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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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
incorporation or organization) Identification No.)
1411 Broadway
New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 730-7770
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock held by non-affiliates
of the Registrant, based on a closing sale price of the Common Stock on the
Nasdaq National Market on March 13, 1999 of $1.06 per share, was approximately
$15,019,712*. As of March 13, 1999, 14,169,540, shares of Common Stock of
Registrant were outstanding.
*For purposes of this report, the number of shares held by
non-affiliates was determined by aggregating the number of shares
held by Officers and Directors of Registrant, and by others who, to
Registrant's knowledge, own more than 10% of Registrant's Common
Stock, and subtracting those shares from the total number of shares
outstanding.
1
PART 1
ITEM 1. BUSINESS
Donnkenny, Inc. (together with its subsidiaries, the "Registrant" or the
"Company") was incorporated in Delaware in 1978 and is a holding company with
four subsidiaries, three of which, during 1998, were operating subsidiaries,
Donnkenny Apparel, Inc. ("Donnkenny Apparel"), Beldoch Industries Corporation
("Beldoch") and MegaKnits, Inc. ("MegaKnits"). The knitting and sewing operation
conducted at the MegaKnits facility located in West Hempstead, NY was sold by
the Company on February 2, 1999. The Company designs, manufactures, imports and
markets a broad line of moderately priced women's sportswear labels, all of
which are engaged in the same line of business.
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. Following the restatement of the Company's
financial statements for the fiscal years ended December 2, 1995 and December 3,
1994, on February 2, 1999, the Company negotiated a resolution of these charges
and, without admitting or denying the charges, and without monetary penalty
being assessed against the Company, has consented to the issuance of an
administrative cease-and-desist order.
PRODUCTS
The Company designs, manufactures, imports, and markets broad lines of
moderately priced women's sportswear. The Company's major labels include Casey &
Max (R), Donnkenny(R), Pierre Cardin (R) and Victoria Jones (R).
Victoria Jones
At the beginning of 1998, the Company combined its separate moderate knit
and sweater labels, Beldoch Popper and Victoria Jones into one label under the
name Victoria Jones. The Victoria Jones label represents moderately-priced
womens' knit and sweater products which are sold to department stores, specialty
stores and chains including Belk, May Company, Kohl's, Dillard's, Saks, Inc.,
Stage Stores, Catherine's, J.C. Penney and Sears. Its products are marketed for
missy, large sizes and petites. Approximately 68% of these products are
imported, predominately from Hong Kong, China and India. In addition, it sells
exclusive private label products to such customers as QVC, Dayton Hudson Corp.
and Lane Bryant.
Casey & Max
Casey & Max manufactures and imports novelty woven tops and sportswear. The
Casey & Max line consists of moderately-priced products sold to department
stores, specialty stores and chains including Belk, Kohl's, Dillard's,
Federated, May Company, Saks, Inc., Stage Stores, Catherine's, J.C. Penney and
Sears. The products are marketed for missy, large sizes and petites.
Approximately 98% of these products are imported, predominately from Hong Kong,
China and India. In addition, it sells exclusive private label products to such
customers as QVC and Dayton Hudson Corp.
Donnkenny
Donnkenny 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 customers include Stage Stores, Saks, Inc.,
Catherine's, Sterns, Bealls, J.C. Penney and Sears. Donnkenny has been an
established brand name for over 60 years. Approximately 57% of Donnkenny
products are manufactured domestically. In addition, it also sells exclusive
private label products to such customers as J.C. Penney and QVC.
Pierre Cardin
Pierre Cardin produces women's knitwear pursuant to a license. The Pierre
Cardin product is sold to better knitwear departments of department stores and
specialty stores. Its major customers include Federated, Belk, Sam's Club, Saks,
Inc., and the Chadwick's Catalog. Approximately 66% of these products are
imported, predominately from Hong Kong, China, and India. In addition, it also
sells exclusive private label products to such customers as Saks, Inc. and the
Bonton.
2
MANUFACTURING AND IMPORTING
Approximately 29% of the Company's products sold in its year ended December
31, 1998 ("Fiscal 1998") were manufactured in the United States, as compared
with 34% in its year ended December 31, 1997 ("Fiscal 1997"). In Fiscal 1998,
the Company's domestically produced products were manufactured at the Company's
production facilities in Virginia and West Hempstead, New York and by several
outside contractors.
The remaining 71% of the Company's products sold in Fiscal 1998 were
produced abroad and imported into the United States, principally from Hong Kong,
China, India, Guatemala, Turkey, Bangladesh, the Dominican Republic, and the
Philippines. The percentage of the Company's products which are manufactured in
the United States is expected to decrease further during the Company's year
ending December 31, 1999 ("Fiscal 1999").
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 10% of the Company's
products, but no other domestic or foreign contractor manufactured more than 8%
of the Company's products in Fiscal 1998.
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 1999 than historically has been the
case, due to the fact that financial markets in East and Southeast Asia continue
to experience difficult conditions, including a currency crisis. As a result of
this 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 58% of
the products sold by the Company in Fiscal 1998 were manufactured in Asia.
CUSTOMERS
In Fiscal 1998 , the Company shipped orders to approximately 14,700 stores
in the United States. This customer base represents approximately 2,600
accounts. Of the Company's net sales for Fiscal 1998, department stores
accounted for approximately 58.5%, wholesale clubs for approximately 15.2%, mass
merchants for approximately 12.8%, specialty retailers for approximately 3.8%,
catalog customers for approximately 3.4%, chain stores for approximately 3.3%,
and other customers for approximately 3.0%.
The Company markets its products to major department stores, including J.
C. Penney, Dillard's, May Company, Federated, Stage Stores, Proffitt's, Sears,
Sam's Club, as well as mass merchants including K-Mart. The Company's also sells
exclusive private label products to catalog specialty retailers and suppliers.
In addition, the Company manufactures products exclusively for J.C. Penney under
its D.K. Gold label.
3
In Fiscal 1998, sales to Wal-Mart accounted for 15.4% and sales to J.C.
Penney accounted for 12.9% of the Company's net sales. The loss of, or
significantly decreased sales to, these customers could have a material adverse
effect on the Company's consolidated financial condition and results of
operations.
The Company's Electronic Data Interchange computer system ("EDI") connects
the Company to approximately 39 of its large customers and, in Fiscal 1998,was
used to place 49% 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 January 31, 1999, the Company had a 23 person sales force, of whom 13
were Company employees and 10 were independent commissioned sales
representatives. These sales representatives are located in 11 cities and
provide nationwide coverage to retailers ranging from individual specialty shops
to national chain stores and catalogs. The Company's principal showrooms are in
New York City.
RAW MATERIALS SUPPLIERS
The Company's sources of fabric and trim supply are well established. As a
result of the large, steady purchases each year by the Company of fabrics and
trim for its production of certain styles, the Company is a major customer of
several of the larger synthetic textile producers. The Company typically
experiences little difficulty in obtaining domestic raw materials and believes
that the current and potential sources of fabric and trim supply are sufficient
to meet its needs for the foreseeable future.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company owns and has registered in the United States, and in certain
foreign jurisdictions, the following trademarks under which a variety of the
Company's products are sold: Beldoch Popper(R), Casey & Max(R), Donnkenny(R),
Victoria Jones(R),. Upon compliance with the trademark statutes of the United
States and the relevant foreign jurisdictions, these trademark registrations may
be renewed.
The Company holds licensing rights to manufacture, import and sell women's
sportswear in the United States and the U.S. Virgin Islands with the Pierre
Cardin(R) trademark, including sweaters, pants, skirts, knitwear, jeans,
swimwear and activewear. Such license is automatically continued from year to
year at the Company's option provided net sales equal specified minimums. The
Company's sales during Fiscal 1998 surpassed the minimum requirements of this
license, and the Company intends to renew this license for an additional one
year period.
BACKLOG
At March 13, 1999, the Company had unfilled, confirmed customer orders of
approximately $59 million, compared to approximately $62 million of such orders
at March 15, 1998, with such orders generally scheduled for delivery within
three to six months of confirmation, although some extend until the end of the
fiscal year. The amount of unfilled orders at a particular time is affected by a
number of factors, including the scheduling of the production and shipment of
garments, which in some instances may be delayed or accelerated at the
customer's request. Accordingly, a comparison of unfilled orders from period to
period is not necessarily meaningful and may not be indicative of eventual
actual shipments. There can be no assurance that cancellations, rejections and
returns will not reduce the amount of sales realized from the backlog of orders.
COMPETITION
The women's apparel business is highly competitive and consists of many
manufacturers and distributors, none of which accounts for a significant
percentage of total sales in the overall market, but many of which are larger
and have substantially greater resources than the Company. The Company competes
with both domestic manufacturers and importers, primarily on an item-by-item
basis, with respect to brand name recognition, price, quality and availability.
4
EMPLOYEES
As of January 31, 1999, the Company had 622 full-time employees, of whom
152 were salaried and 470 were paid on an hourly basis. The Company had 8
part-time employees, all of whom work on an hourly basis.
The Company's hourly labor force is non-union. The Company believes
relations with its employees are good.
ENVIRONMENTAL MATTERS
The Company believes that it is in material compliance with all applicable
federal, state and local environmental laws. The Company does not currently
anticipate the need to make material capital expenditures to remain in
compliance with applicable federal, state and local environmental laws.
ITEM 2. PROPERTIES
During Fiscal 1998, the Company's production requirements continued to shift
from domestically owned or leased facilities to foreign sourced suppliers.
During 1998 and into 1999, several domestic facilities were closed and sold by
the Company. The following table indicates the facilities owned or leased at
December 31, 1998 and facilities that have been disposed of.
As of March 13, 1999, the Company operated six facilities in Virginia,
one in Charleston, South Carolina, one in New York state and one in Hong Kong.
Location Approximate Square Owned or
- -------- Footage Function Leased
------- -------- ------
Christiansburg, Virginia(1)............... 109,000 Finishing Owned
Floyd, Virginia........................... 79,600 Fabric warehouse, sewing, cutting Owned
Independence Grayson, Virginia............ 70,350 Sewing, finishing Owned
Independence Kendon, Virginia............. 37,550 Company leasing to third party Owned
Rural Retreat, Virginia................... 61,230 Company leasing/Storage Owned
Wytheville, Virginia...................... 161,800 Distribution, administration Owned
Charleston, South Carolina(2)............. 200,000 Distribution Center Leased
West Hempstead, New York(3)............... 150,000 Knitting and Sewing Leased
New York, New York(4) 47,050 Offices and principal showrooms Leased
Hong Kong (Comet Building) (5) 2,200 Administration, sourcing, quality Leased
------- control
TOTAL................................. 918,780
=======
- ---------------------
1) This facility was sold on March 17, 1999.
2) This facility is leased, with annual rental payments totaling $460,125,
and is subject to a 3% annual rental escalation, until March 19, 2006,
at which time the lease expires.
3) This facility was sold on February 2, 1999.
4) Annual rental payments for the New York office/showroom space are
approximately $2,000,000 in the aggregate. The Company sublet
approximately 4,000 square feet in 1998, offsetting the rental
payments by approximately $100,000. The leases for the New York
office/showrooms expire in 2006 and 2008.
5) Lease expires in 2000.
Management believes that its current facilities are sufficient to meet
its needs for the foreseeable future.
5
ITEM 3. LEGAL PROCEEDINGS
IN RE DONNKENNY, INC. SECURITIES LITIGATION, 96 Civ. 8452 (MGC): Beginning
in November 1996, ten putative class action complaints were filed in the United
States District Court for the Southern District of New York.
Plaintiffs have filed a Consolidated Complaint which names as defendants the
Company, as well as Edward T. Creevy, Ronald Hollandsworth and Richard Rubin all
of whom are former officers and/or directors of the Company, and KPMG Peat
Marwick LLP ("KPMG"), the Company's former Independent Auditors. 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.
The Company is also party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
proceedings will not, in the aggregate, have a material adverse effect on the
financial condition, results of operations, liquidity or business of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of Fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the Nasdaq National Market under the
symbol "DNKY." The Common Stock began trading on the Nasdaq National Market on
June 17, 1993.
The following table sets forth the quarterly high and low closing prices of
a share of Common Stock as reported by the Nasdaq National Market for the
Company's two most recent fiscal years, plus the interim period through March
13, 1999.
PERIOD HIGH LOW
- ------ ---- ---
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
6
Fiscal 1998
First Quarter.............. $ 3 5/32 2 1/2
Second Quarter............. 4 1/2 2 3/4
Third Quarter.............. 3 13/32 1 1/4
Fourth Quarter............. 2 1/2 15/16
Fiscal 1999
Ten Weeks Ended March 13, 1999........... 2 1/4 1 1/16
On March 13, 1999, the closing price for a share of Common Stock, as
reported by the Nasdaq National Market, was $1.06 per share.
The number of holders of record for Registrant's Common Stock as of March
13, 1999 was 86.
The Company currently anticipates that it will retain all its earnings for
use in the operation and expansion of its business and, therefore, does not
anticipate that it will pay any cash dividends in the foreseeable future. In
addition, the Company's existing credit facilities and the proposed facility
each prohibit the Company from declaring or paying dividends.
7
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1998 and
December 31, 1997 and for each of the fiscal years in the three year period
ended December 31, 1998 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 2,
1995 and December 3, 1994 and for the fiscal years then ended have been derived
from the Company's consolidated financial statements, which are not included
herein. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and its
Subsidiaries and related notes thereto incorporated by reference herein.
Year Ended
----------------------------------------------------------------
DECEMBER 3, DECEMBER 2, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
CONSOLIDATED STATEMENT OF OPERATIONS
DATA: (In thousands, except per share data)
Net sales ........................ $ 145,784 $ 197,960 $ 255,179 $ 245,963 $ 197,861
Cost of sales .................... 102,584 145,460 202,580 196,633 157,069
--------- --------- --------- --------- ---------
Gross profit ..................... 43,200 52,500 52,599 49,330 40,792
Selling, general and
administrative expenses ........ 26,005 34,676 57,603 45,867 39,086
Amortization of goodwill and
other related acquisition costs . 1,145 985 1,449 1,204 1,321
Restructuring Charge ........... 2,815 1,723 1,180
Gain on sale of license .......... (1,116)
--------- --------- --------- --------- ---------
Operating profit (loss) .......... 17,166 14,024 (6,453) 536 (795)
Interest expense, net ............ 2,870 4,135 5,154 4,955 3,913
--------- --------- --------- --------- ---------
Income (loss) before
income taxes and
extraordinary charge ........... 14,296 9,889 (11,607) (4,419) (4,708)
Income taxes (benefit) ........... 5,717 4,254 (3,319) (1,210) (644)
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary charge ........... 8,579 5,635 (8,288) (3,209) (4,064)
Extraordinary charge
related to early
extinguishment of debt,
net of taxes ................... 295 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................ $ 8,284 $ 5,635 $ (8,288) $ (3,209) $ (4,064)
========= ========= ========= ========= =========
BASIC INCOME (LOSS) PER COMMON SHARE
(1):
Income (loss) before
extraordinary item ............. $ .64 $ .41 $ (.59) $ (.23) $ (.29)
Extraordinary item ............... (.02) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................ $ .62 $ .41 $ (.59) $ (.23) $ (.29)
========= ========= ========= ========= =========
Shares used in the calculation of
basic income (loss) per share .... 13,330 13,910 14,012 14,070 14,150
========= ========= ========= ========= =========
DILUTED INCOME (LOSS) PER COMMON
SHARE(1):
Income (loss) before extraordinary
item ........................... $ 0.63 $ 0.40 $ (0.59) $ (0.23) $ (0.29)
Extraordinary item ............... 0.02 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................ $ 0.61 $ 0.40 $ (0.59) $ (0.23) $ (0.29)
========= ========= ========= ========= =========
Shares used in the calculation
of diluted income (loss)
per share ...................... 13,687 13,986 14,012 14,070 14,150
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Working capital .................. $ 53,817 $ 80,270 $ 16,917 $ 38,354 $ 42,661
Total assets ..................... 107,937 157,486 139,433 102,460 100,215
Long-term debt, including
current portion ................ 28,315 62,611 50,761 27,048 32,055
Stockholders' equity ............. 57,351 65,147 55,278 53,086 49,258
- ---------
(1) All per share amounts and the shares used in the calculation of basic income
(loss) per share have been retroactively restated to reflect the two-for-one
stock split paid on December 18, 1995 to stockholders of record on December
4, 1995 and the effects of SFAS 128.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected operating data of the Company as
percentages of net sales, for the periods indicated below:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
FISCAL YEAR ENDED 1996 1997 1998
- ----------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 79.4 79.9 79.4
----- ----- -----
Gross profit 20.6 20.1 20.6
Selling, general and administrative expenses 22.6 18.7 19.7
Amortization of goodwill and other related acquisition 0.5 0.5 0.7
costs
Restructuring charges -- 0.7 0.6
----- ----- -----
Operating income/(loss) (2.5) 0.2 (0.4)
Interest expense, net 2.0 2.0 2.0
----- ----- -----
Loss before income taxes (4.5) (1.8) (2.4)
Income tax (benefit) (1.3) (0.5) (0.3)
----- ----- -----
Net (loss) (3.2%) (1.3%) (2.1%)
===== ===== =====
COMPARISON OF FISCAL 1998 WITH FISCAL 1997
NET SALES
Net Sales decreased by $48.1 million or 19.6% from $246.0 million in Fiscal
1997 to $197.9 million in Fiscal 1998. The decline in net sales was primarily
the result of exiting the licensed character business, which accounted for $37.9
million of the decline and decreases in Victoria Jones of $18.8 million due to
general softness in the sweater business resulting from warmer weather during
the winter of 1998. The decreases were partially offset by increases in Casey &
Max of $8.0 million and $5.6 million in Pierre Cardin. The Company continues to
stress its strategy of diversifying its product mix while selling to a broad
range of retail stores.
GROSS PROFIT
Gross profit for Fiscal 1998 was $40.8 million, or 20.6% of net sales,
compared to $49.3 million, or 20.1% of net sales, for Fiscal 1997. Significant
factors that contributed to the decline in gross profit included the exiting of
the licensed character business and general softness in the sweater business
from the warm weather during the winter of 1998. Additionally, in the fourth
quarter of Fiscal 1998, the Company recorded inventory write offs of $0.7
million related to the sale of the West Hempstead Facility.
9
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $45.9 million
in Fiscal 1997 to $39.1 million in Fiscal 1998. As a percentage of net sales,
these costs increased from 18.7% in Fiscal 1997 to 19.7% in Fiscal 1998.
Included in Fiscal 1998 were charges totaling $1.5 million related to the
closing of the Company's outlet stores, consolidating office facilities,
cancellation of lease agreements and professional fees associated with system
installations. Included in Fiscal 1997 are charges in the amount of
approximately $4.1 million, the largest component of which is $3.5 million in
additional professional fees as the result of legal fees associated with the
previously reported class action lawsuits, legal and accounting fees associated
with the restatement of prior year quarterly and annual financial statements and
consulting services related to the Company's amended credit facility.
Excluding these charges, the balance of selling, general and administrative
expenses for Fiscal 1998 was $37.6 million or 19.0% of net sales and for Fiscal
1997, $41.8 million, or 17.0% of net sales. The $4.2 million decline in selling,
general and administrative expense is due to reductions in all expense
categories except design and sample expense and administrative expenses.
RESTRUCTURING CHARGES
During Fiscal 1998, the Company's production requirements continued to shift
from domestically owned or leased facilities to out sourced suppliers. During
1998 and into 1999 several domestic facilities were closed and sold by the
Company. In the fourth quarter of 1998, the Company recorded a pre-tax charge of
$1.2 million in connection with the sale of its West Hempstead facility which
occurred on February 2, 1999. The restructuring charge included write-offs of
property, plant, equipment, employee severance payments and other incremental
charges directly attributable to the sale of the manufacturing facility.
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of the Mickey & Co. licensed character product line under a
license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5
million for the write-down of merchandise inventories. The restructuring charge
included payments due under agreements with the licensor; write-downs of
property, plant and equipment; costs related to lease terminations; employee
severance payments; and other incremental charges directly attributable to
discontinuing the licensed character product lines.
INCOME FROM OPERATIONS
In Fiscal 1998, the Company reported a loss from operations of $0.8
million, versus income from operations of $0.5 million in Fiscal 1997.
PROVISION FOR INCOME TAXES
The Company's tax benefit in Fiscal 1998 amounts to 13.7% of pre-tax
losses, as compared to a benefit of 27.4% for Fiscal 1997. The benefit in Fiscal
1998 is lower than the Company's historical tax rate due to the recording of a
valuation allowance on a portion of deferred tax assets related to net operating
loss carryforwards.
NET LOSS
In Fiscal 1998 the Company reported a net loss of $4.1 million, or ($0.29)
per share, versus a net loss of $3.2 million, or ($0.23) per share in Fiscal
1997.
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 Lewis Frimel and
the decrease in sales of other licensed character lines. The decrease was
partially offset by increases in the Company's core labels - 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%.
10
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 Lewis Frimel; 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 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 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 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 business; decreases in Sales expenses as 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; and 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 the Mickey & Co. licensed character product line under a
license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5
million for the write-down of merchandise inventories. The restructuring charge
included payments due under agreements with the licensor; write-downs of
property, plant and equipment; costs related to lease terminations; employee
severance payments; and other incremental charges directly attributable to
discontinuing the licensed character product lines.
INCOME FROM OPERATIONS
In Fiscal 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 27.4% 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.
11
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily inventory and accounts receivable, and interest and
principal payments related to certain indebtedness and capital expenditures. The
Company's borrowing requirements for working capital fluctuate throughout the
year.
Capital expenditures were $2.5 million for Fiscal 1998, compared to $0.5
million in Fiscal 1997. In Fiscal 1999, the Company is permitted to spend up to
$2.0 million on capital investments in accordance with the Revolving Credit
Agreement described below. As part of the 1999 capital expense budget, the
Company has committed to spend approximately $0.5 million for upgrading computer
systems to increase efficiencies and become Year 2000 compliant.
At the end of Fiscal 1998, direct borrowings under the revolving credit
facility were $31.6 million. Additionally, the Company had letters of credit
outstanding of $24.3 million, with unused availability of $10.7 million. At the
end of Fiscal 1997, direct borrowings and letters of credit outstanding under
the prior credit facility were $27.0 and $20.9 million, respectively. On
December 31, 1998, the final Term Loan payment was made in accordance with the
Revolving Credit Agreement.
On June 30, 1998, the Company entered into a secured term loan in the amount
of $483,000. The interest rate is fixed at 8.75% and the loan requires monthly
principal and interest payments through June 2001. As of December 31, 1998, the
principal balance of this loan amounted to $411,000. Software, machinery and
equipment secure this loan.
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, MegaKnits, and Beldoch as borrowers. The Credit
Facility consisted of a Term Loan, a Revolving Credit Agreement, and a Factoring
Agreement. The purpose of the Credit Facility was to provide for working capital
needs of the Company including, the issuance of letters of credit. 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). 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.
On November 13, 1998, the Company and the Company's operating subsidiaries
Donnkenny Apparel, Megaknits, and Beldoch, as borrowers, entered into an Amended
and Restated Credit Facility (the "Amended Credit Facility"). The purpose of the
Amended Credit Facility was to, among other things, provide for general working
capital needs of the Company, including the issuance of letters of credit and to
extend the Amended Credit Facility to March 31, 2000.
The Amended Credit Facility provides for a total amount available under the
Revolving Credit Agreement of $75 million subject to an asset based borrowing
formula, with sublimits of $55 million for direct borrowings and, $35 million
for letters of credit and certain overadvances. The interest rate (10% at
December 31, 1998) is equal to the prime rate (8.5% at December 31, 1998) plus 1
1/2% per annum. Outstanding borrowings under the Revolving Credit Agreement 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
will be limited to (i) up to 85% of eligible accounts receivable plus (ii) up to
60% of eligible inventory, plus (iii) an allowable overadvance. Certain proceeds
from the sale of fixed assets and income tax refunds are to be applied to reduce
the overadvance facility.
On March 29, 1999, the Company entered into a Second Waiver and Amendment
Agreement to the Amended Credit Facility which became effective on February 28,
1999 to support the Company's 1999 business plan. Additionally, the Second
Waiver and Amendment waived any existing default for the year ended December 31,
1998 with respect to the Company's non-compliance with covenants related to Net
Tangible Worth and the Cumulative Net Loss tests. Pursuant to this amendment,
the interest rate on borrowings was increased to 2 1/2% above the prime rate and
shall be further increased by 1/8 of 1% on each of July 1, 1999, August 1, 1999,
and September 1, 1999 and the applicable percentage shall be increased by 1/4 of
1% on the first day of each month thereafter, commencing October 1, 1999. A fee
of $150,000 is payable on June 30, 1999.
12
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,
Beldoch and MegaKnits.
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.
During Fiscal 1998, cash used in operating activities was $1.4 million,
principally as the result of increases in accounts receivable and other
non-current assets, partially offset by decreases in inventories and recoverable
income taxes. During Fiscal 1997, the Company's operating activities generated
$20.0 million more cash than it used, principally as the result of decreases in
accounts receivable, inventories and recoverable income taxes, partially offset
by decreases in accounts payable.
Cash used in Fiscal 1998 for investing activities included $2.5 million for
the purchase of fixed assets and the $1.8 million earnout payment related to the
acquisition of Beldoch, which was partially offset by proceeds from the sale of
fixed assets. Cash used in Fiscal 1997 included the purchase of fixed assets for
the Company's South Carolina distribution facility of $0.5 million and included
purchases of machinery and equipment, building improvements and leasehold
improvements; and the $1.2 million earnout payment related to the acquisition of
Beldoch.
Cash provided by financing activities in Fiscal 1998 was $5.0 million,
which represented repayments of $5.6 million on the Term Loan, offset by net
borrowings under the Revolving Credit Agreement of $10.1 million and the
proceeds from an equipment loan of $0.5 million. Cash used in financing
activities in Fiscal 1997 was $22.7 million, which represented repayments of
$12.0 million for a senior term loan, the repayment of a Virginia State Loan of
$0.3 million and net repayments under the revolving credit line of $11.5
million.
The Company believes that cash flows from operations and amounts available
under the revolving credit agreement will be sufficient for its needs for the
foreseeable future.
OTHER ITEMS AFFECTING THE COMPANY
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line manufacturers (such as the Company) and
a larger number of specialty manufacturers. The Company faces substantial
competition in its markets from manufacturers in both categories.
Apparel Industry Cycles and other Economic Factors
The apparel industry historically has been subject to substantial cyclical
variation, with consumer spending on apparel tending to decline during
recessionary periods. A decline in the general economy or uncertainties
regarding future economic prospects may affect consumer spending habits, which,
in turn, could have a material adverse effect on the Company's results of
operations and its financial condition.
Retail Environment
Various retailers, including some of the Company's customers, have
experienced declines in revenue and profits in recent periods and some have been
forced to file for bankruptcy protection. To the extent that these financial
difficulties continue, there can be no assurance that the Company's financial
condition and results of operations would not be adversely affected.
13
Seasonality of Business and Fashion Risk
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as one
year in advance and manufactured approximately one season in advance of the
related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability to successfully anticipate the needs
of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
Foreign Operations
The Company's foreign sourcing operations are subject to various risks of
doing business abroad, including indirect vulnerability to currency
fluctuations, quotas and, in certain parts of the world, political instability.
Any substantial disruption of its relationships with its foreign suppliers could
adversely affect the Company's operations. Some of the Company's imported
merchandise is subject to United States Customs duties. In addition, bilateral
agreements between the major exporting countries and the United States impose
quotas, which limit the amount of certain categories of merchandise that may be
imported into the United States. Any material increase in duty levels, material
decrease in quota levels or material decrease in available quota allocation
could adversely affect the Company's operations.
Asian Operations
The 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 devaluation's and controls. The Company's
risks associated with the Company's Asian operations may be higher in 1999 than
has historically been the case, due to the fact that financial markets in East
and Southeast Asia continue to experience difficult conditions, including a
currency crisis. As a result of this economic volatility, the currencies of many
countries in this region have lost value relative to the US dollar. Although the
Company has experienced no material foreign currency transaction losses since
the beginning of the crisis, its operations in the region are subject to an
increased level of economic instability. Approximately 74.5% of the products
sold by the Company in Fiscal 1998 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 its ability to successfully design, manufacture, import and
market apparel.
Year 2000 Issue
The Company recognizes the need for, and is in the final phases of
implementation of, a comprehensive program intended to upgrade the operating
systems, hardware and software, which should eliminate any issues involving Year
2000 compliance. Certain of the Company's current software systems, without
modification, would 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 to be implemented is designed to be Year
2000 compliant. The Company anticipates that its cost for such upgrade will be
approximately $0.5 million for Fiscal 1999. 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. The Company does not currently have any
information concerning Year 2000 compliance status of its suppliers and
customers. The Company plans to initiate communications with all of its
significant customers, suppliers, and contractors to determine their plans to
remedy any Year 2000 issues that arise in their business. The Company plans to
complete this project prior to December 31, 1999; however, there can be no
assurance that the systems of the other companies on which the Company's systems
rely will be timely converted and would not have a material adverse effect on
the Company's systems. The Company is currently evaluating its non-information
technology systems (embedded technology) issues and is also developing its
contingency plans for its information technology systems and believes that it
will complete both issues in time to accommodate Year 2000 issues.
14
If the Company is unsuccessful in completing remediation of non-compliant
systems, and if customers or vendors cannot rectify Year 2000 issues, the
Company could incur additional costs, which may be substantial, to develop
alternative methods of managing its business and replacing non-compliant
equipment, and may experience delays in receipts from vendors, shipments to
customers, or payments to vendors. The Company has not yet established a
contingency plan in the event of non-compliance.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards for the
accounting and reporting for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company has determined that this
statement will not have a significant impact on its financial statements or
disclosures, as it does not engage in derivative or hedging transactions.
Forward Looking Statements
This Form 10-K (including by not limited to the sections hereof entitled
"Business" and "Management's Discussion and Analysis") contains or incorporates
by reference forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Where any such forward looking
statement includes a statement of the assumptions or bases underlying such
forward looking statement, the Company cautions that assumed facts or bases
almost always vary from the actual results, and the differences between assumed
facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, the Company or its
management expresses an expectation or belief as to future results, there can be
no assurance that the statement of the expectation or belief will result, or be
achieved or accomplished. The words "believe", "expect", "estimate", "project",
"seek", "anticipate" and similar expressions may identify forward-looking
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following item 14 of this Annual Report of Form
10-K
15
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 had been the President of HarGil Capital Associates Ltd., a private
investment firm, since 1994. From 1983 to 1993, he was a Managing Director of
the Investment Banking Division of Merrill Lynch Pierce Fenner & Smith Inc. and
a Senior Vice President of Merrill Lynch Interfunding Inc. Mr. Appelle is 54
years old.
Lynn Siemers-Cross, a director of the Company, became President and Chief
Operating Officer of the Company on April 14, 1997. Prior thereto, 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 40 years old.
Beverly Eichel, has been Executive Vice President and Chief Financial
Officer of the Company since October 1998. Prior thereto, she was Executive Vice
President and Chief Financial Officer of Danskin, Inc. from June 1992 to
September 1998, and had been its Corporate Controller from October 1987 to June
1992. Ms. Eichel also serves as Secretary of the Company. Ms. Eichel is 41 years
old.
Herbert L. Ash, a director of the Company, was a partner at the law firm of
Hahn & Hessen, LLP, Attorneys, since 1972 having become counsel to that firm as
of January 1, 1999. 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, in Denver, Colorado. Mr. Ash is 57 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 64 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 60 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 61 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 56 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 of 1994 to April 1996. From April 1996 through
January 1997, he served as Chairman of the Board and Chief Executive Officer of
Best Products, Inc., a retail sales company which filed for bankruptcy in
September 1996. From 1993 through 1994, Mr. Levy served as Chairman of the Board
and Chief Executive Officer of Conran's, a retail home furnishings company. From
1991 to 1993, he was Vice Chairman and Chief Operating Officer of Montgomery
Ward, a retail sales company. Mr. Levy is a director of Whitehall Jewelers Inc.
Mr. Levy is 56 years old.
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 64 years old.
16
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. Officers,
directors and greater than ten percent shareholders are required to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1998, all
Section 16(a) reporting requirements applicable to the Company's officers,
directors and greater than ten percent shareholders were complied with, except
that Form 5 reports for Mr. Appelle and Ms. Siemers-Cross were not timely filed
for the fiscal year ended December 31, 1998 resulting in the failure by Mr.
Appelle and Ms. Siemers-Cross to report one transaction each.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years ended
December 31, 1998, December 31, 1997, and December 31, 1996 to those persons who
were, at December 31, 1998 (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
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------------------------------------
RESTRICTED SECURITIES ALL OTHER
FISCAL STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS/SARS (1)
- ----------------------------------------------------------------------------------------------------------------------
Harvey A. Appelle (2)(6)
Chairman of the Board and 1998 $402,652 $ 2,880
Chief Executive Officer 1997 400,000 $174,000 $440,625 50,000 2,880
Lynn Siemers-Cross (4)(7)
President and Chief 1998 $502,550 $ 1,020
Operating Officer 1997 500,000 $212,500 $440,625 50,000 660
Beverly Eichel (8)
Executive Vice President and 1998 $ 63,462 $50,000 150,000 $255
Chief Financial Officer
Harvey Horowitz (2)(5) 1998 $70,442
Vice President and General 1997 405,000 $ 750
Counsel 1996 124,444 2,880
Stuart S. Levy (2)(3) 1998 $240,526 $ 2,634
Vice President - Finance and 1997 361,667 $25,000 $ 14,650 11,000
Chief Financial Officer 1996 31,667
(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. Compensation for 1998 represents salary through August 1998, the
date of resignation.
(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 for 1997 was paid in 69,600 shares of common stock.
(7) Bonus for 1997 was a $150,000 cash payment and 25,000 shares of common
stock.
(8) This individual became an Executive Officer of the Company in 1998.
Annual compensation represents prorated compensation from date of hire
in October 1998 and a signing bonus paid in connection with the
execution of her employment agreement with the Company.
17
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 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).
Beverly Eichel
On September 28, 1998, Ms. Eichel entered into a two-year employment
agreement the Company to serve as Executive Vice President and Chief Financial
Officer, providing for a base salary of $275,000 per annum and a one time
signing bonus of $50,000. The agreement provides for a discretionary performance
bonus based on the achievement of goals to be set annually by the Compensation
Committee of the Board, as well as certain insurance benefits.
In addition, in connection with the commencement dates the agreement
provides for the grant of options to purchase 150,000 shares of Common Stock at
an exercise price equal to the fair market value on the date of grant, vesting
over three years.
The agreement provides that in the event Ms. Eichel's employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Eichel will have the right to receive severance
benefits equal to one and one half times the sum of the last annual salary
inclusive of performance bonus.
18
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 $25,000 per month
throughout calendar year 1999. Mr. Horowitz will continue to receive certain
insurance and other benefits and the Company agrees to use its best efforts to
cause Mr. Horowitz to be nominated for election as a member of its Board of
Directors at the annual meeting of its shareholders to take place during
calendar year 1999.
1998 STOCK OPTIONS GRANTS
The Company strives to distribute stock option awards broadly
throughout the organization. Stock option awards are based on the
individual's position and contribution to the Company. The Company's long
term performance ultimately determines compensation from stock options
because stock option value is entirely dependent on the long term growth
of the Company's common stock price.
The following table sets forth certain information concerning
options granted to the Chief Executive Officer and the Named Executive
Officers during Fiscal 1998, including information concerning the
potential realizable value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL RATES
OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS OPTION TERM (1)
-------------------------------------------------------------- -----------------------------
NUMBER OF
SECURITIES % OF TOTAL EXERCISE
UNDERLYING # OF OPTIONS PRICE (3) EXPIRATION
NAME OPTION (#) GRANTED IN 1998 ($/SH) DATE 5% ($) 10% ($)
---- ---------- - --------------- ------ ---- ------ -------
Harvey Appelle
Lynn Siemers-Cross
Herbert L. Ash (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
Sheridan C. Biggs (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
Robert H. Cohen (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
James W. Crystal (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
Beverly Eichel (4) 150,000 28.04% 1.0000 10/13/08 94,334 239,061
Harvey Horowitz (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
Daniel H. Levy (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
Robert H. Martinsen (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
(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,
Horowitz, 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.
(4) Options were granted pursuant to Ms. Eichel's employment agreement.
19
AGGREGATE OPTION
EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR ENDED OPTION VALUES(1)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1998 DECEMBER 31, 1998 (2)
ON EXERCISE VALUE ----------------- ---------------------
(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--- -------- ----------- ------------- ----------- -------------
Harvey Appelle (3) 0 0 137,500 35,000 0 0
Lynn Siemers-Cross (4) 0 0 115,000 35,000 0 0
Herbert L. Ash 0 0 20,000 0 0 0
Sheridan C. Biggs 0 0 20,000 0 0 0
Robert H. Cohen 0 0 20,000 0 0 0
James W. Crystal 0 0 32,500 0 0 0
Harvey Horowitz 0 0 27,500 0 0 0
Daniel H. Levy 0 0 20,000 0 0 0
Robert H. Martinsen 0 0 20,000 0 0 0
Beverly Eichel (4) 0 0 0 150,000 0 $131,250
(1) All options were granted at an exercise price equal to market value of
the common stock on the date of grant.
(2) Amount reflects the market value of the underlying shares of common
stock at the closing sales price reported on the Nasdaq National Market
on December 31, 1998 ($1-7/8) per share.
(3) Represents 22,500 options granted to him under the Company's 1994
non-employee director option plan and 115,000 options granted to him in
connection with the execution of his employment agreement.
(4) All options were granted in connection with the execution of her
employment agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 15, 1999,
with respect to beneficial ownership of the Company's Common Stock by: (i) each
of the Company's directors, (ii) each of the Company's Named Executive Officers,
(iii) each person who is known by the Company beneficially to own more than 5%
of the Company's Common Stock, and (iv) by all directors and executive officers
who served as directors or executive officers of March 15,1999 as a group. All
information in the table below with respect to the Common Stock of the Company
has been restated to reflect the two-for-one stock split paid to all holders of
Common Stock of record on December 4, 1995. For purposes of the Proxy Statement,
beneficial ownership is defined in accordance with 13d-3 under the Securities
Exchange Act of 1934, as amended and means generally the power to vote or
dispose of the securities, regardless of any economic interest therein.
NAME AND ADDRESS COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED
------------------- --------------------- ----------------
Amber Arbitrage LDC 2,322,450(2) 16.4%
c/o Custom House Fund Management Limited
31 Kildare Sheet
Dublin 2, Ireland
Putnam Investments, Inc. 1,296,350(3) 9.1%
1 Post Office Square
Boston, MA 02109
Pioneering Management Corporation 490,000(4) 3.5%
60 State Street
Boston, MA 02109
Harvey A. Appelle 407,100(5) 2.9%
Lynn Siemers-Cross 214,700(6) 1.5%
Herbert L. Ash 21,500(7) *
20
Sheridan C. Biggs 21,000(8) *
Robert H. Cohen 21,000(9) *
James W. Crystal 33,500(10) *
Harvey Horowitz 30,000(11) *
Daniel H. Levy 25,000(12) *
Stuart S. Levy 5,000(13) *
Robert H. Martinsen 53,000(14) *
All directors and officers as a group (10 persons) [831,800] 5.9%
- -------
* Less than 1%.
(1) Percentage to be based on the number of shares of Common Stock
outstanding as of March 13, 1999.
(2) Based on information contained in Schedule 13G filed with the Company
on May 13, 1998.
(3) Based on information contained in Schedule 13G/A filed with the Company
on February 4, 1999. Includes shares held by Putman Investment
Management, Inc. and Putman Advisory Company, Inc.
(4) Based on information contained in Scheduled 13G/A filed with the
Company on October 15, 1998.
(5) Includes 22,500 shares underlying currently exercisable stock options
which have been granted to Harvey A. Appelle pursuant to the Company's
1994 Non-Employee Director Option Plan, 150,000 shares underlying
currently exercisable stock options which have been granted to Mr.
Appelle pursuant to his employment agreement, 30,000 vested shares out
of 150,000 restricted shares granted to Mr. Appelle pursuant to his
employment agreement and 69,600 shares of stock issued to him as part
of Fiscal 1997 compensation. The above does not include 120,000 shares
of restricted stock pursuant to Mr. Appelle's employment agreement,
which become vested March 31, 2000. Also not included are 100,000
options issued as part of Fiscal 1998 Compensation, which are
exercisable after May 15, 1999 and will become exercisable in various
dates through the year 2004.
(6) Includes 4,500 shares of underlying options which have been granted
on April 19, 1996 to Lynn Siemers-Cross pursuant to the Company's
1992 Stock Option Plan and 150,000 shares underlying options which
have been granted pursuant to Ms. Siemers-Cross' employment which is
summarized in this Form 10-K under the caption "Executive
Compensation - Employment Agreements". Also includes 30,000 shares of
restricted stock pursuant to Ms. Siemers-Cross' employment agreement.
Also includes 25,000 shares of stock issued as part of Fiscal 1997
compensation. The above does not include 120,000 of restricted stock
pursuant to Ms. Siemers-Cross' employment agreement, which become
vested March 31, 2000. Also not included are 3,000 options which
have been granted on April 19, 1996 and 100,000 options issued as
part of Fiscal 1998 compensation which are exercisable after
May 15, 1999 and will become exercisable in various dates through the
year 2004.
(7) Includes 20,000 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.
(8) Includes 20,000 shares underlying options which have been granted to
Sheridan C. Biggs pursuant to the Company's 1994 Non-Employee Director
Option Plan. Also includes 1,000 shares held by Mr. Biggs.
(9) Includes 20,000 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.
(10) Includes 32,500 shares underlying options which have been granted to
James W. Crystal pursuant to the Company's 1994 Non Employee Director
Option Plan. Such options are currently exercisable.
(11) Includes 30,000 shares underlying options which have been granted to
Harvey Horowitz pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(12) Includes 20,000 shares underlying options which have been granted to
Daniel A. Levy pursuant to the Company's 1994 Non Employee Director
Option Plan. Such options are currently exercisable.
(13) Includes 5,000 shares underlying options which have been granted
pursuant to Stuart S. Levy's employment.
(14) Includes 20,000 shares underlying options which have been granted to
Robert H. Martinsen pursuant to the Company's 1994 Non Employee
Director Option Plan. Also includes 11,000 shares held by Mr.
Martinsen's spouse. Such options are currently exercisable.
21
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 $169,000 in commissions during 1998 for services rendered
to the Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1998 and December
31, 1997
Consolidated Statements of Operations for the Years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 1998, December 31, 1997 and December 31,
1996.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
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 1998.
22
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, 1999
DONNKENNY, INC.
BY:
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, 1999
/s/ Harvey A. Appelle
---------------------------------------------------------
HARVEY A. APPELLE, CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
/s/ Lynn Siemers-Cross
---------------------------------------------------------
DATED: MARCH 31, 1999 LYNN SIEMERS-CROSS, PRESIDENT AND CHIEF OPERATING OFFICER
/s/ Beverly Eichel
---------------------------------------------------------
DATED: MARCH 31, 1999 BEVERLY EICHEL, CHIEF FINANCIAL OFFICER, EXECUTIVE VICE
PRESIDENT-FINANCE AND SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ Herbert L. Ash
---------------------------------------------------------
DATED: MARCH 31, 1999 HERBERT L. ASH, DIRECTOR
/s/ Sheridan C. Biggs
---------------------------------------------------------
DATED: MARCH 31, 1999 SHERIDAN C. BIGGS, DIRECTOR
/s/ Robert H. Cohen
---------------------------------------------------------
DATED: MARCH 31, 1999 ROBERT H. COHEN, DIRECTOR
/s/ James W. Crystal
---------------------------------------------------------
DATED: MARCH 31, 1999 JAMES W. CRYSTAL, DIRECTOR
/s/ Harvey Horowitz
---------------------------------------------------------
DATED: MARCH 31, 1999 HARVEY HOROWITZ, DIRECTOR
/s/ Daniel H. Levy
---------------------------------------------------------
DATED: MARCH 31, 1999 DANIEL H. LEVY, DIRECTOR
/s/ Robert H. Martinsen
---------------------------------------------------------
DATED: MARCH 31, 1999 ROBERT H. MARTINSEN, DIRECTOR
23
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. and all of the
Shareholders of Beldoch Industries Corporation, dated June 5, 1995.6
24
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
10.45 Named Therein and the Chase Manhattan Bank. 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.
10.46 Employment Agreement between Beverly Eichel and the Company dated
September 28, 1998.17
10.47 Second Waiver and Amendment Agreement dated as of February 28, 1999 to
the Credit Agreement, dated as of June 5, 1995 among the Company, the
Lenders Named Therein and the Chase Manhattan Bank.
25
10.48 Commission's Order Instituting Public Administrative Proceedings, Make
Findings and Instituting a Cease-and-Desist Order and Offer of
Settlement of Donnkenny, Inc. released on February 2, 1999.
21 Subsidiaries of the Company.
- ------------------
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (Registration No. 33-48243), as filed with the
Commission on May 29, 1992 (the "Registration Statement").
(2) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on
May 24, 1993.
(3) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement (Registration Statement No. 33-48243), as filed with the
Commission on May 10, 1993.
(4) Incorporated herein by reference to Amendment No. 5 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on
June 11, 1993.
(5) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 3, 1994.
(6) Incorporated herein by reference to the Company's Report on Form 8-K,
as filed with the Commission on June 2, 1995.
(7) Incorporated herein by reference to the Company's Report on Form 8-K,
as filed with the Commission on 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.
(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.
(17) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 15, 1998.
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, 1998 and December 31, 1997, 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,
1998. 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,
1998 and December 31, 1997, and the results of their operations and cash flows
for each of the fiscal years in the three year period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
March 19, 1999
(March 29, 1999 as to Note 15)
F-1
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
1998 1997
-------- --------
CURRENT ASSETS:
Cash .................................................................... $ 503 $ 257
Accounts Receivable, net of allowances of $620 and
$720 respectively .................................................... 29,363 24,453
Recoverable income taxes ................................................ 655 1,181
Inventories ............................................................. 21,972 27,248
Deferred tax assets ..................................................... 3,080 5,109
Prepaid expenses and other current assets ............................... 1,265 2,146
Assets held for sale .................................................... 1,799 --
-------- --------
Total current assets .................................................... 58,637 60,394
PROPERTY, PLANT AND EQUIPMENT, NET ............................................ 6,337 9,620
OTHER ASSETS .................................................................. 2,327 --
INTANGIBLE ASSETS ............................................................. 32,914 32,446
-------- --------
TOTAL ......................................................................... $100,215 $102,460
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ....................................... $ 154 $ 5,000
Accounts payable ........................................................ 8,391 9,320
Accrued expenses and other current liabilities .......................... 7,431 7,720
-------- --------
Total current liabilities ........................................... 15,976 22,040
-------- --------
LONG-TERM DEBT 31,901 22,048
DEFERRED TAX LIABILITIES ...................................................... 3,080 5,286
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 14,170 and
14,075, shares in 1998 and 1997, respectively ........................ 142 141
Additional paid-in capital .............................................. 47,595 47,360
Retained earnings........................................................ 1,521 5,585
-------- --------
Total stockholders' equity .............................................. 49,258 53,086
-------- --------
TOTAL ......................................................................... $100,215 $102,460
======== ========
See accompanying notes to consolidated financial statements.
F-2
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
NET SALES ........................................................... $ 197,861 $ 245,963 $ 255,179
COST OF SALES ....................................................... 157,069 196,633 202,580
------------ ------------ ------------
Gross Profit ............................................... 40,792 49,330 52,599
OPERATING EXPENSES:
Selling, general and administrative expenses .................. 39,086 45,867 57,603
Amortization of goodwill and other related
acquisition costs ........................................... 1,321 1,204 1,449
Restructuring charge .......................................... 1,180 1,723 --
------------ ------------ ------------
Operating income (loss) .................................... (795) 536 (6,453)
OTHER EXPENSE:
Interest expense (net of interest income of $10, $500
and $0) ....................................................... 3,913 4,955 5,154
------------ ------------ ------------
(Loss) before income taxes ................................. (4,708) (4,419) (11,607)
INCOME TAX (BENEFIT) ................................................ (644) (1,210) (3,319)
------------ ------------ ------------
NET (LOSS) .................................................... (4,064) $ (3,209) $ (8,288)
============ ============ ============
Basic and diluted (loss) per common share ..................... $ (0.29) $ (0.23) $ (0.59)
------------ ------------ ------------
Shares used in the calculation of basic and diluted
(loss) per common share ................................... 14,150,000 14,070,000 14,012,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED TOTAL
PREFERRED COMMON ADDITIONAL PAID-IN STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
------- ------- ------- ------- -------------
BALANCE, DECEMBER 31, 1995 .............. $ -- $ 139 $45,744 $17,082 $62,965
Exercise of stock options ..... -- 1 600 -- 601
Net loss ...................... -- -- -- (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
Issuance of Common Stock ...... -- 1 235 -- 236
Net loss ...................... -- -- -- (4,064) (4,064)
------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1998 .............. $ -- $ 142 $47,595 $ 1,521 $49,258
------- ------- ------- ------- -------
See accompanying notes to consolidated financial statements.
F-4
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) .............................................. (4,064) $ (3,209) $ (8,288)
Adjustments to reconcile net cash
(used in) provided by operating activities:
Deferred income taxes ................................ (177) (1,247) (2,449)
Depreciation and amortization of fixed assets ........ 1,687 1,770 1,911
Loss on disposal of fixed assets ..................... 506 -- --
Amortization of intangibles and other assets ......... 1,321 1,204 1,449
Write down of fixed assets ........................... 907 260 --
Provision for losses on accounts receivable .......... 45 282 231
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ........... (4,955) 4,986 876
Decrease (increase) in recoverable income taxes ...... 526 7,444 (127)
Decrease in inventories .............................. 5,276 19,545 3,458
Decrease (increase) in prepaid expenses and other
current assets ..................................... 881 (513) 1,378
(Increase) in other non-current assets ............... (2,327) -- --
(Decrease) increase in accounts payable .............. (929) (10,156) 8,116
(Decrease) in accrued expenses and
other current liabilities ......................... (53) (335) (796)
-------- -------- --------
Net cash (used in) provided by operating activities (1,356) 20,031 5,759
- --------------------------------------------------------------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ................................ (2,452) (516) (1,016)
Proceeds from sale of fixed assets ...................... 836 640 --
Increase in intangibles ................................. (1,789) (1,200) --
-------- -------- --------
Net cash used in investing activities ............. (3,405) (1,076) (1,016)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ............................. (5,580) (12,253) (7,100)
Proceeds of long-term debt .............................. 483 -- --
Net borrowings (repayments) under revolving credit line . 10,104 (11,460) 290
Proceeds from exercise of stock options ................. -- -- 600
Issuance of Common Stock ................................ -- 117 --
Tax benefit attributable to exercise of stock options ... -- 900 --
-------- -------- --------
Net cash provided by (used in) financing activities 5,007 (22,696) (6,210)
-------- -------- --------
NET INCREASE (DECREASE) CASH .................................. 246 (3,741) (1,467)
CASH, AT BEGINNING OF PERIOD .................................. 257 3,998 5,465
======== ======== ========
CASH, AT END OF PERIOD ........................................ $ 503 $ 257 $ 3,998
======== ======== ========
Supplemental Disclosures
Income taxes paid ....................................... $ 72 $ -- $ 2,990
======== ======== ========
Interest paid ........................................... $ 4,072 $ 5,692 $ 4,960
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998,
DECEMBER 31, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- The Company designs, manufactures, imports and
markets a broad line of moderately priced women's sportswear and operates in one
business segment. The Company's products are primarily sold throughout the
United States by retail chains, department stores and smaller specialty shops.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Donnkenny, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
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.
Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out method (FIFO) (see note 2).
Property, Plant and Equipment -- Property, plant and equipment are
recorded at cost. Depreciation and amortization are computed on a straight-line
basis over the estimated useful lives of the assets or, where applicable, the
term of the lease, if shorter (see note 3).
Estimated useful lives are as follows:
Buildings 9 to 38 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 7 to 10 years
Leasehold improvements 7 to 10 years
(or lease term if shorter)
Other Assets -- In connection with contingent liabilities arising from the
Company's alleged inaccuracies in the reporting of revenues and expenses for
certain reporting periods, the Company has agreed to deposit $5,000 in an escrow
account with the Company's insurance carrier over a three year period to help
defray any claims, if any. At December 31, 1998, $2,083 has been deposited and
has been included in other assets.
Intangible Assets -- Goodwill, which represents the excess purchase price
over fair value of net assets acquired relates to the acquisition of the Company
in 1989 following a change in control, and the sportswear division of Oak Hill
Sportswear Corporation ("Oak Hill") and Beldoch Industries Corporation
("Beldoch") in 1995. Goodwill is amortized on a straight-line basis over the
expected periods to be benefited, ranging from 20 to 40 years.
Also included in intangible assets are 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 4).
Assessment of Asset Impairment -- The Company periodically assesses the
recoverability of the carrying value of long-lived assets, including
identifiable intangible assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
assessment of recoverability of the carrying amount of an asset is based on
estimated undiscounted future cash flows from the use of the asset and eventual
disposition. If the estimated undiscounted future cash flows are less than the
carrying value, an impairment loss is charged to operations based on the
difference between the carrying amount and the fair value of the asset.
The Company assesses the recoverability of goodwill by determining whether
the amortization of goodwill over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations or assets.
If the estimated cash flows are less than the carrying value, an impairment loss
is charged to operations based on the difference between the carrying amount and
the estimated discounted cash flows.
F-6
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which is an asset and liability method. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date. SFAS No. 109 requires that deferred tax assets are
to be reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be realized (see note 7).
Fair Value of Financial Instruments -- The carrying amount of significant
financial instruments, which includes accounts receivable, accounts payable and
accrued expenses, all approximated fair value as of December 31, 1998 and
December 31, 1997 due to their short-term maturities. Long-term debt
approximates fair value due to either its variable interest rate or short term
maturities.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities (such as accounts receivable, inventories, restructuring reserves,
and valuation allowances for income taxes), and disclosures of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
2. INVENTORIES
Inventories consisted of the following at December 31, 1998 and December
31, 1997:
1998 1997
------- -------
Raw materials .. $ 2,155 $ 4,209
Work in process. 4,235 5,584
Finished goods.. 15,582 17,455
------- -------
$21,972 $27,248
======= =======
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31,
1998 and December 31, 1997:
1998 1997
------- -------
Land and land improvements ..................... $ 410 $ 740
Buildings and improvements ..................... 6,241 8,476
Machinery and equipment ........................ 6,295 7,162
Furniture and fixtures ......................... 1,719 1,693
------- -------
14,665 18,071
------- -------
Less accumulated depreciation and
Amortization ................................ 8,328 8,451
------- -------
$ 6,337 9,620
======= =======
4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998 and
December 31, 1997:
1998 1997
------- -------
Goodwill ....................................... $35,274 $33,485
Licenses ....................................... 6,325 6,325
------- -------
41,599 39,810
Less accumulated amortization .................. 8,685 7,364
======= =======
$32,914 $32,446
======= =======
F-7
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities consisted of the following
at December 31, 1998 and December 31, 1997:
1998 1997
------ ------
Accrued Salaries, Benefits and Bonus ............... $1,995 $2,565
Accrued Insurance .................................. 1,000 1,000
Due to Former Owners of Subsidiary ................. 880 0
Accrued Restructuring Expense ...................... 548 1,503
Other Accrued Expenses ............................. 3,008 2,652
------ ------
Total .............................................. $7,431 $7,720
====== ======
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998 and December
31, 1997:
1998 1997
------- -------
Revolving Credit Borrowings (a) $31,644 $21,540
Senior Term Loan (b) -- 5,508
Other (c) 411 --
------- -------
32,055 27,048
Less current maturities 154 5,000
------- -------
$31,901 $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, MegaKnits and Beldoch, as borrowers. The Credit
Facility consisted of a Term Loan, a Revolving Credit Agreement, and a Factoring
Agreement. The purpose of the Credit Facility was for general working capital
purposes including the issuance of letters of credit. 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). 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.
On November 13, 1998, the Company and its operating subsidiaries,
Donnkenny Apparel, MegaKnits, and Beldoch, entered into an Amended and Restated
Credit Facility (the "Amended Credit Facility") to, among other things, provide
for general working capital needs of the Company including letters of credit
and to extend the Amended Credit Facility to March 31, 2000. The Amended Credit
Facility was as follows: the total amount available under the Revolving Credit
Agreement is $75 million subject to an asset based borrowing formula, with
sublimits of $55 million for direct borrowings, $35 million for letters of
credit and certain overadvances. The interest rate (10% at December 31, 1998
and 1997) is equal to the prime rate (8.5% at December 31, 1998 and 1997) plus
1 1/2% per annum. Outstanding borrowings under the Revolving Credit agreement
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 letters of credit fees and unused commitment fees. Advances and letters
of credit will be limited to (i) up to 85% of eligible accounts receivable plus
(ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance.
Proceeds from the sale of fixed assets and income tax refunds are to be applied
to reduce the overadvance facility.
(a) As of December 31, 1998, the borrowings under the Revolving Credit
Agreement amounted to $31.6 million.
(b) As of December 31, 1998, the Term Loan was paid in full.
(c) Other debt consists of a secured term loan that was entered into on June
30, 1998 in the amount of $483. As of December 31, 1998 the principal
balance of this loan amounted to $411. The interest rate is fixed at 8.75%
and the loan requires monthly principal and interest payments of $15
through June 2001. Software, machinery and equipment secure this
obligation.
F-8
Collateral for the Credit Facility includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel,
Beldoch, and Megaknits.
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.
7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 is comprised of the following:
1998 1997 1996
------- ------- -------
Current:
Federal .................... $ -- $(1,537) $(1,462)
State and local ............ (310) 35 592
Deferred ....................... (334) 292 (2,449)
======= ======= =======
$ (644) $(1,210) $(3,319)
======= ======= =======
A reconciliation of the statutory Federal tax rate and the effective rate
is as follows:
1998 1997 1996
---- ---- ----
Federal statutory tax rate ............................. (34)% (34)% (35)%
State and local taxes, net of Federal
income tax benefit ................................. (2) (3) (2)
Losses providing no state and local
tax benefit ........................................ 3 4 4
Nondeductible items .................................... 7 5 3
Losses providing no federal tax benefit ................ 20 -- --
Reduction of valuation allowance........................ (8) -- --
Other .................................................. -- 1 1
--- --- ---
(14)% (27%) (29)%
=== === ===
F-9
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Deferred tax assets:
Accounts receivable allowances ........................ $ 232 $ 470
Inventory valuation ................................... 874 1,991
Accrued expenses ...................................... 1,118 1,546
Restructuring charges ................................. 720 --
State operating loss carryforwards .................... 848 614
Federal operating loss carryforwards .................. 2,570 822
Other ................................................. 136 131
------- -------
Total gross deferred tax assets ................... 6,498 5,574
------- -------
Deferred tax liabilities:
Property, plant and equipment ......................... (1,738) (1,958)
Intangibles ........................................... (3,182) (3,328)
------- -------
Total gross deferred tax liabilities .............. (4,920) (5,286)
------- -------
Net deferred tax asset .................................... 1,578 288
Less valuation allowance .................................. (1,578) (465)
======= =======
Net deferred tax liability................................. $ -- $ (177)
======= =======
As of December 31, 1998 and 1997, the Company recorded a valuation
allowance against the net deferred tax assets due to uncertainty of the
realization of certain net operating loss carryforwards.
As of December 31, 1998, the following Federal and State net operating loss
carryforwards were available:
Net Operating Losses
--------------------
Expiration Dates Federal State
------ -----
2001-2002 ................................................. $ -- $ 510
2011 ...................................................... -- 5,561
2012 ...................................................... 601 5,409
2013 ...................................................... -- 5,540
2014-2017 ................................................. -- 1,341
2018 ...................................................... 5,615 --
2019-2022 ................................................. 1,341 --
During the years ended December 31, 1998 and 1997, the Company recorded
interest income of $10 and $500 related to prior year carry back claims.
8. 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.
b. 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 misstatement of expenses for certain reporting periods.
On February 2, 1999, the Company negotiated a resolution of the SEC's
charges and, without admitting or denying the charges, and without
any monetary penalty being assessed against the Company, has
consented to the issuance of an administrative cease-and-desist order.
F-10
c. 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 in
a escrow account with the Company's insurance carrier over a three
year period to help defray claims, if any.
d. Rental expense for operating leases for the years ended December 31,
1998, 1997, and 1996 approximated $4,557, $4,505 and $5,207,
respectively. Minimum future rental payments as of December 31, 1998
for operating leases with initial noncancelable lease terms in excess
of one year, are as follows:
Year Ending December 31, Amount
------------------------ ------
1999..................................... $ 3,307
2000 ................................... 2,871
2001 .................................... 2,396
2002 .................................... 2,163
2003 .................................... 1,776
Thereafter .............................. 2,306
-----
$14,819
-------
e. At December 31, 1998, the Company was contingently liable for
outstanding letters of credit issued amounting to $24,257.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors an Employees' Savings 401(k) Plan (the "Plan")
covering substantially all of its employees. Contributions to the Plan are made
by the Company at the discretion of the Board of Directors. The Company did not
make contributions to the Plan in the years ended December 31, 1998, 1997 and
1996, except for the payment of administrative expenses.
10. EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income or loss
attributable to common stockholders by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock (convertible
preferred stock, warrants to purchase common stock and common stock options
using the treasury stock method) were exercised or converted into common stock.
Potentially issuable common shares in the diluted EPS computation are excluded
in net loss periods, as their effect would be antidilutive.
The following table sets forth the computation of basic and diluted
earnings per share, for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
-------- -------- -------
Number of shares on which basic and diluted earnings
per share is calculated ............................................................ 14,150 14,070 14,012
======== ======== ========
Net (loss) ........................................................................... $ (4,064) $ (3,209) $ (8,288)
======== ======== ========
Basic and diluted (loss)per share .................................................... $ (0.29) $ (0.23) $ (0.59)
======== ======== ========
In the years ended December 31, 1998, 1997 and 1996, the incremental
shares under stock plans of 431,250, 305,000 and 0 were not considered for the
diluted earnings per share calculation due to their antidilutive effect. As
such, the amounts reported for basic and diluted earnings per share are the
same.
F-11
11. STOCK BASED COMPENSATION
a. Stock Options
The Company has a stock award and incentive program that permits the
issuance of up to 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:
1998 1997 1996
----------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE WEIGHTED-
EXERCISE EXERCISE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS EXERCISE PRICE
------------- -------------- ----------- -------------- ---------- ---------------
Outstanding at beginning
of the year ............... 1,660,650 $ 5.42 658,800 $ 10.51 543,600 $ 8.26
Granted ....................... 500,000 1.13 1,300,500 3.73 216,350 18.15
Exercised ..................... -- -- -- -- (76,100) 7.89
Cancelled ..................... (420,500) 6.04 (298,650) 9.26 (25,050) 12.80
---------- ----------- ---------- ----------- ------------ ------------
Outstanding at end of year .... 1,740,150 4.04 1,660,650 5.42 658,800 11.38
========== ========== ============
Exercisable at end of year .... 484,160 234,800 268,100
========== ========== ============
Available for grant at year end 259,850 339,350 1,341,200
========== ========== ============
The options outstanding at December 31, 1998 range in price as follows:
# OF
OPTIONS EXERCISE PRICE
--------- --------------
475,000 $ .9375 - 2.8750
1,005,300 $ 2.8750 - 4.4375
29,200 $ 8.3125 - 9.9375
230,650 $ 9.9375 - 18.0625
----------
1,740,150
==========
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, 1998, 1997 and 1996
would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
---- ---- ----
Net (loss)
As reported ........................... $ (4,064) $(3,209) $ (8,288)
========== ======= =========
Pro forma ............................ $ (4,777) $(3,834) $ (8,414)
========== ======= =========
Basic and diluted net (loss) per share:
As reported ........................ $ (0.29) $ (0.23) $ (0.59)
========== ======= =========
Pro forma ............................. $ (0.34) $ (0.27) $ (0.60)
========== ======= =========
F-12
The weighted average Black - Scholes value of the options granted during
1998, 1997 and 1996 were $0.83, $2.37, and $10.49, respectively. The following
weighted-average assumptions were used in the Black - Scholes option-pricing
model for grants in 1998, 1997 and 1996 respectively: dividend yield of 0% for
all periods, volatility of 71%, 55%, and 47%, risk-free interest rate of 4.82%,
6.51%, and 6.90% and an expected life of 7 years.
b. Restricted Stock
In 1996, the Company adopted a plan to issue up to 1,000,000 shares of
restricted stock to employees of the Company. During 1997, 305,000 shares were
granted to employees of the Company at no cost to the employees. Of the total
number of restricted shares granted, 5,000 shares vested and were issued upon
the date of grant at the fair market value of $2.94 per share. The remaining
300,000 restricted shares were granted at a per share price of $2.94 and vest
as follows: 60,000 shares on March 31, 1999 and 240,000 shares on March 31,
2000. Compensation cost recorded in 1998 and 1997 was $328 and $233,
respectively, which represents the amortization of the value of the restricted
stock award at the date of grant over the vesting period.
c. Warrants
On January 14, 1997, the Company issued warrants to purchase 75,000
shares of Common Stock at $5.00 per share to the principal of a company to
rescind an acquisition transaction. The warrants are immediately exercisable and
will expire July 23, 2004.
d. Stock Bonus
The Company issued 94,600 shares of common stock to certain key employees
during the quarter ended June 30, 1998 as payment for 1997 bonuses, which were
accrued and recorded as compensation expense of $236 in the year ended December
31, 1997.
e. Stock Appreciation Rights
In 1997, the Company awarded stock appreciation rights to two Executive
Officers. These officers will be paid an amount equal to the appreciation over 5
years of 100,000 shares of stock. No compensation expense was recorded for these
stock appreciation rights in 1998 or 1997.
12. RESTRUCTURING CHARGES
In the fourth quarter of 1998, the Company recorded a pre-tax charge of
$1.2 million and a charge to cost of goods sold of $0.7 million for the
write-down of inventory in connection with the sale of its West Hempstead
facility that occurred on February 2, 1999. The $1.2 million charge included a
loss on the sale of property, plant and equipment, employee severance payments
and other incremental charges directly attributable to the sale of the
manufacturing facility. At December 31, 1998, assets held for sale included
three facilities, two of which were sold subsequent to December 31, 1998.
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of the Mickey & Co. licensed character product line under a
license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5
million for the write down of merchandise inventories. The $1.7 million
restructuring charge included: payments due under agreements with the licensor;
write-downs of property, plant and equipment; costs related to lease
terminations; employee severance payments; and other incremental charges which
were primarily attributable to discontinuing the licensed character product
lines.
13. BUSINESS CONCENTRATIONS
Substantially all of the Company's sales are made to customers in the
United States. Sales to one chain store retailer accounted for approximately
13%, 15% and 19% of the Company's sales in 1998, 1997 and 1996, respectively
and accounts receivable from this customer was $2,763 at December 31, 1998.
Sales to one wholesale club increased to 15% in 1998 from 8% in 1997 and
accounts receivable from this customer was $8,653 at December 31, 1998. No
other customers accounted for more than eight percent of the Company's sales in
1998, 1997 and 1996. The Company estimates an allowance for doubtful accounts
based on the creditworthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could affect the
Company's estimate of its bad debts.
F-13
14. SHAREHOLDERS RIGHTS PLAN
On April 2, 1998, the Company's board of directors authorized a stockholder
rights plan. Under the terms of the plan, stockholders of record at the close of
business on April 13, 1998, received a dividend distribution of one preferred
stock purchase right for each outstanding share of the Company's common stock
held. The rights will become exercisable only in the event, with certain
exceptions, an acquiring party accumulates fifteen percent or more of the
Company's voting stock, or if a party announces an offer to acquire fifteen
percent or more. The rights will expire on April 1, 2008.
Each right will entitle stockholders to buy one one-hundredth of a share of
a new series of preferred stock at an exercisable price of $14.00. In addition,
upon the occurrence of certain events, holders of the rights will be entitled to
purchase either the Company's stock or shares in an "acquiring entity" at half
of market-value. Further, at any time after a person or group acquires fifteen
percent or more (but less than fifty percent) of the Company's outstanding
voting stock, the Board of Directors may, at its option, exchange part or all of
the rights (other than rights held by the acquiring person or group, which will
become void) for shares of the Company's common stock on a one-for-one basis.
The Company will be entitled to redeem the rights at $0.01 per right at any time
until the tenth day following the acquisition of a fifteen percent position in
its voting stock.
15. SUBSEQUENT EVENT
On March 29, 1999, the Company entered into a Second Waiver and Amendment
Agreement to the Amended Credit Facility effective as of February 28, 1999 to
support the Company's 1999 business plan. Additionally, the Second Waiver and
Amendment waived any existing default for the year ended December 31, 1998 with
respect to the Company's non-compliance of the covenants related to Net Tangible
Worth and the Cumulative Net Loss tests. Pursuant to this amendment, the
interest rate on borrowings was increased to 2 1/2% above the prime rate and
shall be further increased by 1/8 of 1% on each of July 1, 1999, August 1, 1999
and September 1, 1999; and the applicable percentage shall be increased by 1/4
of 1% on the first day of each month thereafter, commencing October 1, 1999. A
fee of $150,000 is payable on June 30, 1999.
F-14
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, 1998, DECEMBER 31, 1997, AND DECEMBER 31, 1996
BALANCE
BALANCE AT CHARGED TO AT END
BEGINNING COSTS AND OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ------------ -----------
Year ended December 31, 1998:
Reserve for bad debts ... $ 511,000 45,000 (46,000) $ 602,000
Reserve for discounts ... 209,000 1,190,000 1,381,000 18,000
----------- -----------
$ 720,000 $ 620,000
=========== ===========
Year ended December 31, 1997:
Reserve for bad debts ... $ 968,000 (175,000) 282,000 $ 511,000
Reserve for discounts ... 1,272,000 3,872,000 4,935,000 209,000
----------- -----------
$ 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
=========== ===========