieved in each of the
Company's other divisions, other than the Lewis Frimel Division where net
sales declined by $3.8 million. The Company continues to stress its strategy
of diversifying its product mix while selling to a broad range of retail
stores. Sportswear accounted for approximately 70% of 1996 net sales while
the licensed character business accounted for the remaining 30%.
Gross Profit
Gross profit for fiscal 1996 was $52.6 million, or 20.6% of net sales,
compared to $51.2 million, or 26.5% of net sales, for fiscal 1995. In the
fourth quarter of fiscal 1996, management undertook a program
12
to reduce excess inventories and balance quantities on hand with the
Company's near term needs. As a result, the Company recorded markdowns of
$11.4 million. The Company also recorded, in the fourth quarter,
approximately $5.1 million applicable to sales returns and allowances. The
decline in the gross profit margin was primarily the result of these
markdowns, and to a lesser extent, sales returns and allowances.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $34.0 million
in fiscal 1995 to $57.6 million in fiscal 1996. As a percentage of net sales,
these costs increased from 17.6% in fiscal 1995 to 22.6% in fiscal 1996.
Included in fiscal 1996 are charges totaling $4.2 million, or 1.7% of net
sales related to the following: the rescission of the Fashion Avenue
acquisition of $0.5 million; severance relating to departing employees caused
by the events as described in Part 1, Item 1 of $0.9 million; litigation
expenses related to the events as described in Part 1, Item 1 of $1.2
million; and professional fees for the events as described in Part 1, Item 1
and special investigation of $1.6 million. Excluding these charges, the
balance of SG&A for fiscal 1996 is $53.4 million or 20.9% of net sales. Of
the $19.4 million year to year change, as adjusted, $12.9 million (excluding
distribution expenses) or 5.1% of net sales, relates to Beldoch and Oak Hill
which were only included for six months and five months, respectively, in
fiscal 1995. Additionally, distribution expense increased by $3.8 million to
$7.8 million in fiscal 1996 or 3.1% of net sales, a 1.0 percentage point
increase over 1995. The increase is related to the opening of a new
distribution facility in Summerville, South Carolina and the closing of two
distribution centers in Mississippi and New York.
Loss From Operations
In fiscal 1996 the Company reported a loss from operations of $6.5 million
versus fiscal 1995 operating income of $13.4 million principally related to
the inventory adjustments and sales allowances and the $4.2 million of costs
discussed in the preceding paragraph.
Interest Expense
Interest expense increased by $1.1 million from $4.1 million in fiscal
1995 to $5.2 million in fiscal 1996. The increase in interest expense was
primarily due to the increased working capital needs of the Company resulting
from the acquisitions in 1995, which were funded by the revolving credit
agreement. These increases in borrowing and interest more than offset the
decline in interest expense as a result of reduced borrowing under the
Company's Senior Term Loan. As a percentage of net sales, interest expense
declined from 2.1% during fiscal 1995 to 2.0% in fiscal 1996.
Provision For Income Taxes
The Company's tax benefit in fiscal 1996 amounts to 28.6% of pre-tax
losses as compared to a provision of 43.2% for fiscal 1995. The benefit in
fiscal 1996 is lower than the Company's historical tax rate due to the
recording of a valuation allowance on a portion of deferred tax assets
related to state net operating loss carryforwards.
Net Income
In fiscal 1996 the Company reported a net loss of $8.3 million, or ($0.59)
per share, as a result of the factors described above, versus fiscal year
1995 net income of $5.2 million, or $0.38 per share.
COMPARISON OF FISCAL 1995 WITH FISCAL 1994
Net Sales
Net sales increased by $42.2 million, or 27.9%, from $151.1 million in
fiscal 1994 to $193.3 million in fiscal 1995. This increase was entirely the
result of sales from Oak Hill Sportswear and Beldoch Industries,
13
which were acquired during the third quarter of fiscal 1995 and contributed
$78.4 million to fiscal 1995 net sales, which more than offset declines in
the other divisions. The Company continues to stress its strategy of
diversifying its product mix while selling to a broad range of retail stores.
Gross Profit
Gross profit for fiscal 1995 was $51.2 million, or 26.5% of net sales,
compared to $44.8 million, or 29.6% of net sales, during fiscal 1994. The
decline in gross profit margin was due primarily to costs related to the
discontinuance of certain of the Company's product lines (primarily intimate
apparel sold only to the mass merchants) totaling $5.1 million, or 2.6% of
net sales.
Selling, General And Administrative Expenses
Selling, general and administrative expenses increased from $26.8 million
in fiscal 1994 to $34.0 million in fiscal 1995 primarily as a result of
increased sales. As a percentage of net sales, these costs declined from
17.7% in fiscal 1994 to 17.6% in fiscal 1995.
Restructuring Charge
The Company took a restructuring charge of $2.8 million during the fourth
quarter of fiscal 1995 as described in Note 15 of the Consolidated Financial
Statements.
Other Income
The Company sold the rights to the Ship 'N Shore trademarks during the
first quarter of fiscal 1994 resulting in a pre-tax gain of $1.1 million.
Income From Operations
In fiscal 1995 the Company reported income from operations of $13.4
million versus fiscal 1994 operating income of $18.0 million.
Interest Expense
Interest expense increased from $2.9 million during fiscal 1994 to $4.1
million during fiscal 1995. The increase was the result of reduced borrowings
under the Company's Senior Term Loan with The Prudential Insurance Company of
America, Pruco Life Insurance Company of America, Pruco Life Insurance and
Prudential Reinsurance Company (The "Prudential Senior Term Loan"), which was
repaid in full on February 2, 1995, offset by higher average borrowings under
the Company's Credit Facility required to support higher working capital
needs and to finance the third quarter acquisitions of Beldoch Industries and
Oak Hill Sportswear.
Provision For Income Taxes
The Company provided for taxes at an effective rate of 43.2% for fiscal
1995 and 40.0% for fiscal 1994. The increase was due to an increase in
non-deductible goodwill amortization.
Net Income
In fiscal 1995 the Company reported net income of $5.2 million, or $0.38
per share, as a result of the factors described above, versus fiscal 1994 net
income of $8.8 million, or $0.66 per share.
COMPARISON OF FISCAL 1994 WITH FISCAL 1993
Net Sales
Net sales increased by $7.1 million, or 4.9%, from $144.1 million in
fiscal 1993 to $151.1 million in fiscal 1994. Sales increases were achieved
in the Company's licensed character product lines. The Company continues to
stress its strategy of diversifying its product mix while selling to a broad
range of retail stores.
14
Gross Profit
Gross profit for fiscal 1994 was $44.8 million, or 29.6% of net sales,
compared to $43.8 million, or 30.4% of net sales, for fiscal 1993. The
decline in gross profit margin was due primarily to the introduction in
mid-1994 of intimate apparel which carries a lower gross margin and poor
winter weather that resulted in the closing of the sewing plants for thirteen
days during the first quarter of 1994.
Selling, General And Administrative Expenses
Selling, general and administrative expenses increased from $25.3 million
in fiscal 1993 to $26.8 million in fiscal 1994 primarily as the result of
increased net sales. As a percentage of net sales, these costs increased from
17.6% in fiscal 1993 to 17.7% in fiscal 1994.
Other Income
The Company sold the rights to the Ship 'N Shore trademarks during the
first quarter of fiscal 1994 resulting in a one-time pre-tax gain of $1.1
million.
Interest Expense
Interest expense declined to $2.9 million during fiscal 1994 as compared
to $5.3 million during fiscal 1993. This decline was primarily due to reduced
borrowings under the Prudential Senior Term Loan and reductions of long-term
indebtedness resulting from the repayment of $27.8 million in indebtedness
and accrued interest from the proceeds of the Company's initial public
offering in June 1993 and the repayment of an additional $10.0 million of
indebtedness with proceeds from the Company's second public offering which
closed on May 5, 1994, partially offset by higher average borrowings on the
Company's line of credit to support increased working capital needs.
Provision For Income Taxes
The Company provided for taxes at an effective rate of 40.0% for fiscal
1994 and 39.0% for fiscal 1993.
Extraodinary Items
The Company wrote off the prepayment penalty associated with the early
extinguishment of $10.0 million of debt owed pursuant to the Prudential
Senior Term Loan in the second quarter of fiscal 1994. This extraordinary
write-off was $491,000 before income taxes, and $295,000 net of taxes. A
similar write-off was taken in the second quarter of 1993 of $453,000 (net of
taxes) associated with the early extinguishment of certain subordinated
loans.
Net Income
In fiscal 1994 the Company reported net income of $8.8 million, or $0.66
per share, as a result of the factors described above, versus fiscal year
1993 net income of $6.8 million, or $0.69 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily inventory and accounts receivable, and the interest
and principal payments related to certain indebtedness, and in fiscal 1995,
from acquisitions. The Company's borrowing requirements for working capital
fluctuate throughout the year, with peak borrowing periods between July and
September.
Capital expenditures were $1.0 million for fiscal 1996, and $1.0 million
for fiscal 1995. The Company is permitted to spend up to $1.5 million
annually on capital expenditures in accordance with the Chase Manhattan Bank
(formerly Chemical Bank) Revolving Credit Agreement described below. The
Company has no material capital expenditure commitments.
15
At the end of fiscal 1996, direct borrowings were $50.8 and included a
senior term loan of $17.5 million and revolving credit of $33.0 million with
zero availability. Additionally, the Company had letters of credit
outstanding of $19.9 million with unused availability of $5.1 million. At the
end of fiscal 1995, direct borrowings and letters of credit outstanding under
the prior credit facility were $62.6 million and $11.5 million, respectively.
On April 15, 1997, the Company agreed in principle to amend the Credit
Facility to, among other things, include Donnkenny Apparel, MegaKnits and
Beldoch as borrowers. The Facility consists of a term loan, a revolving
credit, and a factoring agreement. The purpose of the Facility is to continue
to finance increased working capital needs of the Company following the
Beldoch and Oak Hill Sportswear acquisition and for general working capital
purposes including the issuance of letters of credit. The Facility will
expire on March 31, 1999. Under the Facility, The Chase Manhattan Bank would
serve as agent (and would hold a 35% interest), The CIT Group/Commercial
Services Inc. would serve as collateral agent (and hold a 15% interest), and
each of Fleet Bank, N.A. and The Bank of New York would be co-lenders (each
holding a 25% interest).
As of April 1, 1997, the balance of the Term Loan was $16.3 million. The
interest rate is equal to the prime rate plus 1 1/2 % per annum. The
amortization schedule calls for quarterly payments of $1.3 million, with a
balloon payment of $7.5 million due on March 31, 1999. An excess cash flow
recapture would be payable annually within 15 days after receipt of the
Company's audited fiscal year-end financial statements. In addition, any tax
refunds received in excess of $2.0 million applicable to fiscal 1996 or prior
fiscal years would be applied to reduce the balloon payment. The default
interest would be equal to 2% above the otherwise applicable rate. The Term
Loan would carry no prepayment penalty.
The commitment under the Revolving Credit would be $85.0 million, with
sublimits of $70.0 for direct debt and $35.0 for letters of credit. The
interest rate would be equal to the prime rate plus 1 % per annum. Borrowings
in excess of an allowable overadvance would bear interest at the default
interest rate of 2% above the otherwise applicable rate. The Revolving Credit
would also require the Company to pay certain letter of credit fees and
unused commitment fees. Advances and letters of credit (in the aggregate)
would be limited to (i) up to 85% of eligible accounts receivable plus (ii)
up to 60% of eligible inventory, plus (iii) an allowable overadvance.
Under the Factoring Agreement the Company would be charged a factoring
commission equal to 0.45% of the gross amount of sales, plus certain
customary surcharges.
Collateral for the Facility includes a first priority lien on all accounts
receivable, machinery, equipment, trademarks, intangibles and inventory, a
first mortgage on all real property, a pledge of the Company's stock in
Beldoch, and a pledge of the Company's stock in Donnkenny Apparel and
MegaKnits. The Facility would (i) require the Company to make usual and
customary representations and warranties, (ii) provide for certain standard
events of default, including change-in-control and cross default provisions,
(iii) provide certain affirmative covenants, and (iv) provide certain
negative covenants, including limitations on debt, liens, restricted
payments, dividends, mergers, acquisitions, consolidations, asset sales, and
other usual and customary negative covenants.
The Company's operating activities for Fiscal 1996 generated $5.8 million
more cash than they used principally as the result of lower net income,
decreases in accounts receivable of $1.1 million, decreases in inventories of
$3.5 million and increases in accounts payable of $8.1 million.
During fiscal 1994 and fiscal 1995, the Company's operating activities
used more cash than they generated ($5.6 million in fiscal 1994 and $2.7
million in fiscal 1995) primarily as the result of increases in inventory and
receivables. Decreases in accounts payable were offset by decreases in
inventory and lower net income in fiscal 1995 to produce the $2.7 million use
of cash.
Cash used in fiscal 1996, 1995, and 1994 for the purchase of fixed assets
was $1.0 million, $1.0 million and $0.8 million respectively and include
purchases of machinery and equipment, office furniture, building improvements
and leasehold improvements to the Company's South Carolina Warehouse
facility.
During fiscal 1995, cash used for investment in acquisitions was $29.7
million, net of cash acquired. In June of 1995, the Company acquired all of
the issued and outstanding shares of Beldoch for $13.0
16
million in cash and a $2.0 million note payable within one year of the
closing date, bearing interest at 6.0%. The transaction was financed with
long-term borrowings. The Company may be obligated to pay the former owners
additional consideration based on future earnings levels. Any additional
consideration paid will be recorded as goodwill and amortized over the
remainder of the 20-year period subsequent to the acquisition. In July of
1995, the Company completed the purchase of certain assets of Oak Hill for
$14.6 million, financed by additional borrowings under the Company's
revolving credit facility. The excess of the fair market value of net assets
acquired were recorded as goodwill and are being amortized over 20 years.
Cash used in financing activities in Fiscal 1996 was $6.2 million, which
represented repayments of $5.0 million for a senior term loan with Chase
Manhattan Bank (formerly Chemical Bank), and $2.0 million for the note
relating to the acquisition of Beldoch. This was offset by net borrowings
under the revolving credit line and proceeds from the exercise of stock
options.
Cash provided by financing activities in fiscal 1995 was $34 million,
which represented the net proceeds of $11.3 million of long-term debt, net
borrowings of $21.0 million under the revolving credit line, and proceeds of
$2.2 million from the exercise of stock options.
Cash provided by financing activities in fiscal 1994 was $7.0 million,
which represented repayments of $13.3 million of long-term debt, offset by
net borrowing of $9.5 million and the proceeds from the stock offering.
The Company believes that the amount available under the revolving credit
facility provided by the banking group along with the factoring agreement
will be sufficient to support the Company's working capital requirements for
the term of the agreement. Additionally, the Company believes that the letter
of credit facility will be sufficient to support the Company's projected
import business.
OTHER ITEMS AFFECTING THE COMPANY
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line manufacturers (such as the Company)
and a larger number of specialty manufacturers. The Company faces substantial
competition in its markets from manufacturers in both categories.
Apparel Industry Cycles and other Economic Factors
The apparel industry historically has been subject to substantial cyclical
variation, with consumer spending on apparel tending to decline during
recessionary periods. A decline in the general economy or uncertainties
regarding future economic prospects may affect consumer spending habits,
which, in turn, could have a material adverse effect on the Company's results
of operations and its financial condition.
Retail Environment
Various retailers, including some of the Company's customers, have
experienced declines in revenue and profits in recent periods and some have
been forced to file for bankruptcy protection. To the extent that these
financial difficulties continue, there can be no assurance that the Company's
financial condition and results of operations would not be adversely
affected.
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 of the Company to successfully
anticipate the needs of the Company's retail customers and the tastes of the
ultimate consumer up to a year prior to the relevant selling season.
17
Foreign Operations
The Company's foreign sourcing operations are subject to various risks of
doing business abroad, including currency fluctuations (although the
predominant currency used is the U.S. Dollar), quotas and, in certain parts
of the world, political instability. Any substantial disruption of its
relationship with its foreign suppliers could adversely affect the Company's
operations. Some of the Company's imported merchandise is subject to United
States Customs duties. In addition, bilateral agreements between the major
exporting countries and the United States impose quotas, which limit the
amount of certain categories of merchandise that may be imported into the
United States. Any material increase in duty levels, material decrease in
quota levels or material decrease in available quota allocation could
adversely affect the Company's operations.
Factors that May Affect Future Results and Financial Condition.
This Form 10-K 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.
The Company's future operating results and financial condition are dependent
upon the Company's ability to successfully design, manufacture, import and
market apparel.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 14 of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported on the Company's Form 8-K filed November 12, 1996,
on November 4, 1996 the Company's then auditors, KPMG Peat Marwick LLP,
informed the Company that they were resigning. They informed the Company that
they would no longer be able to rely on representations of financial
management and that they did not have access to sufficient, credible
information from others within the Company to enable them to continue as
auditors. On December 17, 1996, Deloitte & Touche LLP accepted appointment to
serve as the Company's new auditors.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Richard Rubin was the Chairman of the Board, President and Chief Executive
Officer of the Company until December 18, 1996, when he resigned from all
positions with the Company. Mr. Rubin joined the Company in 1978 as the
national sales manager for the Company's Kenny Classics division. In 1982, he
became President of Kenny Classics. In 1985, Mr. Rubin was named President
and Chief Executive Officer of the Company.
Harvey A. Appelle, a director of the Company, was appointed Chairman of
the Board and Chief Executive Officer of the Company on December 19, 1996.
Mr. Appelle has been the President of HarGil Capital Associates Ltd., a
private investment firm, since 1994. From 1985 to 1993, he was a Managing
Director of the Investment Banking Division of Merrill Lynch Pierce Fenner &
Smith Inc. and a Senior Vice President of Merrill Lynch Interfunding Inc. Mr.
Appelle is 52 years old.
James W. Crystal, a director of the Company, has been President since
1978, and Chairman of the Board since 1989, of Frank Crystal & Co., Inc.,
international insurance brokers. Mr. Crystal is 59 years old.
Sidney Eagle, a director of the Company, has been a principal of the law
firm Eagle & Fein, or its predecessor, for more than the past five years. Mr.
Eagle is 61 years old.
Harvey Horowitz, a director of the Company, became Vice President and
General Counsel of the Company on October 1, 1996. Prior thereto he was a
partner of the law firm Squadron, Ellenoff, Plesent & Sheinfeld, LLP, for
more than the past five years. Mr. Horowitz is 54 years old.
Edward T. Creevy, C.P.A., was the Chief Financial Officer and Vice
President of the Company from 1989 until December 18, 1996, when he resigned
from all positions with the Company.
Ronald Hollandsworth was Corporate Controller of the Company from 1989
until December 18, 1996, when he resigned from all positions with the
Company.
Stuart S. Levy has been Vice President-Finance and the Chief Financial
Officer of the Company since November 4, 1996. From January 1993 to July
1996, Mr. Levy was Vice President of Finance and Chief Financial Officer of
Xpedite Systems, Inc., a publicly-held provider of enhanced fax services.
From August 1996 through October 1996, Mr. Levy provided services to Xpedite
Systems, Inc., in connection with the completion and integration of
international acquisitions. Prior thereto, he was a financial consultant to
an investment group since 1988. Mr. Levy also serves as Assistant Secretary
of the Company. Mr. Levy is 55 years old.
Lynn Siemers-Cross became President and Chief Operating Officer of the
Company on April 14, 1997. Prior thereto she was President of the Oak Hill
Division, and has been continuously employed by Oak Hill for more than five
years. Ms. Siemers-Cross is 38 years old.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years
ended December 31, 1996, December 2, 1995 and December 3, 1994, to those
persons who were, at December 31, 1996 (i) the chief executive officer and
(ii) the other most highly compensated executive officers of the Company, who
are the only other executive officers of the Company (collectively, the
"Named Executive Officers"). The information in the following tables with
respect to the number of shares of Common Stock underlying options, option
exercise prices and the number of shares of Common Stock acquired upon the
exercise of options has been retroactively restated to reflect the
two-for-one stock split paid to all holders of Common Stock of record on
December 4, 1995 (the "Stock Split").
19
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
- ----------------------------- -------- ----------------------------------------
OTHER ANNUAL
FISCAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1)
- ----------------------------- -------- ---------- ------------ --------------
Richard Rubin
President and Chief 1996 $604,167 $ 0 $60,574(2)
Executive Officer until 1995 500,000 1,500,000 57,249(4)
December 18, 1996 1994 500,000 1,750,000 62,506(6)
Edward T. Creevy 1996 $196,667 $ 0 $88,220
Chief Financial Officer, 1995 190,000 205,000 59,696
V.P. until November 4, 1996 1994 188,750 200,000 0
Ronald Hollandsworth 1996 $140,652 $ 100,000 $67,520
Corporate Controller until 1995 120,000 100,000 63,435
November 4, 1996 1994 118,628 100,000 0
Harvey Appelle(7)
Chairman of the Board and
Chief Executive Officer 1996 0 0 0
Harvey Horowitz(7)
Vice President and General
Counsel 1996 124,444 0 0
Stuart S. Levy(7)
Vice President--Finance and
Chief Financial Officer 1996 31,667 0 0
(RESTUBBED TABLE CONTINUED FROM ABOVE)
LONG TERM
COMPENSATION
AWARDS
- ----------------------------- ----------------------------- -------------
SECURITIES
UNDERLYING
RESTRICTED OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION STOCK AWARDS SARS COMPENSATION
- ----------------------------- --------------- ------------ -------------
Richard Rubin
President and Chief 25,000 $72,233(3)
Executive Officer until 50,000 51,950(3)
December 18, 1996 $1,354,688(8) 0 46,908(3)
Edward T. Creevy 10,000 $ 1,740(6)
Chief Financial Officer, 20,000 1,740(6)
V.P. until November 4, 1996 $ 270,938(8) 20,000 1,020(6)
Ronald Hollandsworth 5,000 $ 488(6)
Corporate Controller until 10,000 409(6)
November 4, 1996 $ 162,563(8) 20,000 339(6)
Harvey Appelle(7)
Chairman of the Board and
Chief Executive Officer 0 2,500(9) 0
Harvey Horowitz(7)
Vice President and General
Counsel 0 2,500(9) 960(6)
Stuart S. Levy(7)
Vice President--Finance and
Chief Financial Officer 0 0 470
- ------------
(1) Includes only items which are, in the aggregate, greater than or equal
to the lesser of $50,000 or 10% of the total annual salary and bonus.
(2) This amount represents a car allowance of $17,800, health insurance
premiums of $19,924 and disability insurance premiums of $22,850.
(3) Represents insurance premiums paid by, or on behalf of, the Company
during the covered fiscal year with respect to term and whole life
insurance for the benefit of the Named Executive Officer.
(4) This amount represents a car allowance of $17,904, health insurance
premiums of $19,782 and disability insurance premiums of $19,563.
(5) This amount represents a car allowance of $19,619, health insurance
premiums of $16,651 and disability insurance premiums of $26,236.
(6) 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.
(7) This individual became an executive officer of the Company in 1996.
(8) On April 19, 1996, pursuant to the terms of the Company's 1996
Restricted Stock Plan, Mr. Rubin was granted 75,000 shares, Mr. Creevy
was granted 15,000 shares and Mr. Hollandsworth was granted 9,000
shares of restricted stock. The closing price of the Company's common
stock on April 19, 1996 was $18.0625. As at December 31, 1996, all of
these restricted stock awards had been forfeited under the terms of
their grants.
(9) Represents options granted pursuant to the Company's 1994 Non-Employee
Director Option Plan.
EMPLOYMENT AGREEMENTS
Harvey Appelle
On April 14, 1997, the Company's Board of Directors authorized the Company
to enter into a three year employment agreement with Mr. Appelle to serve as
Chairman of the Board and Chief Executive Officer. The agreement will provide
for a base annual salary of $400,000 for each of the first two years,
increasing to $500,000 for the third year, and a discretionary performance
bonus based on achievement of goals set annually by the Compensation
Committee of the Board, as well as certain insurance and other benefits.
20
In addition, in connection with the execution of the employment agreement,
the Compensation Committee authorized grants to Mr. Appelle of 150,000
restricted shares and options to purchase an aggregate of 150,000 additional
shares at a price equal to the closing price of the Common Stock on the date
of grant. The agreement will further provide for an incentive cash bonus
equal to the appreciation over five years of 50,000 shares of stock. The
restricted shares, options and right to receive the incentive cash bonus will
vest over the term of the agreement, subject to acceleration in the event of
a change in control of the Company.
The agreement will provide that in the event Mr. Appelle's employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Mr. Appelle will have the right to receive severance
benefits equal to three times the sum of the last annual salary inclusive of
performance bonus (but not incentive bonus).
Lynn Siemers-Cross
On April 14, 1997, the Company's Board of Directors authorized the Company
to enter into a four-year employment agreement with Ms. Siemers-Cross to
serve as President and Chief Operating Officer. The agreement will provide
for a base annual salary of $500,000, a discretionary performance bonus based
on achievement of goals set annually by the Compensation Committee, but not
less than $150,000 for fiscal 1997, as well as certain insurance and other
benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee authorized grants to Ms. Siemers-Cross of 150,000
restricted shares and options to purchase an aggregate of 150,000 additional
shares at a price equal to the closing price of the Common Stock on the date
of grant. The agreement will further provide for an incentive cash bonus
equal to the appreciation over five years of 50,000 shares of stock. The
restricted shares, options and right to receive the incentive cash bonus will
vest over the term of the agreement, subject to acceleration in the event of
a change in control of the Company.
The agreement will provide that in the event Ms. Siemers-Cross' employment
is terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Siemers-Cross will have the right to receive
severance benefits equal to three times the sum of the last annual salary
inclusive of performance bonus (but not incentive bonus).
Harvey Horowitz
On September 5, 1996, Mr. Horowitz entered into a three-year employment
agreement with a subsidiary of the Company to serve as Vice President,
General Counsel and Director of Operations. The agreement provides for a base
annual salary of $400,000, with an annual increase of 5% for each subsequent
year, a non-discretionary performance bonus based on achievement of certain
pre-tax profit goals, a discretionary performance bonus based on achievement
of pre-tax profits in excess of $30,000,000, as well as certain insurance and
other benefits.
In the event the Company does not renew the agreement, it will pay to Mr.
Horowitz compensation for a period of one year following the end of the term
of employment.
Stuart S. Levy
On January 28, 1997, Mr. Levy entered into a two year employment agreement
with the Company to serve as Chief Financial Officer, Vice President-Finance
and Assistant Secretary. The agreement provides for an annual salary of
$335,000, which will increase on November 4, 1997 to $350,000, an annual
bonus based on the performance of Mr. Levy and the Company, as well as
certain insurance and other benefits.
The Agreement provides for a grant of 5,000 restricted shares of Common
Stock, and options to purchase 100,000 shares of Common Stock at a price of
$4.43 per share, vesting over three years.
The Agreement provides for severance payments to be based on the current
year's salary and the preceding year's bonus and to continue for the longer
of the remaining term under the Agreement or six months after termination.
21
1996 STOCK OPTIONS GRANTS
The Company strives to distribute stock option awards broadly throughout
the organization. Stock option awards are based on the individual's position
and contribution to the Company. The Company's long term performance
ultimately determines compensation from stock options because stock option
value is entirely dependent on the long term growth of the Company's common
stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers
during Fiscal 1996, including information concerning the potential realizable
value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
------------------------------------------------------ ----------------------
NUMBER OF % OF TOTAL #
SECURITIES OF OPTIONS
UNDERLYING GRANTED TO
OPTION EMPLOYEES EXERCISE
GRANTED IN FISCAL PRICE (4) EXPIRATION
NAME (#) YEAR ($/SH) DATE 5%($) 10%($)
- -------------------- ------------ -------------- ---------- ------------ ---------- ----------
Richard Rubin........ 25,000(2) 11.83% $18.125 4/19/2006 $284,968 $722,165
Edward T. Creevy .... 10,000(2) 4.73% 18.125 4/19/2006 113,987 288,866
Ronald
Hollandsworth....... 5,000(2) 2.37% 18.125 4/19/2006 56,994 144,433
Harvey A. Appelle ... 2,500(3) 1.18% 18.125 4/19/2006 28,497 72,216
Harvey Horowitz...... 2,500(3) 1.18% 18.125 4/19/2006 28,497 72,216
Stuart S. Levy....... 0 0.00% N/A N/A N/A N/A
- ------------
(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) These options expired as of March 31, 1997.
(3) Represents options granted to Messrs. Appelle and Horowitz as directors
pursuant to the Company's 1994 Non-Employee Director Option Plan.
(4) 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 END OPTION VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1996 DECEMBER 31, 1996(2)
ON EXERCISE VALUE ------------------------------ ------------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------- ---------- ------------- ------------- ----------- -------------
Richard Rubin(3)........ 0 $ 0 75,000 0 $ 0 $ 0
Edward T. Creevy(3) .... 14,000 88,220 4,800 49,200 0 0
Ronald
Hollandsworth(3)....... 8,000 67,520 7,200 37,800 0 0
Harvey Appelle.......... 0 0 22,500 0 0 0
Harvey Horowitz......... 0 0 22,500 0 0 0
Stuart S. Levy.......... N/A N/A N/A N/A N/A N/A
- ------------
(1) All options were granted at an exercise price equal to market value of
the Company's common stock on the date of grant.
22
(2) Amount reflects the market value of the underlying shares of the
Company's common stock at the closing sales price reported on the
Nasdaq National Market on December 31, 1996 ($4.625 per share, which
amount has been retroactively adjusted to reflect the Stock Split) less
the exercise price of each option.
(3) These options expired as of March 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information, as of March 15, 1997,
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 of the Company 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.
NAME AND ADDRESS COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE OWNED
- -------------------------------------------------- ------------------ ----------------
Richard Rubin(7) .................................... 479,640 3.41%
920 Park Avenue
New York, NY 10028
Shaenen Fox Capital ................................. 859,350(1) 6.11%
Management LLC
200 Park Avenue
Suite 3900
New York, NY 10166
Pax Clearing Company ................................ 1,199,200(2) 8.52%
Limited Partnership Capital
440 South LaSalle Street
Suite 3100
Chicago, IL 60605
Putnam Investments, Inc.............................. 1,087,300(1) 7.73%
1 Post Office Square
Boston, MA 02109
Pioneering Management Corporation .................. 730,000(1) 5.19%
60 State Street
Boston, MA 02109
Edward T. Creevy(7) ................................. 6,000 *
11 Nappa Drive
Westport, CT 06886
Ronald Hollandsworth(7) ............................. None *
190 Brookhaven Drive
Wytheville, VA 24382
Harvey A. Appelle(3) .............................. 32,500 *
James W. Crystal(4) ............................... 23,500 *
Sidney Eagle(5) ................................... 19,300 *
Harvey Horowitz(6) ................................ 22,500 *
Stuart S. Levy(8) ................................. 5,000 *
All directors and officers as a group (5 persons) 102,800 *
- ------------
* Less than 1%.
(1) Based on information contained in a Schedule 13G filed with the
Company.
23
(2) Based on information contained in a Schedule 13D filed with the
Company.
(3) Includes 22,500 shares underlying stock options which have been granted
to Harvey A. Appelle pursuant to the Company's 1994 Non-Employee
Director Option Plan. Such options are currently exercisable.
(4) Includes 22,500 shares underlying stock options which have been granted
to James Crystal pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(5) Includes 17,500 shares underlying stock options which have been granted
to Sidney Eagle, pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(6) Includes 22,500 shares underlying stock options which have been granted
to Harvey Horowitz, pursuant to the Company's 1994 Non-Employee
Director Option Plan. Such options are currently exercisable.
(7) Based on information contained in a Form 4 filed with the Company.
(8) Shares to be issued pursuant to Mr. Levy's employment agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Crystal is Chairman and President of Frank Crystal & Co., Inc., which
provides insurance brokerage services to the Company. Frank Crystal & Co.,
Inc. received approximately $154,000 in commissions during 1996 for services
rendered to the Company.
Mr. Rubin was a party to an employment agreement with a subsidiary of the
Company, and is a party to a settlement agreement, as described in
"Business--Significant Financial and Business Developments."
Until October 1, 1996, Mr. Horowitz was the managing partner of Squadron,
Ellenoff, Plesent & Sheinfeld, LLP, which performs legal services for the
Company. During 1996, the Company paid approximately $494,000 in fees and
disbursement reimbursement to Squadron, Ellenoff, Plesent & Sheinfeld, LLP.
Mr. Horowitz is a party to an employment agreement with a subsidiary of the
Company, as set forth in Exhibit 10.35 hereto.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. The following financial statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996, December 2, 1995 and
December 3, 1994
Consolidated Statements of Operations for the Fiscal Years ended
December 31, 1996, December 2, 1995 and December 3, 1994
Consolidated Statements of Stockholders' Equity for the Fiscal Years
ended December 31, 1996, December 2, 1995 and December 3, 1994
Consolidated Statements of Cash Flows for the Fiscal Years ended
December 31, 1996, December 2, 1995 and December 3, 1994
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, during the last quarter of Fiscal 1996, the following
reports on Form 8-K:
A report on Form 8-K on December 19, 1996, stating that the Company had
been informed that the Securities and Exchange Commission was formally
investigating various matters relating to the Company's financial statements
and to trading in the Company's securities; that, as of November 19, 1996,
Mr. Thomas E. Constance had resigned as a member of the Company's Board of
Directors; that, as of December 18, 1996, Mr. Richard Rubin had resigned as
the Company's President and Chief Executive Officer; and that the Company had
issued a press release to the effect that Mr. Harvey Appelle had been named
Chairman of the Board of Directors of the Company, and also that the
Company's Board of Directors had appointed an Executive Operating Committee.
A report on Form 8-K on November 12, 1996, stating that on November 4,
1996 KPMG Peat Marwick LLP, the Company's certifying accountant, had orally
advised the Company of its resignation; stating the reasons for such
resignation; stating that, on November 5, 1996, the Company had received from
KPMG Peat Marwick a letter affirming its resignation; and stating that the
Company had selected Deloitte & Touche LLP as its new independent auditors.
A report on Form 8-K on October 18, 1996, in which the Company confirmed
its announcement that it was changing its fiscal year to one ending on
December 31, 1996, and that it expected to file amended quarterly reports for
the 1995 fiscal year and the first two quarters of the 1996 fiscal year to
reflect adjustments to the timing of recognition of sales revenues. The
report further stated that the Company's Form 10-K for Fiscal 1995 was to be
amended with respect to the 1994 and 1995 fiscal years.
A report on Form 8-K on September 21, 1996, stating that, on September 6,
1996, pursuant to a Stock Purchase Agreement of September 3, 1996, Donnkenny
Apparel had acquired all of the outstanding capital stock of Fashion Avenue
Knits Inc. and related companies. Further, the report stated that the
Company, on September 11, 1996, determined to change its fiscal year to one
ending on December 31 of each year, and that its Form 10-Q filing for the
third quarter, ending September 30, 1996, would cover the transition period.
The report further stated that the Company expected to file amended quarterly
reports for the 1995 fiscal year and for the first two quarters of fiscal
1996 to reflect adjustments to the timing of recognition of sales revenues.
25
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: April 14, 1997
DONNKENNY, INC.
By: /s/ Harvey A. Appelle
-----------------------------------
Harvey A. Appelle, Chairman
of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company in the capacities and on the dates indicated.
Dated: April 14, 1997 /s/Harvey A. Appelle
-----------------------------------------------------
Harvey A. Appelle, Chairman of the Board of
Directors and Chief Executive Officer (Principal
Executive Officer)
Dated: April 14, 1997 /s/Sidney Eagle
-----------------------------------------------------
Sidney Eagle, Director
Dated: April 14, 1997 /s/James W. Crystal
-----------------------------------------------------
James W. Crystal, Director
Dated: April 14, 1997 /s/Harvey Horowitz
-----------------------------------------------------
Harvey Horowitz, Director
/s/ Stuart S. Levy
---------------------------------------------------------
Stuart S. Levy, Chief Financial Officer, Vice
President-Finance and Assistant Secretary (Principal
Dated: April 14, 1997 Financial and Accounting Officer)
26
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION 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)
10.22 Employment Agreement between Richard Rubin and the Company, dated
September 23, 1992.(3)
10.23 Lease Purchase Agreement among The Industrial Development Authority of
Dickenson County, Virginia, Donnkenny, Inc. and the County of Dickenson,
Virginia, dated July 31, 1989.(3)
10.24 Loan Agreement between The Industrial Development Authority of Dickenson
County, Virginia and Donnkenny Apparel, Inc., dated as of June 8,
1992.(3)
10.25 Credit Agreement among Donnkenny Apparel, Inc. the Lenders Named therein
and Chemical Bank, as Agent, dated February 2, 1995.(5)
10.26 Satisfaction and Termination Agreement among Donnkenny, Inc., Donnkenny
Apparel, Inc., The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Prudential Reinsurance Company, dated February 2,
1995.(5)
10.27 Release of Security Interest-Marks among Donnkenny, Inc., Donnkenny
Apparel, Inc., The Prudential Insurance Company of America, Pruco Life
Insurance Company and Prudential Reinsurance Company, dated February 2,
1995.(5)
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.(8)
10.29 Stock Purchase Agreement among Donnkenny Apparel, Inc. and all of the
Shareholders of Beldoch Industries Corporation, dated June 5, 1995.(6)
10.30 Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries
Corporation, the Guarantors Named therein, the Lenders Named therein and
Chemical Bank, as Agent, dated June 5, 1995.(7)
27
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ----------- ------------------------------------------------------------------------ -----------------
10.31 Employment Agreement between Richard Rubin and the Company, dated
November 30, 1995.(9)
10.32 Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors.(9)
10.33 Donnkenny, Inc. 1996 Restricted Stock Plan.(12)
10.34 Stock Purchase Agreement between Donnkenny Apparel, Inc. and Mel Weiss,
dated as of September 3, 1996.(10)
10.35 Employment Agreement between Harvey Horowitz and the Company, dated
September 5, 1996.
10.36 Settlement Agreement between Richard Rubin and the Company, dated
December 18, 1996.(11)
10.37 Rescission Agreement between Donnkenny Apparel, Inc. and Mel Weiss,
dated as of January 24, 1997.
10.38 Employment Agreement between Stuart S. Levy and the Company, dated
January 28, 1997.
10.39 Term Sheet and Commitment Letter for Credit Agreement.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
- ------------
1 Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (Registration No. 33-48243), as filed with the Commission on
May 29, 1992 (the "Registration Statement").
2 Incorporated herein by reference to Amendment No. 4 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on May
24, 1993.
3 Incorporated herein by reference to Amendment No. 3 to the Registration
Statement (Registration Statement No. 33-48243), as filed with the
Commission on May 10, 1993.
4 Incorporated herein by reference to Amendment No. 5 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on
June 11, 1993.
5 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 3, 1994.
6 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on June 2, 1995.
7 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on June 17, 1995.
8 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on August 8, 1995.
9 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 2, 1995.
12 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on September 21, 1996.
11 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on December 19, 1996.
12 Incorporated by reference to the Company's 1996 Proxy Statement, filed
March 22, 1996.
28
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------------------------------- ---------------------------------
Christiansburg Garment Company Delaware
Donnkenny Apparel, Inc. Delaware
Beldoch Industries Corporation Delaware
MegaKnits, Inc. New York
29
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, 1996, December 2, 1995 and December
3, 1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years 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 Corporation's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Donnkenny, Inc. at December
31, 1996, December 2, 1995 and December 3, 1994 and the results of their
operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note 2, the accompanying consolidated financial statements
for the years ended December 2, 1995 and December 3, 1994 have been restated.
Deloitte & Touche LLP
New York, New York
April 15, 1997
F-1
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
(AS RESTATED) (AS RESTATED)
ASSETS
CURRENT ASSETS:
Cash.............................................. $ 3,998 $ 2,688 $ 1,606
Accounts receivable, net of allowances of $2,240,
$1,946 and $881 in 1996, 1995 and 1994,
respectively..................................... 29,721 49,834 34,349
Recoverable income taxes.......................... 8,625 6,921 2,308
Inventories....................................... 46,793 47,660 34,458
Deferred tax assets............................... 4,439 2,414 1,330
Prepaid expenses and other current assets ........ 1,633 1,464 1,260
-------------- ------------- -------------
Total current assets............................. 95,209 110,981 75,311
PROPERTY, PLANT AND EQUIPMENT, NET................. 11,774 12,670 9,552
INTANGIBLE ASSETS.................................. 32,450 34,013 24,316
-------------- ------------- -------------
TOTAL.............................................. $139,433 $157,664 $109,179
============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................. $ 50,761 $ 7,092 $ 85
Accounts payable.................................. 19,476 13,178 16,959
Accrued expenses and other current liabilities ... 8,055 10,354 3,975
-------------- ------------- -------------
Total current liabilities........................ 78,292 30,624 21,019
-------------- ------------- -------------
LONG-TERM DEBT..................................... -- 55,519 28,230
DEFERRED TAX LIABILITIES........................... 5,863 6,287 2,104
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized 500
shares, issued none .............................
Common stock, $.01 par value; authorized 20,000
shares, issued and outstanding 14,045, 13,968
and 13,644 shares in 1996, 1995 and 1994,
respectively..................................... 140 139 137
Additional paid-in capital........................ 46,344 45,744 43,585
Retained earnings................................. 8,794 19,351 14,104
-------------- ------------- -------------
Total stockholders' equity....................... 55,278 65,234 57,826
-------------- ------------- -------------
TOTAL.............................................. $139,433 $157,664 $109,179
============== ============= =============
See accompanying notes to consolidated financial statements.
F-2
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 3)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
(AS RESTATED) (AS RESTATED)
NET SALES.................................... $ 255,179 $ 193,306 $ 151,147
COST OF SALES................................ 202,580 142,128 106,389
-------------- ------------- -------------
Gross profit............................... 52,599 51,178 44,758
OPERATING EXPENSES:
Selling, general and administrative
expenses................................... 57,603 34,000 26,772
Amortization of goodwill and other related
acquisition costs.......................... 1,449 985 1,145
Restructuring charge........................ -- 2,815 --
Gain on sale of license..................... -- -- (1,116)
-------------- ------------- -------------
Operating (loss) income.................... (6,453) 13,378 17,957
OTHER EXPENSE:
Interest expense............................ 5,154 4,135 2,870
-------------- ------------- -------------
(Loss) income before income taxes and
extraordinary item........................ (11,607) 9,243 15,087
INCOME TAX PROVISION (BENEFIT)............... (3,319) 3,996 6,034
-------------- ------------- -------------
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM.......................... (8,288) 5,247 9,053
EXTRAORDINARY ITEM--
Net of income taxes......................... -- -- 295
-------------- ------------- -------------
NET (LOSS) INCOME............................ $ (8,288) $ 5,247 $ 8,758
============== ============= =============
(LOSS) INCOME PER COMMON SHARE:
(Loss) income before extraordinary item .... $ (0.59) $ 0.38 $ 0.68
Extraordinary item.......................... -- -- (0.02)
-------------- ------------- -------------
Net (loss) income........................... $ (0.59) $ 0.38 $ 0.66
============== ============= =============
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING............... 14,012,116 13,910,342 13,330,192
============== ============= =============
See accompanying notes to consolidated financial statements.
F-3
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996, AND
YEARS ENDED DECEMBER 2, 1995 AND DECEMBER 3, 1994
(IN THOUSANDS)
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 4, 1993 ..... $-- $ 62 $32,775 $ 6,945 $39,782
Adjustment of results of prior
periods....................... -- -- -- (1,599) (1,599)
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 4, 1993
(As restated)................. -- 62 32,775 5,346 38,183
Stock Split (two for one) .... -- 69 (69) -- --
Proceeds from stock offering . -- 6 10,879 -- 10,885
Net income (as restated) ..... -- -- -- 8,758 8,758
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 3, 1994 (As
restated)...................... -- 137 43,585 14,104 57,826
Exercise of stock options .... 2 2,159 -- 2,161
Net income (as restated) ..... -- -- -- 5,247 5,247
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 2, 1995
(As restated)................. -- 139 45,744 19,351 65,234
Net loss--December 3, 1995 to
December 31, 1995 (Note 3) .. -- -- -- (2,269) (2,269)
Exercise of stock options .... 1 600 601
Net loss--year ended December
31, 1996..................... -- -- -- (8,288) (8,288)
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 31, 1996 .... $-- $140 $46,344 $ 8,794 $55,278
=========== ======== ============ ========== ===============
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 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
(AS RESTATED) (AS RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income before extraordinary item............. $ (8,288) $ 5,247 $ 9,053
Extraordinary item.................................. -- -- (295)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes.............................. (2,449) 1,279 350
Depreciation and amortization of fixed assets ..... 1,911 1,889 1,036
Amortization of inventory step up.................. -- 1,905 --
Amortization of intangibles and other ............. 1,449 985 1,145
Provision for losses on accounts receivable ....... 231 1,065 (237)
Changes in assets and liabilities, net of the
effects of acquisitions and disposals:
Decrease (increase) in accounts receivable ........ 876 (9,601) (5,587)
Increase in recoverable income taxes............... (127) (4,613) (2,308)
Decrease (increase) in inventories................. 3,458 2,138 (10,406)
Decrease in prepaid expenses and other current
assets............................................ 1,378 289 524
Increase (decrease) in accounts payable............ 8,116 (6,286) 3,002
(Decrease) increase in accrued expenses and other
current liabilities............................... (796) 3,012 (1,722)
Decrease in income taxes payable................... -- -- (116)
-------------- ------------- -------------
Net cash provided by (used in) operating
activities........................................ 5,759 (2,691) (5,561)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets............................ (1,016) (962) (815)
Acquisitions, net of cash acquired.................. -- (29,715) --
-------------- ------------- -------------
Net cash used in investing activities............. (1,016) (30,677) (815)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES: ...............
Repayment of long-term debt......................... (7,100) (13,711) (13,330)
Proceeds of long-term debt.......................... -- 25,000 --
Repayments under revolving credit line.............. (151,010) (30,500) (18,000)
Borrowings under revolving credit line.............. 151,300 51,500 27,500
Proceeds of stock offering.......................... -- -- 10,885
Proceeds from exercise of stock options............. 600 2,161 --
-------------- ------------- -------------
Net cash (used in) provided by financing
activities........................................ (6,210) 34,450 7,055
-------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH...................... (1,467) 1,082 679
CASH, AT BEGINNING OF PERIOD......................... 5,465 1,606 927
-------------- ------------- -------------
CASH, AT END OF PERIOD............................... $ 3,998 $ 2,688 $ 1,606
============== ============= =============
See accompanying notes to consolidated financial statements.
F-5
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996,
DECEMBER 2, 1995 AND DECEMBER 3, 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- The Company designs, manufactures, imports and
markets a broad line of moderately priced women's sportswear and sleepwear.
In addition, the Company manufactures, imports and markets men's, women's and
children's sportswear and intimate apparel featuring various licensed cartoon
character images. 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.
CHANGE IN YEAR END -- In September 1996, the Company adopted December 31
as its fiscal year end. Prior to 1996, the Company's fiscal year ended on the
first Saturday in the month of December. Summarized statement of operations
and cash flow data for the transition period from December 3, 1995 through
December 31, 1995 (the "Transition Period") is included herein (See Note 3).
PUBLIC OFFERING -- On May 5, 1994, the Company completed a public offering
of 5,060,000 shares of common stock of which 1,177,640 shares were sold by
the Company and 3,882,360 shares were sold by certain stockholders. The price
per share of $10.3725 for the offering resulted in proceeds of $10,885. The
net proceeds were used to repay indebtedness, accrued interest and a
prepayment penalty.
INVENTORIES -- Inventories are stated at the lower of cost or market. Cost
is determined using the last-in, first-out method (LIFO) for $28,769 and the
first-in, first-out method (FIFO) for the balance of the inventories at
December 31, 1996.
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.
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)
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, and the sportswear division of Oak Hill Sportswear
Corporation ("Oak Hill") in 1995. Goodwill is amortized on a straight-line
basis over the expected periods to be benefited, ranging from 20 to 40 years.
Also included in intangible assets are organizational expenses and costs
related to licenses acquired by the Company, which are being amortized using
the straight-line method over periods of 5 to 20 years, respectively.
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.
F-6
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 operation or
asset. If the estimated cash flows are less than the carrying value, an
impairment loss is charged to operations based on the difference between the
carrying amount and the estimated discounted cash flows.
INCOME TAXES -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in income in the period that
includes the enactment date. SFAS No. 109 requires that deferred tax assets
are to be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
STOCK SPLIT -- On November 17, 1995, the Board of Directors authorized a
two-for-one stock split which was paid to all holders of record on December
4, 1995. All references in the accompanying consolidated financial statements
to number of shares, per share amounts, and prices of the Company's common
stock for periods prior to December 4, 1995 have been restated to reflect the
stock split.
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, 1996,
December 2, 1995, and December 3, 1994 due to their short maturities. Bank
debt approximates fair value due to its variable interest rate.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- During 1996, the Company
adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes financial accounting and reporting standards
for stock-based employee compensation plans. This statement allows employers
to continue to apply previous accounting guidance regarding stock-based
compensation and only disclose the proforma impact the accounting provisions
of the new standard would have had. The pro forma amounts required to be
disclosed will reflect the difference between compensation cost, if any,
included in net income and the related cost measured by the fair value based
method defined in this Statement.
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, restructuring
reserves, 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.
2. RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the years ended
December 2, 1995 and December 3, 1994 because of errors discovered for those
periods subsequent to the issuance of such financial statements. The
financial statements for the years ended December 2, 1995 and December 3,
1994 required restatement to correct the reporting for the recognition of net
sales, cost of sales, and certain expenses.
F-7
The impact of the restatement on the Company's balance sheets and
statements of operations is summarized as follows:
YEAR ENDED YEAR ENDED
STATEMENTS OF OPERATIONS DECEMBER 2, 1995 DECEMBER 3, 1994
- ----------------------------------- --------------------------- ---------------------------
(AS ORIGINALLY (AS ORIGINALLY
REPORTED) (RESTATED) REPORTED) (RESTATED)
Net sales .......................... $210,270 $193,306 $158,800 $151,147
Gross profit........................ 56,351 51,178 46,517 44,758
Operating income.................... 13,869 13,378 18,600 17,957
Income before extraordinary charge 5,763 5,247 10,064 9,053
Net income.......................... 5,763 5,247 9,769 8,758
Per common share:
Income before extraordinary item . $ 0.41 $ 0.38 $ 0.76 $ 0.68
Net income ........................ $ 0.41 $ 0.38 $ 0.74 $ 0.66
BALANCE SHEET DECEMBER 2, 1995 DECEMBER 3, 1994
- ----------------------------------- --------------------------- ---------------------------
(AS ORIGINALLY (AS ORIGINALLY
REPORTED) (RESTATED) REPORTED) (RESTATED)
Current Assets .................... $111,603 $110,981 $ 77,758 $ 75,311
Total Assets ...................... 161,647 157,664 111,626 109,179
Total Liabilities ................. 93,287 92,430 51,190 51,353
Stockholders' Equity .............. 68,360 65,234 60,436 57,826
3. TRANSITION PERIOD
The following information represents the condensed consolidated income
statement and cash flow information for the transition period from December
3, 1995 to December 31, 1995:
INCOME STATEMENT DATA
Net sales ............................ $ 6,838
Gross profit.......................... 915
Operating expenses ................... 4,339
Operating loss ....................... (3,424)
Other expense ........................ (422)
Net loss before income tax benefit .. (3,846)
Net loss ............................. (2,269)
CASH FLOW DATA
Cash flow from operating activities . $ 7,827
Cash flows from investing activities (11)
Cash flow from financing activities . (5,039)
Net increase in cash ................. 2,777
Cash at beginning of period .......... 2,688
Cash at end of period ................ 5,465
4. ACQUISITIONS
In June 1995, the Company acquired all of the issued and outstanding
shares of Beldoch Industries Corporation ("Beldoch") for $13,000 in cash and
a $2,000 note payable due within one year of the closing date, bearing
interest at 6%. The transaction was financed with long-term borrowings (Note
8). The Company may be obligated to pay the former owners additional
consideration based on future earnings levels. Any additional consideration
paid will be recorded as goodwill and amortized over the remainder of the 20
year period subsequent to the acquisition.
In July 1995, the Company completed the purchase of certain assets of Oak
Hill for $14,600, financed by additional borrowings under the Company's
revolving credit line. The excess of the purchase price over the fair market
value of net assets acquired was recorded as goodwill and is being amortized
over 20 years.
F-8
The operating results of each acquisition are included in the Company's
consolidated results of operations from the respective date of acquisition.
The following unaudited pro forma information assumes the acquisitions of
Beldoch and Oak Hill were completed as of the beginning of each of the
respective years. These results have been presented for comparative purposes
only and do not purport to be indicative of results that would have occurred
if the acquisitions had been made at the beginning of each of the respective
years, or results that may occur in the future:
1995 1994
---------- ----------
Net sales .......... $248,698 $296,458
Operating income ... 8,666 21,069
Net income ......... 384 8,461
Earnings per share 0.03 0.63
5. INVENTORIES
Inventories consist of the following at December 31, 1996, December 2,
1995, and December 3, 1994:
1996 1995 1994
--------- --------- --------
Raw materials ................... $12,081 $11,071 $ 8,320
Work in process ................. 4,808 4,783 4,314
Finished goods .................. 29,904 31,806 21,824
--------- --------- --------
$46,793 $47,660 $34,458
========= ========= ========
If the first-in, first-out method of inventory valuation had been used,
inventories would have been approximately $404, $346, and $270 higher than
reported at December 31, 1996, December 2, 1995, and December 3, 1994,
respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consist of the following at December 31,
1996, December 2, 1995, and December 3, 1994:
1996 1995 1994
--------- --------- --------
LAND AND LAND IMPROVEMENTS ...... $ 747 $ 747 $ 747
Buildings and improvements ...... 8,691 8,342 7,039
Machinery and equipment .......... 8,787 9,207 5,718
Furniture and fixtures ........... 1,342 1,021 806
--------- --------- --------
19,567 19,317 14,310
Less accumulated depreciation and
amortization .................... 7,793 6,647 4,758
--------- --------- --------
$11,774 $12,670 $ 9,552
========= ========= ========
7. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996, December
2, 1995, and December 3, 1994:
1996 1995 1994
--------- --------- ---------
Goodwill....................... $32,059 $32,059 $27,913
Licenses ...................... 6,550 6,550 616
--------- --------- ---------
38,609 38,609 28,529
Less accumulated amortization 6,159 4,596 4,213
--------- --------- ---------
$32,450 $34,013 $24,316
========= ========= =========
F-9
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996, December 2,
1995, and December 3, 1994:
1996 1995 1994
--------- --------- ---------
Revolving credit (a) ....... $33,000 $36,500 $15,500
Senior term (b) ............ 17,500 23,750 --
Seller note (c) ............ -- 2,000 --
Prudential senior term (d) -- -- 12,368
Other ...................... 261 361 447
--------- --------- ---------
50,761 62,611 28,315
Less current maturities ... 50,761 7,092 85
--------- --------- ---------
$ -- $55,519 $28,230
========= ========= =========
- ------------
(a) The revolving credit line, which was originally scheduled to expire on
February 2, 1999, was modified by the fifth amendment and waiver
agreement to waive any defaults through April 30, 1997. The agreement
provides for maximum borrowings of up to $35,500. Each advance bears
interest at the prime plus 0.5%. At December 31, 1996, the prime rate
was 8.25%.
(b) On June 5, 1995, the Company entered into a senior term loan with Chase
Manhattan Bank (formerly Chemical Bank) for $25,000. The loan is
payable in quarterly installments of $1,250 which began September 30,
1995, with a balloon payment of $7,500 due February 2, 1999. The loan
bears interest at the prime rate plus 1.0% at December 31, 1996.
(c) Note payable to former owners of Beldoch which was due and paid in June
1996. This note bears interest at 6%.
(d) The senior term loan from an insurance company with a face amount of
$30,000 was issued in February 1990 to refinance then existing
indebtedness. This loan was payable in installments that began in March
1992, with the final payment made in February 1995. Interest was
payable quarterly at 11.7%.
The agreements contain certain restrictive covenants which, among other
things, require the Company to maintain certain financial ratios, and to
restrict investments, additional indebtedness and the payment of dividends.
The revolving credit and senior term loan are secured by substantially all
of the assets of the Company and Beldoch.
New Loan Agreement
On April 15, 1997, the Company agreed to a new credit facility to amend
and replace its existing credit facility. The new facility, which expires on
March 31, 1999, consists of a term loan, a revolving credit facility and a
factoring agreement.
The Company's debt under the existing credit facility which was scheduled
to expire on February 2, 1999 was classified as current portion of long-term
debt as of December 31, 1996 because of the existence of covenant defaults
allowing the Company's lenders to call the debt. Upon the closing of the new
credit facility, that portion of the Company's debt which is not payable
within one year will be long term.
The term loan, in the original amount of $25,000 is payable in quarterly
installments of $1,250 with a balloon payment of $7,500 on March 31, 1999 and
bears interest at the prime rate (8.25% at December 31, 1996) plus 1 1/2%.
Additional principal payments are required out of excess cash flow, as
defined, which includes any tax refunds for 1996 and prior years in excess of
$2,000. As a result, an additional $6,625 has been classified as current at
December 31, 1996.
F-10
The revolving credit facility provides for borrowings of up to $85,000,
subject to an asset based borrowing formula with a direct debt sublimit of
$70,000 and a letter of credit sublimit of $35,000. Borrowings under the
revolving loan facility bear interest at prime plus 1/2%.
As part of the aforementioned amendment, the Company agreed to a factoring
agreement with a member of the lending group, whereby all accounts receivable
will be factored for the duration of the loan agreement.
As collateral for borrowings under the agreement, the Company has granted
the lenders a first priority lien on all accounts receivable, inventory,
machinery, equipment and intangibles and pledged the stock of Beldoch and
Donnkenny Apparel, Inc.
The Credit Agreement contains numerous financial and operating 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 maximum cumulative net loss test.
9. INCOME TAXES
Income tax expense (benefit) for 1996, 1995 and 1994 is comprised of the
following:
1996 1995 1994
---------- -------- --------
Current:
Federal.......... $(1,462) $2,241 $4,762
State and local 592 476 922
Deferred ......... (2,449) 1,279 350
---------- -------- --------
$(3,319) $3,996 $6,034
========== ======== ========
A reconciliation of the statutory Federal tax rate and the effective rate
follows:
1996 1995 1994
--------- -------- --------
Federal statutory tax rate ................. (35)% 35% 35%
State and local taxes, net of Federal
income tax benefit ........................ (2) 4 3
Losses providing no state and local tax
benefit.................................... 4 -- --
Amortization of nondeductible goodwill ..... 3 3 2
Other ...................................... 1 1 --
--------- -------- --------
(29)% 43% 40%
========= ======== ========
F-11
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, DECEMBER 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
Deferred tax assets:
Accounts receivable allowances ...... $ 662 $ 513 $ 427
Inventory valuation .................. 2,356 1,182 853
Accrued expenses ..................... 584 249 50
Restructuring charges ................ 448 470 --
State operating loss carryforwards ... 634 -- --
Other ................................ 182 -- --
-------------- ------------- -------------
Total gross deferred tax assets .... 4,866 2,414 1,330
Less valuation allowance ............ (427) -- --
-------------- ------------- -------------
Total net deferred tax assets ...... 4,439 2,414 1,330
-------------- ------------- -------------
Deferred tax liabilities:
Property, plant and equipment ....... (2,294) (2,489) (2,104)
Intangibles .......................... (3,569) (3,798) --
-------------- ------------- -------------
Total gross deferred tax liabilities (5,863) (6,287) (2,104)
-------------- ------------- -------------
Net deferred tax liability............. $(1,424) $(3,873) $ (774)
============== ============= =============
As of December 31, 1996, December 2, 1995, and December 3, 1994, the
Company has deferred tax assets attributable to accounts receivable
allowances, inventory valuation, accrued expenses, restructuring charges and
other items. The Company considers these assets to be fully realizable based
on the Company's anticipated future earnings and the fact that most of these
items are expected to reverse within the next twelve months. At December 31,
1996, the Company recorded a valuation allowance for a portion of its state
net operating loss carryforward.
10. COMMITMENTS AND CONTINGENCIES
a. In November 1996, ten designated class action lawsuits were
commenced against the Company and certain former officers in the
United States District Court for the Southern District of New
York. The complaints in these actions allege various violations of
the federal securities laws and seek an unspecified amount of
monetary damages and other monetary relief. These actions have now
been consolidated pursuant to court order and the plaintiffs have
been directed to file a consolidated complaint. As this
consolidated complaint has yet to be filed, the Company is not
presently in a position to determine the ultimate outcome of these
legal proceedings or the impact on their financial condition of
the Company.
In September 1996, the Securities and Exchange Commission ("SEC")
obtained an order directing a private investigation of the Company
in connection with, among other things, the alleged overstatement
of revenues and expenses for certain reporting periods. The
Company is continuing to cooperate with the SEC's ongoing
investigation. In addition, the Nasdaq Stock Market, Inc.
commenced a review of the Company's eligibility for continued
listing on the Nasdaq Stock Market. Management believes that the
accompanying restated financial statements reflect all adjustments
necessary to correct previously issued financial statements.
F-12
b. Rental expense for operating leases for the periods ended December
31, 1996, December 2, 1995 and December 3, 1994 approximated
$5,207, $2,996, and $1,729, respectively. Minimum future rental
payments as of December 31, 1996 for operating leases with initial
noncancelable lease terms in excess of one year, are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------
1997..................... $ 3,909
1998..................... 3,761
1999..................... 3,475
2000..................... 2,590
2001..................... 2,402
Thereafter .............. 11,643
--------
$27,780
========
c. At December 31, 1996, the Company was contingently liable on
outstanding letters of credit issued amounting to $19,166.
11. 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. Total
contributions to the Plan charged to operations for 1996, 1995 and 1994
amounted to approximately $0, $0 and $302, respectively, exclusive of
administrative costs.
12. SUPPLEMENTAL CASH FLOW INFORMATION
a. Cash paid for interest and income taxes was $4,960 and $2,990,
respectively, in 1996, $3,993 and $7,409, respectively, in 1995
and $2,464 and $7,314, respectively, in 1994.
b. In connection with the acquisition of all the issued and
outstanding shares of Beldoch and certain assets of Oak Hill for
$32,400 (inclusive of a $2,000 note payable), the Company acquired
assets with a fair value of $38,241 and assumed liabilities of
$9,987 and recorded goodwill of $4,146.
13. GAIN ON SALE OF LICENSE
The Company sold the rights to the Ship 'N Shore trademarks in December
1993 resulting in one-time pretax gain of $1,116 equal to $0.05 per share on
an after-tax basis.
14. STOCK OPTIONS
The Company has a stock award and incentive program which permits the
issuance up to 2,000,000 options on terms as determined by the Board of
Directors.
Under the terms of the plan, options granted may be either non-qualified
or incentive stock options and the exercise price, determined by the Stock
Option committee, may not be less than the fair market value of a share on
the date of the grant.
F-13
Information regarding the Company's stock option plan is summarized
below:
1996 1995 1994
--------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- -------------- ----------- -------------- ---------- --------------
Outstanding at beginning
of the year ................... 543,600 $ 8.26 727,000 $7.55 582,000 $ 6.69
Granted ........................ 216,350 18.15 198,000 8.14 187,000 10.39
Exercised ...................... (76,100) 7.89 (323,200) 6.69
Canceled ....................... (25,050) 12.80 (58,200) 8.03 (42,000) 7.99
----------- -------------- ----------- -------------- ---------- --------------
Outstanding at end of year .... 658,800 11.38 543,600 8.26 727,000 7.55
=========== =========== ==========
Exercisable at year end ........ 268,100 130,000 275,000
=========== =========== ==========
Available for grant at year
end............................ 1,341,200 1,456,400 1,273,000
=========== =========== ==========
The options outstanding at December 31, 1996 range in price as follows:
# OF OPTIONS EXERCISE PRICE
- -------------- --------------
454,100 $6.69-$11.06
204,700 $18.15
- --------------
658,800
==============
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 Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's net income and
earnings per share for the years ended December 31, 1996 and December 2, 1995
would have been reduced to the pro forma amounts indicated below:
1996 1995
---------- --------
Net (loss) income:
As reported ................ $(8,288) $5,247
Pro forma .................. (8,414) 5,185
Net (loss) income per share:
As reported ................ $ (0.59) $ 0.38
Pro forma .................. (0.60) 0.37
The weighted average fair value of the options granted during 1996 and
1995 were $10.49 and $4.29, respectively.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1996 and 1995, respectively: dividend yield of 0% and 0%,
volatility of 47% and 36%, risk-free interest rate of 6.90% and 6.41%, and an
expected life of 7 years and 7 years.
15. RESTRUCTURING CHARGE
During the fourth quarter of 1995, the Company adopted a plan of
restructuring and recorded a pretax charge of $2,815. The key elements of the
restructuring plan include the costs associated with the consolidation of
certain manufacturing facilities and the discontinuance of certain product
lines. The
F-14
restructuring provision includes estimated costs of asset write-downs, lease
terminations and other charges. As of the December 31, 1996 and December 2,
1995, approximately $1,135 and $1,200 of the charge is represented by an
accrual for future expenditures, principally related to lease terminations
and the closing of a manufacturing facility.
16. 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
19%, 15% and 18% of the Company's sales in fiscal 1996, 1995 and 1994,
respectively. Sales to another mass retailer accounted for 15% of the
Company's sales in fiscal 1994. No other customers accounted for more than
four percent of the Company's sales in fiscal 1996, 1995 and 1994, and no
account receivable from any customer exceeded $7,981 at December 31, 1996.
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimate of its bad debts.
F-15
DONNKENNY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
DONNKENNY, INC.
Valuation and Qualifying Accounts
For the Fiscal Years ended
December 3, 1994, December 2, 1995 and December 31, 1996
BALANCE OF CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ------------ ------------ ------------
Year ended December 31, 1996:
Reserve for bad debts $ 897,000 233,000 162,000 $ 968,000
Reserve for discounts 1,112,000 6,357,000 6,197,000 1,272,000
------------ ------------
$2,009,000 $2,240,000
============ ============
Year ended December 2, 1995:
Reserve for bad debts $ 468,000 795,000 666,000 $ 597,000
Reserve for discounts 413,000 3,686,000 2,750,000 $1,349,000
------------ ------------
$ 881,000 $1,946,000
============ ============
Year ended December 3, 1994:
Reserve for bad debts $ 592,000 169,000 293,000 $ 468,000
Reserve for discounts 526,000 2,483,000 2,596,000 413,000
------------ ------------
$1,118,000 $ 881,000
============ ============