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PRIVILEGED AND CONFIDENTIAL HH DRAFT 3/27/98
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21940
DONNKENNY, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 51-0228891
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1411 Broadway
New York, New York 10018
(Address of principal executive offices) (Zip Code)
(212) 730-7770
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.|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 19, 1998 of $2.75 per share, was approximately
$38,706,085. As of March 19, 1998, 14,074,940 shares of Common Stock of
Registrant were outstanding.
1.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, the "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.
REGULATORY INVESTIGATION
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.
PRODUCTS
The Company designs, manufactures, imports and markets a broad line of
moderately priced women's sportswear. The Company's major labels include
Victoria Jones (R), Casey & Max(R), Pierre Cardin(R) and Donnkenny (R).
The Victoria Jones Company
At the beginning of 1998, the Company combined its separate moderate knit
and sweater companies, Beldoch Popper and Victoria Jones into one division
under the name The Victoria Jones Company. The Victoria Jones label
represents moderately-priced womens' knit and sweater products which are sold
to department stores, specialty stores and chains, including Belk, Mercantile,
May Company, Lane Bryant, Kohl's, Dillard's, Federated, Proffitt's , Stage
Stores, Catherine's, J.C. Penney and Sears. The division's products are
marketed for missy, large sizes and petites. Approximately 76% of these
products are imported, predominantly from Hong Kong, China and India. The
balance is manufactured domestically, principally in the Company's West
Hempstead, New York facility.
Casey & Max Division
The Casey & Max division manufactures and imports novelty woven tops and
sportswear under the brand name Casey & Max. The Casey & Max line consists of
moderately-priced products sold to department stores, specialty stores and
chains, including Belk, Mercantile, Kohl's, Dillard's, Federated, May Company,
Proffitt's, Stage Stores, Catherine's, J.C. Penney and
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Sears. The division's products are marketed for missy, large sizes and petites.
Approximately 93% of these products are imported, predominantly from Hong Kong,
China and India.
Donnkenny Division
The Donnkenny division manufactures and imports moderately-priced women's
career and casual coordinated merchandise as well as fashion products marketed
for missy, large sizes and petites. Its major accounts include Stage Stores,
Proffitt's, Catherine's, Frederick Atkins, J.C. Penney and Sears. Donnkenny
has been an established brand name for over 60 years. Approximately 80% of
Donnkenny products are manufactured domestically.
Pierre Cardin Division
The Pierre Cardin division produces women's knitwear 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, Belk, Mercantile, Proffitt's and Frederick Atkins stores and the
Chadwick's Catalog. Approximately 53% of these products are imported,
predominantly from Hong Kong, China, and India.
Custom and Private Label Products
The Company's Knitmaker's division is a private label division selling
exclusive private label products to such customers as QVC, J.C. Penney and Levi
Strauss. A vast majority of Knitmaker's products are manufactured in the
Company's facility located in West Hempstead, New York. The Company also
manufactures products on a contract basis utilizing the Company's Southern
manufacturing facilities to customers which include, among others, Cross Creek,
Basset Walker and Tultex.
Licensed Character Products
Through 1997, pursuant to non-exclusive licenses from Disney Enterprises,
Inc., the Company manufactured, imported and sold a Mickey & Co.(R) line of
sportswear collections and other clothing for women, men and children. The
Company also sold sleepwear and women's intimate apparel products using various
non-Disney licensed cartoon images. The Company has substantially exited
these businesses in 1997.
MANUFACTURING AND IMPORTING
Approximately 34% of the Company's products sold in its fiscal year ended
December 31, 1997 ("Fiscal 1997") were manufactured in the United States, as
compared with 46% in its fiscal year ended December 31, 1996 ("Fiscal 1996").
The Company's domestically produced products are manufactured at the Company's
production facilities in Virginia and West Hempstead, New York and by several
outside contractors.
The remaining 66% of the Company's products sold in Fiscal 1997 were
produced abroad and imported into the United States, principally from Hong
Kong, China, India, Guatemala, Turkey, Bangladesh, Dominican Republic, and the
Philippines. The percentage of the Company's products
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which are manufactured in the United States is expected to decrease further
during the Company's fiscal year ending December 31, 1998 ("Fiscal 1998").
The Company's purchases from its foreign suppliers are effected through
individual purchase orders specifying the price and quantity of the items to be
produced. Generally, the Company does not have any long-term, formal
arrangements with any of the suppliers which manufacture its products. The
Company continually seeks additional suppliers throughout the world for its
sourcing needs. One foreign contractor accounted for 14.2% of the Company's
products, but no other domestic or foreign contractor manufactured more than
10% of the Company's products in Fiscal 1997.
Virtually all of the Company's merchandise imported into the United States
is subject to United States duties. In addition, bilateral agreements between
the major exporting countries and the United States impose quotas that limit
the amount of certain categories of merchandise that may be imported into the
United States. Because the United States may, from time to time, impose new
quotas, duties, tariffs or other import controls or restrictions, the Company
monitors import and quota-related developments.
Attendant with the Company's increased reliance on foreign manufacturing
is a risk of excess inventory. The Company must commit to its foreign
manufacturers and suppliers four to six months in advance of its selling
season, usually before the Company has received its orders from its customers.
Thus, there exists the risk that the purchase orders by the Company's customers
will be less than the amount manufactured. The Company believes that this risk
is outweighed by the cost savings to the Company by manufacturing such products
abroad. Conversely, in the event there exists excess demand for the Company's
products, the lengthy production time for imported goods makes it impossible
for the Company to return to the market to purchase additional goods for the
same selling season. The Company's relationships with foreign suppliers are also
subject to the additional risks of doing business abroad, including currency
fluctuations and revaluations, restrictions on the transfer of funds and in
certain parts of the world, political instability. The Company's operations
have not been materially affected by any of such factors to date. However, due
to the large portion of the Company's products which are produced abroad, any
substantial disruption of its relationships with its foreign suppliers could
have a material adverse effect on the Company's operations and financial
condition.
The portion of the Company's products which it currently imports from Asia
is further subject to certain political and economic risks including, but not
limited to, political instability, changing tax and trade regulations and
currency devaluations and controls. The Company's risks associated with the
Company's Asian operations may be higher in 1998 than has historically been the
case, due to the fact that financial markets in East and Southeast Asia have
recently experienced and continue to experience difficult conditions, including
a currency crisis. As a result of recent economic volatility, the currencies of
many countries in this region have lost value relative to the U.S. dollar.
Because the Company does not enter into foreign currency transactions, the
Company has experienced no foreign currency transaction losses since the
beginning of this crisis. However, its operations in the region are subject to
an increased level of economic instability. In the countries which have
experienced the highest degree of instability, (Korea, Taiwan and Indonesia),
the Company's purchasing activities have been minimal. The impact of these
regional events on the Company's business, and in particular its sources of
supply, cannot be determined at this time. Approximately 50% of the products
sold by the Company in Fiscal 1997 were manufactured in Asia.
-4-
CUSTOMERS
In Fiscal 1997, the Company shipped orders to approximately 19,800 stores
in the United States. This customer base represents approximately 5,300
accounts. Of the Company's net sales for Fiscal 1997, chain stores accounted
for approximately 4.0%, specialty retailers for approximately 2.8%, department
stores for approximately 62.1%, mass merchants for approximately 18.1%,
catalogue customers for approximately 4.8%, and other customers for
approximately 8.2%.
The Company markets its products to major department stores including J.C.
Penney, Dillard's, May Company, Federated, Stage, Proffitt's and Sears, as well
as specialty retailers. Knitmaker's, a part of the Company's private label
operation, sells exclusive products to catalog specialty retailers and
suppliers. In addition, the Company manufactures products exclusively for J. C.
Penney under its D.K. Gold label.
In Fiscal 1997, consolidated net sales to J.C. Penney accounted for 15.4%
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.
The Company's Electronic Data Interchange computer system ("EDI") connects
the Company to approximately 37 of its large customers and, in Fiscal 1997, was
used to place 36% of the Company's order dollars. 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.
SALES AND MARKETING
At March 19, 1998, the Company had a 23 person sales force, of whom 13
were Company employees and 10 were independent commissioned sales
representatives. Sales representatives are located in 9 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.
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(R), Victoria Jones(R), Victoria
Sport(R), Casey & Max(R), Beldoch Popper(R), Knitmaker's(R)
-5-
and Private Stock(R). Upon compliance with the trademark statutes of the United
States and the relevant foreign jurisdictions, these trademark registrations
may be renewed.
The Company holds licensing rights to manufacture, import and sell women's
sportswear in the United States and the U.S. Virgin Islands with the Pierre
Cardin trademark, including sweaters, pants, skirts, knitwear, jeans, swimwear
and activewear. Such license is automatically continued from year to year at
the Company's option provided net sales meet certain specified minimums. The
Company's sales during Fiscal 1997 surpassed the minimum requirements of this
license, and the Company intends to renew this license for an additional one
year period.
BACKLOG
At March 19, 1998, the Company had unfilled, confirmed customer orders of
approximately $62 million, compared to approximately $64 million of such orders
at March 15, 1997, 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.
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COMPETITION
The women's apparel business is highly competitive and consists of many
manufacturers and distributors, none of which accounts for a significant
percentage of total sales in the overall market, but many of which are larger
and have substantially greater resources than the Company. The Company competes
with both domestic manufacturers and importers, primarily on an item-by-item
basis, with respect to brand name recognition, price, quality and availability.
EMPLOYEES
As of March 19, 1998, the Company had 1,211 full-time employees, of whom
189 were salaried and 1,022 were paid on an hourly basis. The Company had 15
part-time employees, all of whom work on an hourly basis.
The Company's hourly labor force is non-union. The Company believes
relations with its employees are good.
ENVIRONMENTAL MATTERS
The Company believes that it is in material compliance with all applicable
federal, state and local environmental laws. The Company does not currently
anticipate the need to make material capital expenditures to remain in
compliance with applicable federal, state and local environmental laws.
-7-
ITEM 2. PROPERTIES
The Company currently operates seven facilities in Virginia, one in
South Carolina, two in New York State and one in Hong Kong.
APPROXIMATE SQUARE OWNED OR
LOCATION FOOTAGE FUNCTION LEASED
- -------- ------- -------- ------
Christiansburg, Virginia............ 109,000 Finishing Owned
Dryden, Virginia.................... 28,850 Sewing Owned
Floyd, Virginia..................... 79,600 Fabric Warehouse, Owned
sewing, cutting
Independence, Virginia (Grayson).... 70,350 Sewing Owned
Independence, Virginia (Kendon)..... 37,550 Storage Owned
Rural Retreat, Virginia............. 61,230 Sewing Owned
Wytheville, Virginia................ 161,800 Distribution, Owned
administration
Charleston, South Carolina(1) 200,000 Distribution center Leased
West Hempstead, New York 150,000 Knitting, sewing Leased
New York, New York(2)............... 62,500 Offices and principal Leased
showrooms
Hong Kong (Comet Building).......... Administration, Leased
2,200 sourcing, quality
------- control
TOTAL........................... 963,080
=======
- -------------------------
(1) 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.
(2) 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.
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ITEM 3. LEGAL PROCEEDINGS
IN RE DONNKENNY, INC. SECURITIES LITIGATION, 96 Civ. 8452 (MGC): Beginning
in November 1996, ten punative class action complaints were filed in the United
States District Court for the Southern District of New York.
Plaintiffs have filed a Consolidated Complaint which names as defendants
the Company, as well as Edward T. Creevy, Ronald Hollandsworth, Richard Rubin,
all of whom are former officers and/or directors of the Company, and KPMG Peat
Marwick LLP ("KPMG", the Company's former Auditor). The Consolidated Complaint
alleges that defendants violated Section 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, by, among other
things, preparing false financial statements which allegedly overstated sales
and revenues. The Consolidated Complaint seeks compensatory damages,
prejudgement interest, attorneys fees and costs.
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.
On December 5, 1997, the Court granted KPMG's motion to dismiss the
Consolidated Complaint as to KPMG.
Discovery is proceeding in the consolidated action.
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 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the Nasdaq National Market under
the symbol "DNKY." The Common Stock began trading on the Nasdaq National Market
on June 17, 1993.
The following table sets forth the quarterly high and low closing prices
of a share of Common Stock as
reported by the Nasdaq National Market for the Company's two most recent fiscal
years, plus the interim eleven-week period ended March 19, 1998.
PERIOD HIGH LOW
- ------ ---- ---
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
Second Quarter........................................... 4 3/4 2 3/8
Third Quarter............................................ 4 9/16 3 1/8
Fourth Quarter........................................... 5 3/16 2 1/2
Fiscal 1998
Eleven weeks ended 3/19/98............................... $3 $2 1/2
On March 19, 1998, the closing price for a share of Common Stock, as
reported by the Nasdaq National Market, was $2.75 per share.
The number of holders of record for Registrant's Common Stock as of March
19, 1998 was 96.
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 prohibit the Company from
declaring or paying dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1997 and
December 31, 1996 and for each of the fiscal years in the three year period
ended December 31, 1997 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 3, 1994 and December 4, 1993 and for the fiscal years then ended have
been derived from the Company's consolidated financial statements, which are
not included herein. The December 4, 1993 financial statements 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.
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YEAR ENDED
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DECEMBER 4, DECEMBER 3, DECEMBER 2, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1997
---------- --------- ---------- ---------- -----------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales......................... $144,080 $151,147 $193,306 $255,179 $245,963
Cost of sales..................... 100,321 106,389 142,128 202,580 196,633
------- ------- ------- ------- -------
Gross profit...................... 43,759 44,758 51,178 52,599 49,330
Selling, general and
administrative expenses......... 25,298 26,772 34,000 57,603 45,867
Amortization of goodwill
and other related
acquisition costs............... 1,317 1,145 985 1,449 1,204
Restructuring charge................ 2,815 1,723
------- ------- ------- ------- -------
Gain on sale of license........... (1,116)
Operating profit (loss)........... 17,144 17,957 13,378 (6,453) 536
Interest expense, net............. 5,312 2,870 4,135 5,154 4,955
------- ----- ----- ----- -----
Income (loss) before
income taxes and
extraordinary charge............ 11,832 15,087 9,243 (11,607) (4,419)
Income taxes (benefit)............ 4,615 6,034 3,996 (3,319) (1,210)
------- ------- ------- ------- -------
Income (loss) before
extraordinary charge............ 7,217 9,053 5,247 (8,288) (3,209)
Extraordinary charge
related to early
extinguishment of debt, 453 295
net of taxes.................... ------- ------- -------- --------- ---------
Net income (loss)................. $ 6,764 $ 8,758 $ 5,247 $ (8,288) $ (3,209)
======== ======== ======== ========= =========
BASIC INCOME (LOSS) PER COMMON
SHARE(1):
Income (loss) before
extraordinary item.............. $ .74 $ .68 $ .38 $ (.59) $ (.23)
Extraordinary item................ $ (.05) (.02)
-------- ------ ------- ------- --------
Net income (loss)................. $ .69 $ .66 $ .38 $ (.59) $ (.23)
======= ====== ====== ======= =========
Shares used in the calculation of
basic income (loss) per share....... 9,816 13,330 13,910 14,012 14,070
======= ====== ====== ====== =========
CONSOLIDATED BALANCE SHEET DATA:
Working capital................... $ 28,814 $ 54,292 $ 80,357 $ 16,917 $ 38,354
Total assets...................... 93,112 109,179 157,664 139,433 102,460
Long-term debt, including
Current portion................. 32,110 28,315 62,611 50,761 27,048
Stockholders' equity.............. 39,782 57,826 65,234 55,278 53,086
(1) All per share amounts and the shares used in the calculation of basic
income (loss) per share have been retroactively restated to reflect the
two-for-one stock split paid on December 18, 1995 to stockholders of
record on December 4, 1995,and the effects of SFAS 128.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected operating data of the Company as a
percentage of net sales, for the periods indicated below:
FISCAL YEAR ENDED
----------------------------------------------------
DECEMBER 2, DECEMBER 31, DECEMBER 31,
----------- ------------ ------------
1995 1996 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 73.5 79.4 79.9
---- ---- ----
Gross profit 26.5 20.6 20.1
Selling, general and administrative expenses 17.6 22.6 18.7
Amortization of goodwill and other related 0.5 0.6 0.5
acquisition costs
Restructuring charge 1.5 0.7
---- ---- ----
Operating income (loss) 6.9 (2.5) 0.2
Interest expense, net 2.1 2.0 2.0
--- --- ---
Income (loss) before income taxes 4.8 (4.5) (1.8)
Income tax provision (benefit) 2.1 (1.3) (0.5)
--- ----- -----
Net income (loss) 2.7% (3.2%) (1.3%)
------ ------ ------
COMPARISON OF FISCAL 1997 WITH FISCAL 1996
Net Sales
Net sales decreased by $9.2 million, or 3.6%, from $255.2 million in
Fiscal 1996 to $246.0 million in Fiscal 1997. The decline in net sales was
primarily the result of decreases in the Licensed Character business which was
down $35.6 million or 46.9%. The decline was due to the discontinuation of the
Lewis Frimel division and the decrease in sales of other licensed character
lines. The decrease was partially offset by increases in the Company's core
divisions - Donnkenny, Beldoch and Oak Hill which had increases of $8.1
million, $9.8 million and $8.8 million, respectively. 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 84% of 1997 net
sales while the licensed character business accounted for the remaining 16%.
Gross Profit
Gross profit for Fiscal 1997 was $49.3 million, or 20.1% of net sales,
compared to $52.6 million, or 20.6% of net sales, for Fiscal 1996. Significant
factors that contributed to the decline in gross profit included the sell off
of inventory resulting from the closing of the Lewis Frimel Division; softness
in other licensed character lines and excess supply of these products in the
market place; softness in the sweater business due to warmer weather during
the winter of 1997; and approximately $0.3 million applicable to sales
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returns and allowances recorded in the fourth quarter of 1997 in the normal
course of business. Additionally, in the fourth quarter of Fiscal 1997, the
Company decided to discontinue certain licensed character lines, and as a
result recorded additional markdowns of $0.5 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from $57.6 million
in Fiscal 1996 to $45.9 million in Fiscal 1997. As a percentage of net sales,
these costs decreased from 22.6% in Fiscal 1996 to 18.7% in Fiscal 1997.
Included in Fiscal 1997 are one-time charges in the amount of approximately
$4.1 million, the largest component of which is $3.5 million in additional
professional fees as the result of legal fees associated with the previously
reported class action lawsuits, legal and accounting fees associated with the
restatement of prior year quarterly and annual financial statements and
consulting services related to the Company's amended credit facility. Included
in Fiscal 1996 were one-time 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 of $0.9
million and professional fees of $2.8 million associated with the class action
lawsuits, legal and accounting fees related to the special investigation and
restatements of prior year financial results.
Excluding these charges, the balance of selling, general and
administrative expenses for Fiscal 1997 was $41.8 million, or 17.0% of net
sales and for Fiscal 1996, $53.4 million, or 20.9% of net sales. The $11.6
million decline in selling, general and administrative expense is due to
reductions in all expense categories except distribution and factoring fees.
Distribution expenses increased as a result of higher temporary employee
expenses in the South Carolina distribution facility which were mostly offset
by savings from the closing of the Mississippi distribution facility and lower
costs at the West Hempstead distribution facility. As a result of the amended
credit facility discussed below, the Company incurred $1.0 million in factoring
fees which were not incurred in Fiscal 1996. The reductions in other selling,
general and administrative categories included: Design and Sample expense
decreases which were primarily the result of synergies resulting from
consolidating company activities and reduced sample expense related to the
discontinuation of the licensed character division; decrease in Sales expenses
was the result of headcount and advertising reductions and lower sales
commissions related to the reduced road force; decreases in Administrative
expenses resulting from headcount reductions; Occupancy expense reductions
which were primarily the result of closing the Plainview and Mississippi
distribution facilities in Fiscal 1996.
Restructuring Charge
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of Mickey & Co. licensed character product line under a
license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1.7 million and a charge to cost of goods sold of
$0.5 million for the write-down of merchandise inventories. The restructuring
charge included payments due under agreements with the licensor; write-downs
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of property, plant and equipment; costs related to lease terminations; employee
severance payments; and other incremental charges directly attributable to
discontinuing the licensed character product lines.
Income From Operations
In Fiscal 1997, the Company reported income from operations of $0.5
million, versus a loss from operations of $6.5 million in Fiscal 1996.
Provision For Income Taxes
The Company's tax benefit in Fiscal 1997 amounts to 27.0% of pre-tax
losses, as compared to a benefit of 28.6% for Fiscal 1996. The benefit in
Fiscal 1997 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 Loss
In Fiscal 1997 the Company reported a net loss of $3.2 million, or ($0.23)
per share, versus a net loss of $8.3 million, or ($0.59) per share in Fiscal
1996.
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 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.
-15-
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 of $0.9 million;
litigation expenses of $1.2 million; and professional fees and special
investigation expenses 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily inventory and accounts receivable, and interest and
principal payments related to certain indebtedness. The Company's borrowing
requirements for working capital fluctuate throughout the year.
-16-
Capital expenditures were $0.5 million for Fiscal 1997, compared to
$1.0 million in Fiscal 1996. In Fiscal 1998 the Company may spend up to $3.5
million on capital investments in accordance with the Revolving Credit
Agreement described below. As part of the 1998 capital expense budget, the
Company has committed to spend approximately $2.1 million for upgrading
computer systems to increase efficiencies and become Year 2000 compliant.
At the end of Fiscal 1997, direct borrowings were $27.0 million, which
included a senior term loan of $5.5 million and revolving credit borrowings of
$21.5 million. Additionally, the Company had letters of credit outstanding of
$20.9 million, with unused availability of $14.1 million. At the end of Fiscal
1996, direct borrowings and letters of credit outstanding under the prior
credit facility were $50.8 million and $19.9 million, respectively.
On April 30, 1997, the Company entered into an amended credit facility
(the "Credit Facility") to, among other things, include the Company's operating
subsidiaries Donnkenny Apparel, Inc., MegaKnits, Inc. and Beldoch Industries
Corp., as borrowers. The Credit Facility consists of a Term Loan, a Revolving
Credit Agreement, and a Factoring Agreement. The purpose of the Credit
Facility is to provide for working capital needs of the Company including,
the issuance of letters of credit. The Credit Facility expires on March 31,
1999. Under the Credit Facility, The Chase Manhattan Bank serves as agent
(and holds a 35% interest), the CIT Group/Commercial Services Inc. ("CIT")
serves as collateral agent (and holds a 15% interest), and each of Fleet Bank,
N.A. and the Bank of New York are co-lenders (each holding a 25% interest).
As of March 20, 1998, the balance of the Term Loan was $5.5 million. The
interest rate is equal to the prime rate plus 1 1/2% per annum. The
amortization schedule calls for quarterly payments of approximately
$1.3 million, with a balloon payment of $0.5 million due on March 31, 1999.
An excess cash flow recapture is payable annually within 15 days after receipt
of the Company's audited fiscal year-end financial statements. In addition,
any tax refunds received in Fiscal 1998 will be applied to reduce the balloon
payment. The default interest rate, if applicable, would be equal to 2% above
the otherwise applicable rate. The Term Loan does not carry any prepayment
penalty.
The total amount available under the Revolving Credit Agreement is
$85 million subject to an asset based borrowing formula, with sublimits of
$70 million for direct borrowings and $35 million for letters of credit. The
interest rate is equal to the prime rate plus 1 1/2% per annum. Borrowings in
excess of an allowable overadvance will bear interest at the prime rate plus
3 1/2%. The Revolving Credit Agreement also requires the Company to pay
certain letter of credit fees and unused commitment fees. Advances and letters
of credit are limited to (i) up to 85% of eligible accounts receivable plus
(ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance.
In April, 1997 the Company also entered into a Factoring Agreement with
CIT. The Factoring Agreement provides for a factoring commission equal to 0.45%
of the gross amount of sales, plus certain customary surcharges. An additional
fee of 0.20% was paid upon the conversion to a factored receivable arrangement.
-17-
Collateral for the Credit Facility includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel Inc.,
Beldoch Industries Corp., and Megaknits, Inc.
The Credit Facility contains numerous financial and operational covenants,
including limitations on additional indebtedness, liens, dividends, stock
repurchases and capital expenditures. In addition, the Company is required
to maintain specified levels of tangible net worth and comply with a maximum
cumulative net loss test.
At December 31, 1997, the Company was not in compliance with the covenant
related to the maximum cumulative net loss test. On March 31, 1998, Chase
Manhattan Bank, as agent, issued a waiver for the violation of this covenant.
Additionally, on March 31, 1998, in support of the Company's 1998 business
plan, the previously discussed Credit Facility was amended to provide for a
sublimit for direct borrowings of $60 million; a letter of credit line of
$35 million; and required seasonal overadvances. Any tax refunds applicable
to 1997 and prior years and proceeds from the sale of fixed assets are to be
applied to reduce the balloon payment on the Term Loan.
During Fiscal 1997, the Company's operating activities generated $20.0
million more cash than they used, principally as the result of decreases in
accounts receivable, inventories and recoverable income taxes, partially offset
by decreases in accounts payable. During Fiscal 1996, the Company's operating
activities generated $5.8 million more cash than they used, principally as the
result of decreases in accounts receivable and inventories, increases in
accounts payable partially, offset by the net loss.
Cash used in Fiscal 1997 for investing activities included $0.5 million
for the purchase of fixed assets and the $1.2 million contingent earnout
payment related to the acquisition of Beldoch, which was partially offset by
proceeds from the sale of fixed assets. Cash used in Fiscal 1996 for the
purchase of fixed assets was $1.0 million and included purchases of machinery
and equipment, building improvements and leasehold improvements to the
Company's South Carolina distribution facility.
Cash used in financing activities in Fiscal 1997 was $22.7 million, which
represented repayments of $12.3 million on the Term Loan, net repayments under
the Revolving Credit Agreement of $11.5 million and the repayment of the
Virginia state loan of $0.2 million. 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 The Chase Manhattan 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.
The Company believes that cash flows from operations and amounts available
under the revolving credit agreement will be sufficient for its needs for the
foreseeable future.
OTHER ITEMS AFFECTING THE COMPANY:
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line manufacturers (such as the
Company) and a larger number of specialty manufacturers. The Company faces
substantial competition in its markets from manufacturers in both
categories.
Apparel Industry Cycles and other Economic Factors
The apparel industry historically has been subject to substantial cyclical
variation, with consumer spending on apparel tending to decline during
recessionary periods. A decline in the general economy or uncertainties
regarding future economic prospects may affect
-18-
consumer spending habits, which, in turn, could have a material adverse
effect on the Company's results of operations and its financial condition.
Retail Environment
Various retailers, including some of the Company's customers, have
experienced declines in revenue and profits in recent periods and some
have been forced to file for bankruptcy protection. To the extent that
these financial difficulties continue, there can be no assurance that the
Company's financial condition and results of operations would not be
adversely affected.
Seasonality of Business and Fashion Risk
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as
one year in advance and manufactured approximately one season in advance
of the related retail selling season. Accordingly, the success of the
Company's products is often dependent on the ability to successfully
anticipate the needs of retail customers and the tastes of the ultimate
consumer up to a year prior to the relevant selling season.
Foreign Operations
The Company's foreign sourcing operations are subject to various risks of
doing business abroad, including indirect vulnerability to currency
fluctuations, quotas and, in certain parts of the world, political
instability. Any substantial disruption of its 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.
Asian Operations
The Company's operations in Asia are subject to certain political and
economic risks including, but not limited to, political instability,
changing tax and trade regulations and currency devaluations and controls.
The Company's risks associated with the Company's
-19-
Asian operations may be higher in 1998 than has historically been the
case, due to the fact that financial markets in East and Southeast Asia
have recently experienced and continue to experience difficult conditions,
including a currency crisis. As a result of recent economic volatility,
the currencies of many countries in this region have lost value relative
to the U.S. dollar. Although the Company has experienced no material
foreign currency transaction losses since the beginning of this crisis,
its operations in the region are subject to an increased level of economic
instability. Approximately 50% of the products sold by the Company in
Fiscal 1997 were manufactured in Asia. The impact of these events on the
Company's business, and in particular its sources of supply, cannot be
determined at this time.
Factors that May Affect Future Results and Financial Condition
The Company's future operating results and financial condition are
dependent upon the Company's ability to successfully design, manufacture,
import, and market apparel.
Year 2000 Issue
The Company recognizes the need for, and has begun implementation of, a
comprehensive program intended to upgrade the operating systems, hardware
and software, which should eliminate any issues involving Year 2000
compliance. The Company's current software systems, without modification,
will be adversely affected by the inability of the systems to
appropriately interpret date information after 1999. As part of the
process of improving the Company's information systems to provide
enhanced support to all operating areas, the Company will upgrade to new
financial and operating systems. Such upgrade will provide for or
eliminate any issues involving year 2000 compliance because all software
implemented is designed to be year 2000 compliant. The Company anticipates
that its cost for such upgrade will be approximately $2.1 million. The
Company anticipates that it will complete its systems conversion in time
to accommodate year 2000 issues. If the Company fails to complete such
conversion in a timely manner, such failure will have a material adverse
effect on the business, financial condition and results of operations of
the Company.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure
about Segments of an Enterprise and Related Information" which is
effective for periods beginning after December 15, 1997. SFAS No. 131
requires that public companies report certain information about operating
segments in their annual financial statements and in condensed financial
statements of interim periods issued to shareholders. This statement also
requires that public companies report certain information about their
products and services, the geographic areas in which they operate, and
their major customers. The Company is currently reviewing the impact of
this statement on its current level of disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
This statement standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures. The Company is currently reviewing the
impact of this statement on its current level of disclosure.
Forward-Looking Statements
This Form 10-K (including but not limited to the sections hereof entitled
"Business" and "Management's Discussion and Analysis") contains or
incorporates by reference forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Where any such
forward-looking statement includes a statement of the assumptions or bases
underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be
material, depending on the circumstances. Where, in any forward-looking
statement, the Company or its management expresses an expectation or
belief as to future results, there can be no assurance that the statement
of the expectation or belief will result, or be achieved or accomplished.
The words "believe", "expect", "estimate", "project", "seek", "anticipate"
and similar expressions may identify forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 14 of this Annual Report 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.
-20-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
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 1983 to 1993, he was a Managing Director of
the Investment Banking Division of Merrill Lynch Pierce Fenner & Smith Inc. and
a Senior Vice President of Merrill Lynch Interfunding Inc. Mr. Appelle is 53
years old.
Herbert L. Ash, a director of the Company, has been a partner at the law
firm of Hahn & Hessen, Attorneys, since 1972. Mr. Ash has been a director of
Hampton Industries, Inc., a manufacturer of apparel, since 1994. He is also a
Trustee of the National Jewish Medical and Research Center, Denver, Colorado.
Mr. Ash is 56 years old.
Sheridan C. Biggs, a director of the Company, is Executive-in-Residence at
the Graduate Management Institute at Union College. Prior to that, he was a
senior partner of Price Waterhouse, the accounting and consulting firm; he was
with that firm for thirty-one years until his retirement in 1994. During his
career at Price Waterhouse, Mr. Biggs served as a Vice Chairman and member of
the firm's management committee. Mr. Biggs is 63 years old.
Robert H. Cohen, a director of the Company, is the founder, President and
Chief Executive Officer of Recharge Corporation of America, a recycling company
formed on July 1, 1995. He has also been Chief Executive Officer of R.J.C.
Development Corporation, a real estate company, since 1987. For several years
prior to founding Recharge Corporation of America, Mr. Cohen invested for his
own account, having retired in 1996 as President and Chief Executive Officer of
Craftex Creations, Inc., a manufacturer of intimate apparel, and in 1993 of
Shamrock Outlet Stores, Inc. From 1987 to 1992, Mr. Cohen served on the board
of the Intimate Apparel Council of the American Apparel Manufacturers'
Association. Mr. Cohen is 59 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 60 years old.
Harvey Horowitz, a director of the Company, served as Vice President, and
General Counsel of the Company from October 1, 1996 to February 28, 1998 when
he resigned his office as Vice President. For more than five years, prior to
October 1, 1996, he was a partner of the law firm Squadron, Ellenoff, Plesent &
Sheinfeld, LLP. Mr. Horowitz is a director of Biofield Corp., a medical device
company. Mr. Horowitz is 55 years old.
Daniel H. Levy, a director of the Company, has been a principal of and
consultant to LBK Consulting Inc., a retail consulting business, since January
1997 and during the period from 1994 to April 1996. From April 1996 through
January 1997, he served as Chairman of the Board and Chief Executive Officer of
Best Products, Inc., a retail sales company which filed for bankruptcy in
September 1996. From 1993 through 1994, Mr. Levy served as Chairman of the
Board and Chief Executive Officer of Conran's, a retail home furnishings
company. From 1991 to 1993, he was Vice Chairman and Chief Operating Officer of
Montgomery Ward, a retail sales company. Mr. Levy is a director of Marks Bros.
Inc. Jewelers and Phar-Mor, Inc. Mr. Levy is 55 years old.
-21-
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 information 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 56
years old.
Robert H. Martinsen, a director of the Company, worked at
Citicorp/Citibank for thirty-eight years until his retirement in 1995. At that
point, he was Chairman of Credit Policy. Prior to that, he was in charge of
corporate business in Asia. Prior to that, he was Chairman and President of
Citibank's asset based finance subsidiary, Citicorp Industrial Credit.
Mr. Martinsen is 63 years old.
Lynn Siemers-Cross, a director of the Company, became President and Chief
Operating Officer of the Company on April 14, 1997. Prior thereto, she was
President of the Oak Hill Division of the Company, and had been President of
the Oak Hill Division for more than five years. Ms. Siemers-Cross is 39 years
old.
-22-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years
ended December 31, 1997, December 31, 1996, and December 2, 1995 to those
persons who were, at December 31, 1997 (i) the chief executive officer and (ii)
the other most highly compensated executive officers of the
Company(collectively, the "Named Executive Officers"). The information in the
following tables with respect to the number of shares of Common Stock
underlying options, option exercise prices and the number of shares of Common
Stock acquired upon the exercise of options has been retroactively restated to
reflect the two-for-one stock split paid to all holders of Common Stock of
record on December 4, 1995 (the "Stock Split").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
----------------------------------------------------------------------------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL RESTRICTED UNDERLYING COMPENSATION
POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS/SARS (1)
- ------------------------------------------------------------------------------------------------------------------------
Harvey A. Appelle(2)(6) 1997 $ 400,000 174,000 440,625 50,000 2,880
Chairman of the Board 1996 0
and Chief Executive
Officer 2,880
Harvey Horowitz(2)(5) 1997 $ 405,000
Vice President and 1996 124,444
General Counsel
Stuart S. Levy(2)(3) 1997 $ 361,667 25,000 14,650 11,000
Vice President - 1996 31,667
Finance And Chief
Financial Officer
Lynn Siemers-Cross(4)(7) 1997 $ 500,000 212,500 440,625 50,000 660
President and
Chief Operating
Officer
- -----------------------
(1) Represents insurance premiums paid by, or on behalf of, the
Company during the covered fiscal year with respect to term life
insurance for the benefit of the Named Executive Officer.
(2) This individual became an executive officer of the Company in
1996.
(3) On November 4, 1997, this individual's salary increased to
$350,000 per annum.
(4) This individual became an executive officer of the Company in
1997.
(5) This individual resigned his office as vice president on February
28, 1998 and entered into a two-year consulting agreement with the
Company
(6) Bonus paid in 69,600 shares of common stock.
(7) Bonus paid as follows: $150,000 cash payment and 25,000 shares of
common stock.
-23-
EMPLOYMENT AGREEMENTS
Harvey Appelle
On June 12, 1997, Mr. Appelle entered into a three-year employment
agreement with the Company to serve as its Chairman of the Board and Chief
Executive Officer. The agreement provides for a base annual salary of $400,000
for the first two years of the term and of $500,000 for the third year of the
term, as well as a discretionary performance bonus based on the achievement of
goals to be set annually by the Compensation Committee of the Board, as well as
certain insurance and other benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee granted to Mr. Appelle 150,000 restricted shares and
options to purchase an aggregate of 150,000 additional shares at a price equal
to the closing price of the Common Stock on the date of grant. The agreement
further provides for an incentive cash bonus equal to the appreciation over
five years of 50,000 shares of stock. The restricted shares, options and right
to receive the incentive cash bonus will vest over the term of the agreement,
subject to acceleration in the event of a change in control of the Company.
The agreement provides 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 June 12, 1997, Ms. Siemers-Cross entered into a four-year employment
agreement with the Company to serve as its President and Chief Operating
Officer. The agreement provides for a base annual salary of $500,000, a
discretionary performance bonus based on the achievement of goals to be set
annually by the Compensation Committee, but not less than $150,000 for Fiscal
1997, as well as certain insurance and other benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee granted to Ms. Siemers-Cross 150,000 restricted
shares and options to purchase an aggregate of 150,000 additional shares at a
price equal to the closing price of the Common Stock on the date of grant. The
agreement further provides for an incentive cash bonus equal to the
appreciation over five years of 50,000 shares of stock. The restricted shares,
options and right to receive the incentive cash bonus will vest over the term
of the agreement, subject to acceleration in the event of a change in control
of the Company.
The agreement provides that in the event Ms. Siemers-Cross' employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Siemers-Cross will have the right to receive
severance benefits equal to three times the sum of the last annual salary
inclusive of performance bonus (but not incentive bonus).
-24-
Harvey Horowitz
On February 28, 1998, Mr. Horowitz entered into a two-year consulting
agreement with the Company, which agreement superseded Mr. Horowitz's
employment agreement with the Company dated September 5, 1996. Under the new
agreement, Mr. Horowitz agrees to provide certain consulting services to the
Company and its officers with respect to legal matters arising out of the
business affairs of the Company. The new agreement provides for monthly
payments to be made by the Company to Mr. Horowitz equal to $35,000 for March
1998, $30,000 per month thereafter for the balance of calendar year 1998, and
$25,000 per month throughout calendar year 1999. Mr. Horowitz will continue to
receive certain insurance and other benefits and the Company agrees to use its
best efforts to cause Mr. Horowitz to be nominated for election as a member of
its Board of Directors at the annual meeting of its shareholders to take place
during calendar year 1998.
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
$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 $4.43 per share, vesting over
three years. The Agreement provides for severance payments to be based on the
current year's salary and the preceding year's bonus and to continue for the
longer of the remaining term under the Agreement or six months after
termination.
1997 STOCK OPTIONS GRANTS
The Company strives to distribute stock option awards broadly throughout
the organization. Stock option awards are based on the individual's position
and contribution to the Company. The Company's long term performance ultimately
determines compensation from stock options because stock option value is
entirely dependent on the long term growth of the Company's common stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers during
Fiscal 1997, including information concerning the potential realizable value of
such options.
-25-
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (1)
---------------------------------------------------- -----------------------
Number of % of Total #
Securities of Options
Underlying Granted to
Option Employees Exercise
Price (3) Expiration
Name (#) Year ($/Sh) Date 5%($) 10%($)
- ---- ------- -------- --------- ---------- ------- ------
Harvey A. Appelle 150,000 11.4% 2.9375 4/14/2007 277,107 702,243
Herbert L. Ash (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130
Sheridan C. Biggs (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130
Robert H. Cohen (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130
James W. Crystal (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130
Harvey Horowitz 25,000 1.9% 3.9375 6/10/2007 61,907 156,884
Daniel H. Levy (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130
Stuart S. Levy 100,000 7.6% 4.4375 1/28/2007 279,072 707,223
Robert H. Martinsen (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130
Lynn Siemers-Cross 150,000 11.4% 2.9375 4/14/2007 277,107 702,243
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the SEC and, therefore, are not intended to
forecast possible future appreciation, if any, of the Company's stock
price.
(2) Represents options granted to Messrs. Ash, Biggs, Cohen, Crystal, Levy,
and Martinsen as directors pursuant to the Company's 1994 Non-Employee
Director Option Plan.
(3) All options were granted at an exercise price equal to the market value of
the Company's common stock on the date of grant.
AGGREGATE OPTION
EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES(1)
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options at Options at
Acquired December 31, 1997 December 31, 1997
on Exercise Value ---------------------------------- -------------------------
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- -------- ----------- ------------- ----------- -------------
Harvey Appelle 0 0 22,500 150,000 0 0
Herbert L. Ash 0 0 15,000 0 0 0
Sheridan C. Biggs 0 0 15,000 0 0 0
Robert H. Cohen 0 0 15,000 0 0 0
James W. Crystal 0 0 27,500 0 0 0
Harvey Horowitz 0 0 22,500 25,000 0 0
Daniel H. Levy 0 0 15,000 0 0 0
Stuart S. Levy 0 0 33,333 66,667 0 0
Robert H. Martinsen 0 0 15,000 0 0 0
Lynn Siemers-Cross 0 0 0 157,500 0 0
- --------------------
(1) All options were granted at an exercise price equal to market value of the
common stock on the date of grant.
-26-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 15, 1998,
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) 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(1) PERCENTAGE OWNED
-------------------- --------------------- ----------------
Schaenen Fox Capital 859,350(2) 5.7%
Management LLC
200 Park Avenue
Suite 3900
New York, NY 10166
Putnam Investments, Inc. 1,388,150(2) 9.2%
1 Post Office Square
Boston, MA 02109
Pioneering Management Corporation 890,000(2) 5.9%
60 State Street
Boston, MA 02109
Harvey A. Appelle 427,100(3) 2.8%
Herbert L. Ash 15,500(4) *
Sheridan C. Biggs 18,000(5) *
Robert H. Cohen 20,000(6) *
James W. Crystal 28,500(7) *
Harvey Horowitz 50,000(8) *
Daniel H. Levy 20,000(9) *
Stuart S. Levy 105,000(10) *
Robert H. Martinsen 32,000(11) *
Lynn Siemers-Cross 327,200(12) 2.2%
All directors and officers as a group 974,700 7.1%
(11 persons)
* Less than 1%.
-27-
(1) Except as otherwise indicated, the information as to securities owned
by directors, nominees and executive officers was furnished to the
Company by such directors, nominees and executive officers.
(2) Based on information contained in Schedule 13G 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, which are currently exercisable.
Also includes 150,000 shares issued pursuant to Mr. Appelle's
employment agreement, which is summarized in this Form 10-K under the
caption "Executive Compensation-Employment Agreements". Such options
are currently not exercisable. Also includes 69,600 shares of stock
issued as part of Fiscal 1997 compensation as described in this Form
10-K under the caption "Executive Compensation" Footnote (6).
(4) Includes 15,000 shares underlying options which have been granted to
Herbert L. Ash pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(5) Includes 15,000 shares underlying options which have been granted to
Sheridan C. Biggs pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(6) Includes 15,000 shares underlying options which have been granted to
Robert H. Cohen pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(7) Includes 27,500 shares underlying stock options which have been
granted to James W. Crystal pursuant to the Company's 1994
Non-Employee Director Option Plan. Such options are currently
exercisable.
(8) 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.
(9) Includes 15,000 shares underlying options which have been granted to
Daniel H. Levy pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(10) Shares issued pursuant to Mr. Levy's employment agreement of January
28, 1997, which is summarized in this Form 10-K under the caption
"Executive Compensation-Employment Agreements". Currently one-third
of such options are exercisable.
(11) Includes 15,000 shares underlying options which have been granted to
Robert H. Martinsen pursuant to the Company's 1994 Non-Employee
Director Option Plan. Such options are currently exercisable.
(12) Includes 7,500 shares granted on April 19, 1996 to Lynn Siemers-Cross
pursuant to the Company's 1992 Stock Option Plan and 150,000 shares
issued pursuant to Ms. Siemers-Cross' employment agreement which is
summarized in this Form 10-K under the caption "Executive Compensation-
Employment Agreements". Such options are currently not exercisable.
Also includes 25,000 shares of stock issued as part of Fiscal 1997
compensation as described in this Form 10-K under the caption
"Executive Compensation" footnote (7).
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 $186,000 in commissions during 1997 for services
rendered to the Company.
Herbert L. Ash, Esq., partner Hahn & Hessen, LLP provided certain legal
services to the Company. Hahn & Hessen, LLP received approximately $13,000
in 1997 for legal services rendered to the Company.
-28-
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, 1997 and December
31, 1996
Consolidated Statements of Income for the Fiscal Years ended
December 31, 1997, December 31, 1996 and December 2, 1995
Consolidated Statements of Stockholders' Equity for the
Fiscal Years ended December 31, 1997, December 31, 1996, and
December 2, 1995
Consolidated Statements of Cash Flows for the Fiscal Years
ended December 31, 1997, December 31, 1996 and December 2,
1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Valuation and Qualifying Accounts
3. The Exhibits, which are listed on the Exhibit Index attached
hereto.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of Fiscal
1997.
-29-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1998
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: March 31, 1998 /s/ Harvey A. Appelle
_________________________________________
Harvey A. Appelle, Chairman of the Board
of Directors and Chief Executive Officer
(Principal Executive Officer)
Dated: March 31, 1998 /s/ Herbert L. Ash
_________________________________________
Herbert L. Ash, Director
Dated: March 31, 1998 /s/ Sheridan C. Biggs
_________________________________________
Sheridan C. Biggs, Director
Dated: March 31, 1998 /s/ Robert H. Cohen
_________________________________________
Robert H. Cohen, Director
Dated: March 31, 1998 /s/ James W. Crystal
_________________________________________
James W. Crystal, Director
Dated: March 31, 1998 /s/ Harvey Horowitz
_________________________________________
Harvey Horowitz, Director
Dated: March 31, 1998 /s/ Daniel H. Levy
_________________________________________
Daniel H. Levy, Director
Dated: March 31, 1998 /s/ Stuart S. Levy
_________________________________________
Stuart S. Levy, Chief Financial Officer,
Vice President-Finance and Assistant
Secretary (Principal Financial and
Accounting Officer)
-30-
Dated: March 31, 1998 /s/ Robert H. Martinsen
_________________________________________
Robert H. Martinsen, Director
Dated: March 31, 1998 /s/ Lynn Siemers-Cross
_________________________________________
Lynn Siemers-Cross, President and Chief
Operating Officer
-31-
EXHIBIT INDEX
Exhibit Description Sequentially
No. of Exhibit Numbered Page
- ------ ----------- -------------
3.1 Amended and Restated Certificate of Incorporation of Donnkenny,
Inc., dated May 15, 1992.1
3.3 Certificate of Ownership and Merger of DHC Holding Corporation into
Donnkenny, Inc.1
3.4 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Donnkenny, Inc., dated May 18,
1993.2
3.5 By-laws of Donnkenny, Inc., dated May 18, 1993.2
4.1 Specimen form of Common Stock Certificate.4
10.12 Amended and Restated Donnkenny, Inc. 1992 Stock Option Plan.9
10.13 Form of Indemnification Agreement with Directors and Executive
Officers.2
10.14 Donnkenny, Inc. Employees Savings 401(k) Plan.1
10.22 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.
-32-
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
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, 1996.13
10.36 Settlement Agreement between Richard Rubin and the Company, dated
December 18, 1996.11
10.37 Rescission Agreement between Donnkenny Apparel, Inc. and the
Company, dated December 18, 1996.13
10.38 Employment Agreement between Stuart S. Levy and the Company, dated
January 28, 1997.13
10.39 Seventh Amendment, Waiver and Release Agreement, dated as of January
31, 1997, to the Credit Agreement, dated as of June 5, 1995 among
the Company, the Lenders Named Therein, the Guarantors Named Therein
and the Chase Manhattan Bank.15
10.40 Eighth Amendment Agreement, dated as of April 28, 1997, to the
Credit Agreement, dated as of June 5, 1995 among the Company, the
Lenders Named Therein, the Guarantors Named Therein and the Chase
Manhattan Bank.16
10.41 Employment Agreement between Harvey A. Appelle and the Company,
dated April 14, 1997.14
10.42 Employment Agreement between Lynn Siemers-Cross and the Company,
dated April 14, 1997.14
10.43 Consultant Agreement between Harvey Horowitz and the Company, dated
February 28, 1998.
10.44 Eighth Amendment Waiver dated as of June 5, 1995 to the Credit
Agreement, dated as of April 28, 1997 among the Company, the
Lenders Named Therein and the Chase Manhattan Bank.
10.45 Tenth Amendment Agreement, dated as of March 31, 1998 to the Credit
Agreement, dated as of June 5, 1995 among the Company, the Lenders
Named Therein, The Guarantors Named Therein and the Chase Manhattan
Bank.
21 Subsidiaries of the Company
1 Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (Registration No. 33-48243), as filed with the
Commission on May 29, 1992 (the "Registration Statement").
-33-
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.
10 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 herein by reference to the Company's 1996 Proxy
Statement, filed March 22, 1996.
-34-
13 Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
14 Incorporated herein by reference to the Company's Report on Form
10-Q, filed with the Commission on August 6, 1997.
15 Incorporated herein by reference to the Company's Report on Form 8-K,
as filed with the Commission on February 20, 1997.
16 Incorporated herein by reference to the Company's Report on Form
10-Q, filed with the Commission on May 16, 1997.
-35-
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
-36-
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, 1997 and December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the fiscal years in the three year period ended December 31,
1997. Our audits also included the financial statements schedule listed in the
Index at item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects the financial position of Donnkenny, Inc. at December 31,
1997 and December 31, 1996, and the results of their operations and cash flows
for each of the fiscal years in the three year period ended December 31, 1997
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statements 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.
Deloitte & Touche LLP
New York, New York
March 20, 1998
(March 31, 1998 as to Note 8)
F-1
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash ........................................................ $ 257 $ 3,998
Accounts Receivable, net of allowances of $720 and
$2,240 24,453 29,721
Recoverable income taxes .................................... 1,181 8,625
Inventories ................................................. 27,248 46,793
Deferred tax assets ......................................... 5,109 4,439
Prepaid expenses and other current assets ................... 2,146 1,633
-------- --------
Total current assets ..................................... 60,394 95,209
PROPERTY, PLANT AND EQUIPMENT, NET ............................. 9,620 11,774
INTANGIBLE ASSETS .............................................. 32,446 32,450
-------- --------
TOTAL .......................................................... $102,460 $139,433
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................... $ 5,000 $ 50,761
Accounts payable ............................................ 9,320 19,476
Accrued expenses and other current liabilities .............. 7,720 8,055
-------- --------
Total current liabilities ............................... 22,040 78,292
-------- --------
LONG-TERM DEBT ................................................. 22,048
DEFERRED TAX LIABILITIES ....................................... 5,286 5,863
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 14,075 and 14,045 shares .. 141 140
Additional paid-in capital .................................. 47,360 46,344
Retained earnings ........................................... 5,585 8,794
-------- --------
Total stockholders' equity ............................... 53,086 55,278
-------- --------
TOTAL .......................................................... $102,460 $139,433
======== ========
See accompanying notes to consolidated financial statements.
F-2
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 2,
1997 1996 1995
------------ ------------ ------------
NET SALES ............................................................... $ 245,963 $ 255,179 $ 193,306
COST OF SALES ........................................................... 196,633 202,580 142,128
------------ ------------ ------------
Gross Profit ..................................................... 49,330 52,599 51,178
OPERATING EXPENSES:
Selling, general and administrative expenses ........................ 45,867 57,603 34,000
Amortization of goodwill and other related
acquisition costs ................................................ 1,204 1,449 985
Restructuring charge ................................................ 1,723 2,815
------------ ------------ ------------
Operating income (loss) .......................................... 536 (6,453) 13,378
OTHER EXPENSE:
Interest expense (net of interest income of $500 in 1997) ........... 4,955 5,154 4,135
------------ ------------ ------------
(Loss) income before income taxes ................................ (4,419) (11,607) 9,243
INCOME TAX (BENEFIT) PROVISION .......................................... (1,210) (3,319) 3,996
------------ ------------ ------------
NET (LOSS) INCOME ....................................................... $ (3,209) $ (8,288) $ 5,247
============ ============ ============
Basic (loss) income per common share ................................ $ (0.23) $ (0.59) $ 0.38
============ ============ ============
Shares used in the calculation of
basic (loss) income per common share ................................ 14,070,000 14,012,000 13,910,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
DONKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
BALANCE, DECEMBER 3, 1994 ........................ $ $ 137 $ 43,585 $ 14,104 $ 57,826
Exercise of stock options .................... 2 2,159 2,161
Net income ................................... 5,247 5,247
-------- -------- -------- -------- --------
BALANCE, DECEMBER 2, 1995 ........................ 139 45,744 19,351 65,234
Net loss - December 3, 1995 to
December 31, 1995 (Note 2) ................ (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
Issuance of Common Stock...................... 1 116 117
Tax benefit attributable to the exercise of
stock options................................ 900 900
Net loss.................................. (3,209) (3,209)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 ....................... $ $ 141 $ 47,360 $ 5,585 $ 53,086
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 2,
1997 1996 1995
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................................ $ (3,209) $ (8,288) $ 5,247
Adjustments to reconcile net cash
provided by (used in) operating activities:
Deferred income taxes .................................................. (1,247) (2,449) 1,279
Depreciation and amortization of fixed assets .......................... 1,770 1,911 1,889
Amortization of inventory step up ...................................... 1,905
Amortization of intangibles and other assets ........................... 1,204 1,449 985
Write down of fixed assets ............................................. 260
Provision for losses on accounts receivable ............................ 282 231 1,065
Changes in assets and liabilities, net of the effects
of acquisitions and disposals:
Decrease (increase) in accounts receivable ............................. 4,986 876 (9,601)
Decrease (increase) in recoverable income taxes ........................ 7,444 (127) (4,613)
Decrease in inventories ................................................ 19,545 3,458 2,138
(Increase) decrease in prepaid expenses and
other current assets ................................................ (513) 1,378 289
(Decrease) increase in accounts payable ................................ (10,156) 8,116 (6,286)
(Decrease) increase in accrued expenses and
other current liabilities ........................................... (335) (796) 3,012
-------- -------- --------
Net cash provided by (used in) operating
activities .......................................................... 20,031 5,759 (2,691)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ................................................. (516) (1,016) (962)
Proceeds from sale of fixed assets ....................................... 640
Increase in intangibles .................................................. (1,200)
Acquisitions, net of cash acquired ....................................... (29,715)
-------- -------- --------
Net cash used in investing activities ............................... (1,076) (1,016) (30,677)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt .............................................. (12,253) (7,100) (13,711)
Proceeds of long-term debt ............................................... 25,000
Net (repayments) borrowings under revolving credit line .................. (11,460) 290 21,000
Proceeds from exercise of stock options .................................. 600 2,161
Issuance of common stock.................................................. 117
Tax benefit attributable to exercise of stock options..................... 900
-------- -------- --------
Net cash (used in) provided by financing
activities .......................................................... (22,696) (6,210) 34,450
-------- -------- --------
NET (DECREASE) INCREASE IN CASH .............................................. (3,741) (1,467) 1,082
CASH, AT BEGINNING OF PERIOD ................................................. 3,998 5,465 1,606
-------- -------- --------
CASH, AT END OF PERIOD ....................................................... $ 257 $ 3,998 $ 2,688
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 2, 1995,
DECEMBER 31, 1996 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- The Company designs, manufactures, imports and
markets a broad line of moderately priced women's sportswear and 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 department stores, specialty stores, and chain stores.
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 2).
INVENTORIES -- Inventories are stated at the lower of cost or market
using the first-in, first-out method (FIFO) (see Note 4).
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are
recorded at cost. Depreciation and amortization are computed on a straight-line
basis over the estimated useful lives of the assets or, where applicable, the
term of the lease, if shorter (see Note 5).
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 following a change in control, and the sportswear divisions of
Oak Hill Sportswear Corporation ("Oak Hill") and Beldoch Industries Corp.
("Beldoch") in 1995. Goodwill is amortized on a straight-line basis over the
expected periods to be benefited, ranging from 20 to 40 years.
Also included in intangible assets are 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
(see Note 6).
F-6
ASSESSMENT OF ASSET IMPAIRMENT -- The Company periodically assesses the
recoverability of the carrying value of long-lived assets, including
identifiable intangible assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
assessment of recoverability of the carrying amount of an asset is based on
estimated undiscounted future cash flows from the use of the asset and eventual
disposition. If the estimated undiscounted future cash flows are less than the
carrying value, an impairment loss is charged to operations based on the
difference between the carrying amount and the fair value of the asset.
The Company assesses the recoverability of goodwill by determining whether
the amortization of goodwill over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations or assets.
If the estimated cash flows are less than the carrying value, an impairment
loss is charged to operations based on the difference between the carrying
amount and the estimated discounted cash flows.
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which is an asset and liability method. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. SFAS No. 109 requires that deferred
tax assets are to be reduced by a valuation allowance if it is more likely than
not that some portion or all of the deferred tax assets will not be realized
(see Note 9).
STOCK SPLIT -- On November 17, 1995, the Board of Directors authorized a
two-for-one stock split that 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, 1997 and
December 31, 1996 due to their short-term maturities. Long-term debt
approximates fair value due to its variable interest rate.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" which is effective for periods beginning after December 15, 1997.
SFAS No. 131 requires that public companies report certain information about
operating segments in their annual financial statements and in condensed
financial statements of interim periods issued to shareholders. This statement
also requires that public companies report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. The Company is currently reviewing the impact of this
statement on its current level of disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is effective for fiscal
years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. This statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. The Company is
currently reviewing the impact of this statement on its current level of
disclosure.
F-7
2. 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 flow 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
3. ACQUISITIONS
In June 1995, the Company acquired all of the issued and outstanding
shares of 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 (see Note 8). The Company is obligated to pay the
former owners additional consideration if certain financial results are
achieved through 1998. In 1997, the Company paid $1,200, which was recorded as
goodwill, and is being 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.
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 1995. 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 1995, or results that may occur in the future.
F-8
1995
--------
Net sales ............................................. $248,698
Operating income ...................................... 8,666
Net income ............................................ 384
Basic earnings per share .............................. 0.03
4. INVENTORIES
Inventories consist of the following at December 31, 1997 and December 31,
1996:
1997 1996
------- -------
Raw materials .......................... $ 4,209 $12,081
Work in process ........................ 5,584 4,808
Finished goods ......................... 17,455 29,904
======= =======
$27,248 $46,793
======= =======
If the first-in, first-out method of inventory valuation had been used at
December 31, 1996, rather than the last-in, first-out method for certain
divisions, inventories would have been approximately $404 higher than reported.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consist of the following at December 31,
1997 and December 31, 1996:
1997 1996
------- -------
Land and land improvements ..................... $ 740 $ 747
Buildings and improvements ..................... 8,476 8,691
Machinery and equipment ........................ 7,162 8,787
Furniture and fixtures ......................... 1,693 1,342
------- -------
18,071 19,567
Less accumulated depreciation and
Amortization ................................ 8,451 7,793
======= =======
$ 9,620 $11,774
======= =======
F-9
6. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1997 and
December 31, 1996:
1997 1996
------- -------
Goodwill $33,485 $32,059
Licenses 6,325 6,550
------- -------
39,810 38,609
Less accumulated amortization 7,364 6,159
======= =======
$32,446 $32,450
======= =======
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following at
December 31, 1997 and December 31, 1996:
1997 1996
------ ------
Accrued Salaries, Benefits and Bonus $2,565 $3,127
Accrued Restructuring Expenses 1,503 0
Other Accrued Expenses 3,652 4,928
====== ======
Total Accrued Expenses $7,720 8,055
====== ======
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and December
31, 1996:
1997 1996
------- -------
Revolving Credit Borrowings (a) $21,540 $33,000
Senior Term Loan (b) 5,508 17,500
Other -- 261
------- -------
27,048 50,761
Less current maturities 5,000 50,761
======= =======
$22,048 $ --
======= =======
On April 30, 1997 the Company entered into an amended Credit Facility (the
"Credit Facility") to, among other things, include the Company's operating
subsidiaries Donnkenny Apparel, Inc., Megaknits Inc. and Beldoch Industries
Corporation, as borrowers. The Credit Facility consists of a Term Loan, a
Revolving Credit Agreement, and a Factoring Agreement. The purpose of the
Credit Facility is to continue to finance increased working capital needs of
the Company following the 1995 Beldoch and Oak Hill acquisitions and for
general working capital purposes including the issuance of letters of credit.
The Credit Facility will expire on March 31, 1999. Under the Credit Facility,
F-10
The Chase Manhattan Bank serves as agent (and holds a 35% interest), the CIT
Group/Commercial Services Inc. ("CIT") serves as collateral agent (and holds a
15% interest), and each of Fleet Bank, N.A. and the Bank of New York are
co-lenders (each holding a 25% interest).
(a) As of December 31, 1997, borrowings under the Revolving Credit
Agreement amounts to $21.5 million. The total amount available under the
Revolving Credit Agreement is $85 million subject to an asset based
borrowing formula, with sublimits of $70 million for direct borrowings and
$35 million for letters of credit. The interest rate is equal to the prime
rate (8.5% at December 31, 1997) plus 1 1/2% per annum. Outstanding
borrowings under the Revolving Credit Agreement in excess of an allowable
overadvance bear interest at the prime rate plus 3 1/2%. The Revolving
Credit Agreement also requires the Company to pay certain letter
of credit fees and unused commitment fees. Advances and letters of credit
are limited to (i) up to 85% of eligible accounts receivable plus (ii)
up to 60% of eligible inventory, plus (iii) an allowable overadvance.
(b) As of December 31, 1997, the balance of the Term Loan is $5.5 million.
The interest rate is equal to the prime rate (8.5% at December 31, 1997)
plus 1 1/2% per annum and the amortization schedule calls for quarterly
payments of approximately $1.3 million. The balloon payment, which is due
on March 31, 1999 has been reduced from $7.5 million to $0.5 million
primarily from the proceeds of tax refunds received by the Company in
1997. An excess cash flow recapture is payable annually within 15 days
after receipt of the Company's audited fiscal year-end financial
statements. The default interest rate, if applicable, is equal to 2%
above the otherwise applicable rate. The Term Loan does not carry any
prepayment penalty.
In April, 1997, the Company also entered into a Factoring Agreement
with CIT. The Factoring Agreement provides for a factoring commission equal to
0.45% of the gross amount of sales, plus certain customary surcharges. An
additional fee of 0.20% was paid upon the conversion to a factored receivable
arrangement.
Collateral for the Credit Facility includes a first priority lien
on all accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel,
Inc., Beldoch Industries Corporation, and Megaknits, Inc.
The Credit Facility contains numerous financial and operational covenants,
including limitations on additional indebtedness, liens, dividends, stock
repurchases and capital expenditures. In addition, the Company is required to
maintain specified levels of tangible net worth and comply with a maximum
cumulative net loss test.
At December 31, 1997, the Company was not in compliance with the covenant
related to the maximum cumulative net loss test. On March 31, 1998, The Chase
Manhattan Bank, as agent, issued a waiver for the violation of this covenant.
Additionally, on March 31, 1998, the Credit Facility was amended to
provide for a sublimit for direct borrowings of $60 million; a letter of credit
line of $35 million; and required seasonal overadvances as requested by the
Company. Any tax refunds received applicable to 1997 and prior years and
proceeds from the sale of fixed assets are to be applied to reduce the balloon
payment on the Term Loan.
F-11
9. INCOME TAXES
Income tax expense (benefit) for 1997, 1996 and 1995 is comprised of the
following:
1997 1996 1995
------- ------- ------
Current:
Federal .................... $(1,537) $(1,462) $2,241
------
State and local ............ 35 592 476
------
Deferred ....................... 292 (2,449) 1,279
------- ------- ------
$(1,210) $(3,319) $3,996
======= ======= ======
A reconciliation of the statutory Federal tax rate and the effective rate
follows:
1997 1996 1995
---- ---- ----
Federal statutory tax rate ....................... (34)% (35)% 35%
--
State and local taxes, net of Federal income
tax benefit...................................... (3) (2) 4
Losses providing no state and local tax
benefit.......................................... 4 4
Amortization of nondeductible goodwill ........... 5 3 3
--
Other ............................................ 1 1 1
--- --- --
(27)% (29)% 43%
=== === ==
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below:
DECEMBER 31, DECEMBER 31,
1997 1996
------- -------
Deferred tax assets:
Accounts receivable allowances ............................ $ 470 $ 662
Inventory valuation ...................................... 1,991 2,356
Accrued expenses .......................................... 1,546 584
Restructuring charges ..................................... -- 448
State operating loss carryforwards ........................ 614 634
Federal operating loss carryforwards ...................... 822
Other ..................................................... 131 182
------- -------
Total gross deferred tax assets ........................... 5,574 4,866
Less valuation allowance .................................. (465) (427)
------- -------
Total net deferred tax assets ............................ 5,109 4,439
------- -------
Deferred tax liabilities:
Property, plant and equipment ............................. (1,958) (2,294)
Intangibles ............................................... (3,328) (3,569)
------- -------
Total gross deferred tax liabilities ...................... (5,286) (5,863)
------- -------
Net deferred tax liability ................................ $ (177) $(1,424)
======= =======
F-12
As of December 31, 1997 and December 31, 1996, the Company had deferred tax
assets attributable to accounts receivable allowances, inventory valuation
reserves, accrued expenses and other items. The Company considers these
deferred tax assets to be fully realizable at the Federal tax level based upon
the Company's anticipated future earnings and because many of these items are
expected to reverse within the next twelve months. As of December 31, 1997 and
December 31, 1996, the Company recorded a valuation allowance for a portion of
its state net operating loss carryforwards.
As of December 31, 1997, the following Federal and state net operating loss
carryforwards were available:
Net Operating Losses
--------------------
Expiration Dates Federal State
-----------------------------------------------
2003 $1,676 $ -
2011 - 6,070
2012 742 5,550
During the fourth quarter of the fiscal year ended December 31, 1997, the
Company recorded interest income of $500 related to prior year carry-back
claims.
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 filed a consolidated amended
complaint. The Company is not presently in a position to determine
the ultimate outcome of these legal proceedings or their impact on
the 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 which
became a formal investigation in the latter part of 1996.
b. In connection with contingent liabilities arising from the alleged
inaccuracies in the Company's reporting of revenues and expenses for
certain reporting periods, the Company has agreed to deposit $5,000
over a three year period to help defray claims, if any.
c. Rental expense for operating leases for the fiscal years ended
December 31, 1997, December 31,1996 and December 2, 1995 approximated
$4,505, $5,207, and $2,996, respectively. Minimum future rental
payments as of December 31, 1997 for operating leases with initial
noncancelable lease terms in excess of one year, are as follows:
YEAR
ENDING
DECEMBER 31, AMOUNT
------------ ------
1998 .......... $ 3,683
1999 .......... 3,309
2000 .......... 2,445
2001 .......... 1,998
2002 .......... 1,851
Thereafter .... 8,640
-------
$21,926
d. At December 31, 1997, the Company was contingently liable on
outstanding letters of credit issued amounting to $20,917.
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. The Company did not
make contributions to the Plan in 1997, 1996, and 1995, except for the payment
of administrative costs.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share, for the years ended December 31, 1997, December 31, 1996
and December 2, 1995:
1997 1996 1995
Number of shares on which basic earnings ---- ---- ----
per share is calculated:
Average outstanding during the period 14,070 14,012 13,910
Add-incremental shares under stock
compensation plans 0 0 76
-------- -------- -------
Number of shares on which diluted
earnings per share is calculated 14,070 14,012 13,986
======== ======== =======
Net (loss) income $ (3,209) $ (8,288) $ 5,247
======== ======== =======
Basic (loss) income per share $ (0.23) $ (0.59) $ 0.38
======== ======== =======
Diluted (loss) income per share $ (0.23) $ (0.59) $ 0.38
======== ======== =======
Stock options to purchase 311,500 shares in the year ended December 2, 1995,
were outstanding, but not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares, and therefore, the effect would be antidilutive.
In the years ended December 31, 1997 and 1996, the incremental shares under
stock plans were not considered for the diluted earnings per share calculation
due to their antidilutive effect. As such, the amounts reported for basic and
diluted earnings per share are the same.
13. SUPPLEMENTAL CASH FLOW INFORMATION
a. Cash paid for interest and income taxes was $5,692 and $0,
respectively, in 1997, $4,960 and $2,990, respectively, in 1996 and
$3,993 and $7,409, respectively, in 1995.
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.
F-13
14. STOCK OPTIONS
The Company has a stock award and incentive program that permits the
issuance of up to 2,000,000 options on terms as determined by the Board of
Directors.
Under the terms of the plan, options granted may be either non-qualified
or incentive stock options and the exercise price, determined by the Stock
Option Committee, may not be less than the fair market value of a share on the
date of the grant.
Information regarding the Company's stock option plan is summarized below:
1997 1996 1995
--------------------------- ---------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- --------------- ----------- --------------- ---------- --------------
Outstanding at beginning
of the year ............................... 658,800 $10.51 543,600 $ 8.26 727,000 $ 7.55
Granted .................................... 1,300,500 3.73 216,350 18.15 198,000 8.14
Exercised .................................. 0 0 (76,100) 7.89 (323,200) 6.69
Canceled ................................... (298,650) 9.26 (25,050) 12.80 (58,200) 8.03
---------- --------------- ----------- --------------- ---------- --------------
Outstanding at end of year ................. 1,660,650 5.42 658,800 11.38 543,600 8.26
========== =========== ===========
Exercisable at end of year ................. 234,800 268,100 130,000
========== =========== ===========
Available for grant at year end ............ 240,050 1,341,200 1,456,400
========== =========== ===========
The options outstanding at December 31, 1997 range in price as follows:
# OF OPTIONS EXERCISE PRICE
------------ --------------
402,900 $ 1.8064- 3.6125
965,000 $ 3.6126- 5.4188
------------
81,000 $ 7.2251- 9.0313
------------
21,200 $ 9.0313-10.8375
------------
55,000 $10.8376-12.6438
------------
135,550 $16.2564-18.0625
============
1,660,650
============
The Company applies Accounting Principles Board Opinion No. 25, and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans
because the exercise price for stock options granted equaled the market price
of the underlying stock at the date of grant. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share for the years ended December 31,
1997, December 31, 1996 and December 2, 1995 would have been reduced to the pro
forma amounts indicated below:
F-14
1997 1996 1995
------------- ------------ ---------
Net (loss) income:
As reported ......................................................... $(3,209) $(8,288) $5,247
======= ======= ======
Pro forma ........................................................... $(3,834) $(8,414) $5,185
======= ======= ======
Basic net (loss) income per share:
As reported ......................................................... $ (0.23) $ (0.59) $ 0.38
======= ======= ======
Pro forma ........................................................... $ (0.27) $ (0.60) $ 0.37
======= ======= ======
The weighted average fair value of the options granted during 1997, 1996
and 1995 were $2.37, $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 1997, 1996 and 1995, respectively: dividend yield of 0%
for all periods, volatility of 55%, 47% and 36%, risk-free interest rate of
6.51%, 6.90% and 6.41%, and an expected life of 7 years.
15. RESTRICTED STOCK AND WARRANTS
Restricted Stock
In 1996, the Company adopted a plan to issue up to 1,000,000 shares of
restricted stock to employees of the Company. During 1997, 305,000 shares
were granted to employees of the Company at no cost to the employees. Of the
total number of restricted shares granted, 5,000 shares vested and were issued
upon the date of grant at the fair market value of $2.94 per share. The
remaining 300,000 restricted shares were granted at a per share price of $2.94
and vest as follows: 60,000 shares on March 31, 1999, and 240,000 shares on
March 31, 2000. Compensation cost recorded in 1997 was $233,000, which
represents the amortization of the value of the restricted stock award at the
date of grant over the vesting period.
Warrants
On January 14, 1997 the Company issued warrants to purchase 75,000 shares
of Common Stock at $5.00 per share to the principal of a company to rescind an
acquisition transaction. The warrants are immediately exercisable and will
expire July 23, 2004.
16. RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of Mickey & Co. Licensed Character product line under a
license agreement with the Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1,723 and a charge to cost of goods sold of $548 for
the write-down of merchandise inventories. The restructuring charge included:
payments due under agreements with the licensor; write-downs of property,
plant and equipment; costs related to lease terminations; employee severance
payments; and other incremental charges which were primarily attributable to
discontinuing the Licensed Character product lines.
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 included the costs associated with the consolidation of
certain manufacturing facilities and the discontinuance of certain product
lines. The restructuring provision included estimated costs of asset
write-downs, lease terminations and other charges.
17. 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 15%, 19%
and 15% of the Company's sales in Fiscal 1997, 1996 and 1995, respectively. No
other customers accounted for more than eight percent of the Company's sales in
fiscal 1997, 1996 and 1995, and no account receivable from any customer
exceeded $4,408 at December 31, 1997. The Company estimates an allowance for
doubtful accounts based on the creditworthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts.
F-15
DONNKENNY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II Valuation and Qualifying Accounts
SCHEDULE II
DONNKENNY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Fiscal Years ended
December 31, 1997, December 31, 1996, and December 2, 1995
BALANCE OF CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------------------------------------------------- --------------
Year ended December 31, 1997:
Reserve for bad debts $ 968,000 (175,000) 282,000 $ 511,000
Reserve for discounts 1,272,000 3,872,000 4,935,000 209,000
-------------- --------------
$2,240,000 $ 720,000
============== ==============
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
============== ==============