Back to GetFilings.com
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, 2002
-----------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21940
DONNKENNY, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0228891
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1411 Broadway
New York, New York 10018
- --------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 790-3900
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes|x| No|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes|_| No|X|
Based upon the closing sale price on the Over-the-Counter Market on June 28,
2002, the last business day of the registrants's most recently completed second
fiscal quarter, the aggregate market value of the registrant's Common Stock, par
Value $.01 per share, held by non-affliates of the registrant on such date was
approximately $2,948,431.
The aggregate market value of the shares of Common Stock held by non-affiliates
of the Registrant, based on a closing sale price of the Common Stock on the
Over-the-Counter Market on March 14, 2003 of $1.00 per share, was approximately
$2,862,554*. As of March 24, 2003, 4,367,417, shares of Common Stock of
Registrant were outstanding.
- --------------------
* For purposes of this report, the number of shares held by non-affiliates was
determined by aggregating the number of shares held by Officers and Directors
of Registrant, and by others who, to Registrant's knowledge, own more than
10% of Registrant's Common Stock, and subtracting those shares from the total
number of shares outstanding.
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. Donnkenny Apparel, Inc. ("Donnkenny Apparel") and Beldoch
Industries Corporation ("Beldoch") are the operating subsidiaries of the
Company.
Products
The Company designs, imports, and markets broad lines of moderately priced
women's sportswear. The Company's major labels include Pierre Cardin (R),
Donnkenny (R), Casey & Max (R), Victoria Jones (R) and Harve Benard (R). In 2002
the Company's products were marketed through the following divisions: Pierre
Cardin, Ann Travis, Donnkenny, Casey & Max and Victoria Jones.
Pierre Cardin
The division produces women's knitwear pursuant to a license with Pierre
Cardin. It also produces knitwear and sweaters under a license agreement with
Harve Benard. The products are sold to knitwear and sweater departments of
department and specialty stores. Its major customers include Federated,
Chadwick's Catalog, Stein Mart, Sam's Club, Marshalls and Newton Buying. In
addition, it sells exclusive private label products to such customers as Lerner
Direct and the Bon Ton. Approximately 93% of these products are imported,
predominately from China, Bangladesh, Thailand, Cambodia and the Philippines.
During the third quarter of 2000, the Company launched a new moderately priced
sportswear line called Pierre Cardin Options under the Pierre Cardin license. In
2001, based on Management's evaluation of the performance of the Pierre Cardin
Options line, the Company decided to consolidate the line under the Pierre
Cardin division.
Ann Travis
On July 1, 2000, the Company acquired certain assets of Ann Travis Inc. The
Company produced women's sportswear under the licensed Delta Burke trademark
which was terminated by the Company in October 2002. Customers include
Chadwick's Catalog, Mervyn's, J.C. Penney, Catherines, Stage Stores and Goody's.
Approximately 44% of Ann Travis products are sourced in the Far East, 44% are
sourced in Central America, and the balance are manufactured domestically.
Donnkenny
Donnkenny sources moderately priced women's career and casual pants and
tops for missy, petites and large sizes. Its major customers include J.C.
Penney, Kmart, Dunlap, Fred Meyer and Stage Stores. Donnkenny has been an
established brand name for over 60 years. In addition, it sells exclusive
private label products. Approximately 74% of its products are sourced in Central
America. Approximately 26% are sourced in the Far East.
Casey & Max
Casey & Max sources novelty woven tops and sportswear under the Casey & Max
and Victoria Jones labels. The line consists of moderately priced products sold
to department stores, specialty stores and chains including Mervyns,
Catherine's, Kohl's, Goody's, Peebles, Fred Meyer, Bealls, Foleys, Stein Mart
and May Company. The products are marketed for missy, large sizes and petites.
In addition, it sells exclusive private label products. Approximately 98% of
these products are imported, predominately from India and China.
Victoria Jones
Victoria Jones sources moderately-priced women's knit and sweater products
which are sold to department stores, specialty stores and chains including May
Company, Mervyn's, Catherine's, Kmart, Federated, Macys West, J.C. Penney,
Sears, Dillard's, Elder-Beerman and Sam's Club. Its products are marketed for
missy, large sizes and petites. In addition, it sells exclusive private label
products. All of these products are imported, predominately from China, Vietnam,
Bangladesh and Lesotho.
2
Manufacturing and Importing
Approximately 2% of the Company's products sold in the year ended December
31, 2002 ("Fiscal 2002") were manufactured in the United States, as compared
with 10% in the year ended December 31, 2001 ("Fiscal 2001).
The remaining 98% of the Company's products sold in Fiscal 2002 were
produced abroad and imported into the United States, principally from China,
Guatemala, India, Vietnam, Cambodia, Korea, Thailand, Bangladesh and the
Philippines.
The Company's purchases from its foreign suppliers are effected through
individual purchase orders specifying the price and quantity of the items to be
produced. Generally, the Company does not have long-term, formal arrangements
with the suppliers which manufacture its products. The Company continually seeks
additional suppliers throughout the world for its sourcing needs. Two foreign
contractors, one in India and one in China, accounted for 23% of the Company's
purchases, but no other domestic or foreign contractor manufactured more than 9%
of the Company's purchases in Fiscal 2002.
Virtually all of the Company's merchandise imported into the United States
is subject to United States duties. In addition, bilateral agreements between
the major exporting countries and the United States impose quotas that limit the
amount of certain categories of merchandise that may be imported into the United
States. Because the United States may, from time to time, impose new quotas,
duties, tariffs or other import controls or restrictions, the Company monitors
import and quota-related developments.
Attendant with the Company's increased reliance on foreign manufacturing is
a risk of excess inventory. The Company must commit to its foreign manufacturers
and suppliers four to six months in advance of its selling season, usually
before the Company has received the majority of its orders from its customers.
Thus, there exists the risk that the purchase orders by the Company's customers
will be less than the amount manufactured. The Company believes that this risk
is outweighed by the cost savings to the Company by manufacturing such products
abroad. Conversely, in the event there exists excess demand for the Company's
products, the lengthy production time for imported goods makes it difficult for
the Company to purchase additional goods for the same selling season. The
Company's relationships with foreign suppliers also are subject to the risks of
doing business abroad, including currency fluctuations, restrictions on the
transfer of funds and, in certain parts of the world, political instability. In
order to mitigate this risk, all of the Company's foreign purchasing is done in
U.S. dollars. The Company's operations have not been materially affected by any
of such factors to date. However, due to the large portion of the Company's
products which is produced abroad, any substantial disruption of its
relationships with its foreign suppliers could have a material adverse effect on
the Company's operations and financial condition.
Customers
In Fiscal 2002, the Company shipped orders to approximately 9,600 stores in
the United States. This customer base represents approximately 700 accounts. Of
the Company's net sales for Fiscal 2002, department stores accounted for
approximately 47%, wholesale clubs approximately 30%, catalog customers
approximately 8%, mass merchants approximately 2%, chain stores approximately
2%, specialty retailers approximately 4% and other customers approximately 7%.
The Company markets its products to department stores, including J. C.
Penney, May Company, Federated, Stein Mart, Kohl's, Goody's, Stage Stores, Saks,
Inc. and Sears, as well as wholesale clubs including Sam's, catalog customers
including Chadwick's of Boston and mass merchants including K-Mart. The Company
also sells exclusive private label products to catalog specialty retailers and
suppliers.
In Fiscal 2002, sales to Sam's Club accounted for 27% of the Company's net
sales, sales to J.C. Penney accounted for 18% and sales to Chadwick's of Boston
accounted for 8%. 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 51 of its large customers and, in Fiscal 2002, was
used to place 59% of the Company's order dollars. The Company is also linked by
3
EDI to several of its major fabric suppliers, which allows the Company to review
purchase orders for fabric on a weekly basis.
Sales and Marketing
At March 14, 2003, the Company had a 6 person sales force; 4 of them were
Company employees and 2 were independent commissioned sales representatives. The
Company's principal showrooms are in New York City.
Raw Materials Suppliers
The Company's sources of fabric and trim supply are well established. In
2002, 81% of all goods produced were manufactured using raw materials sourced
from overseas. The balance of raw materials is sourced domestically. The Company
typically experiences little difficulty in obtaining raw materials and believes
that the current and potential sources of fabric and trim supply are sufficient
to meet its needs for the foreseeable future.
Trademarks and Proprietary Rights
The Company owns and has registered in the United States, and in certain
foreign jurisdictions, the following trademarks under which a variety of the
Company's products are sold: Donnkenny (R), Casey & Max (R), Victoria Jones (R),
Ann Travis(R) and Beldoch Popper (R). Upon compliance with the trademark
statutes of the United States and the relevant foreign jurisdictions, these
trademark registrations may be renewed.
The Company holds licensing rights to manufacture, import and sell women's
sportswear in the United States and the U.S. Virgin Islands under the Pierre
Cardin(R) trademark, including sweaters, pants, skirts, knitwear, jeans,
swimwear and activewear. The license is automatically continued from year to
year at the Company's option provided net sales equal specified minimums. The
Company's sales during Fiscal 2002 surpassed the minimum requirements of this
license, and the Company intends to continue this license. On January 1, 2001
the Company signed a three-year agreement with Harve Benard to produce and sell
a knitwear line. The Company began shipments in the fourth quarter of 2001. The
agreement is renewable for an additional three-year term provided net sales
equal specified minimums. With the acquisition of the Ann Travis assets in July
2000, the Company was granted the licensing rights to manufacture, import and
sell women's sportswear, knits and sweaters in the United States under the Delta
Burke(R) trademark. In October 2002, the Company terminated the Delta Burke
license.
Backlog
At March 14, 2003, the Company had unfilled, confirmed customer orders of
approximately $24.8 million, compared to approximately $28.8 million of such
orders at March 15, 2002, with such orders generally scheduled for delivery
within three to six months of confirmation, although some extend until the end
of the fiscal year. The amount of unfilled orders at a particular time is
affected by a number of factors, including the scheduling of the production and
shipment of garments, which in some instances may be delayed or accelerated at
the customer's request. Generally, a comparison of unfilled orders from period
to period is not necessarily meaningful and may not be indicative of eventual
actual shipments. Some decline in orders is attributed to the fact that the
retailers are ordering closer to need and due to current business conditions.
There can be no assurance that cancellations, rejections and returns will not
reduce the amount of sales realized from the backlog of orders.
Competition
The women's apparel business is highly competitive and consists of many
manufacturers and distributors, none of which account 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 March 14, 2003 the Company had 177 full-time employees, of whom 102
were salaried and 75 were paid on an hourly basis. The Company had 3 part-time
employees, of whom all worked 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
----------
The following table indicates the facilities owned or leased at December 31,
2002. The Company owns three facilities in Virginia, and leases three additional
facilities: one in Summerville, South Carolina, one in New York State and one in
Hong Kong.
Approximate Owned or
Location Square Footage Function Leased
Summerville, South Carolina(1)... 200,000 Distribution center Leased
New York, New York(2)......... 43,034 Offices and principal showrooms Leased
Wytheville, Virginia............. 161,800 Distribution, administration Owned
Hong Kong (Comet Building) (3) 2,200 Administration, sourcing, quality control Leased
Floyd, Virginia.................. 79,600 Currently for sale Owned
Independence (Grayson), Virginia 70,350 Currently for sale Owned
------
TOTAL......................... 556,984
- --------------------
1) This facility is leased, with annual rental payments totaling $488,146, and
is subject to a 3% annual rental escalation, until March 19, 2006, at which
time the lease expires.
2) Annual rental payments for the New York office/showroom space are
approximately $1,800,000 in the aggregate. The leases for the New York
office/showrooms expire in 2006 and 2008.
3) Lease expires in 2004.
Management believes that its current facilities are sufficient to meet its
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
-----------------
a. On April 27, 1998, Wanda King, a former employee of the Company, commenced
an action against the Company in the United States District Court for the
Western District of Virginia. In her complaint, the Plaintiff sought
damages in excess of $8.0 million claiming that she was constructively
discharged by the Company. The Company interposed an Answer to the amended
Complaint denying the material allegations asserted in the Complaint and
brought a motion for summary judgment to dismiss the case. On October 22,
2001, the Magistrate Judge, after considering the Motion for Summary
Judgment, recommended to the United States District Court that the case
against the Company be dismissed in its entirety. The Plaintiff objected to
the recommendation of the Magistrate Judge. By Order dated February 25,
2002, the United States District Judge granted the Company's motion for
summary judgment and the case was dismissed. The Plaintiff has appealed
this dismissal to the United States Court of Appeals for the Fourth
Circuit.
b. The Company is also a party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
5
these proceedings will not, in the aggregate, have a material adverse
effect on financial condition, results of operations, liquidity or business
of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
The Company's Common Stock is currently traded on the Over-the-Counter
Market under the symbol "DNKY." There is no established public trading market
for the Company's Stock.
The following table sets forth the quarterly high and low closing prices of
a share of Common Stock for the Company's two most recent fiscal years, plus the
interim period through March 14, 2003.
Period High Low
- ------ ---- ----
Fiscal 2001
First Quarter..................................... $0.59 0.38
Second Quarter.................................... 0.99 0.34
Third Quarter..................................... 1.10 0.66
Fourth Quarter.................................... 0.90 0.41
Fiscal 2002
First Quarter..................................... $1.35 0.84
Second Quarter.................................... 1.54 0.75
Third Quarter..................................... 1.25 0.60
Fourth Quarter.................................... 1.25 0.56
Fiscal 2003
Eleven Weeks Ended March 14, 2003................. $1.30 0.70
On March 14, 2003, the closing price for a share of Common Stock was $1.00
per share.
The number of holders of record for the Company's Common Stock as of March
24, 2003 was 35.
The Company currently anticipates that it will retain all its earnings for
use in the operation and expansion of its business and, therefore, does not
anticipate that it will pay any cash dividends in the foreseeable future. In
addition, the Company's credit agreement prohibits the Company from declaring or
paying dividends without the consent of the Company's lenders.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2002 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of Donnkenny, Inc. are authorized for issuance. All
information has been restated to effect the one-for-four reverse stock split
effective April 20, 2000 (see Note 17 to the Consolidated Financial Statements).
6
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans Total
------------------------ -------------------- ------------------------- -----
Plan Category
- ---------------------------
Equity Compensation Plans
Approved by Security Holders
- Stock Options (1) 367,427 $ 5.64 107,748 475,175
- Warrants (2) 18,750 $20.00 N/A 18,750
Equity Compensation Plans
not Approved by Security Holders N/A N/A N/A N/A
------------------------ -------------------- ------------------------- -----
Total 386,177 N/A 107,748 493,925
------------------------ -------------------- ------------------------- -----
(1). Stock Options
The Company has a stock award and incentive program that permits the
issuance of up to 500,000 options to employees on terms as determined by the
Board of Directors. In addition, the Company has an award program that permits
option grants to Directors up to a maximum of 75,000 shares.
Under the terms of the plan, options granted may be either non-qualified or
incentive stock options and the exercise price, determined by the Stock Option
committee, may not be less than the fair market value of the Company's Common
Stock on the date of the grant.
(2). Warrants
On January 14, 1997, the Company issued warrants to purchase 18,750 shares
of Common Stock at $20.00 per share to the principal of a company to rescind an
acquisition transaction. The warrants are immediately exercisable and will
expire July 23, 2004.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected consolidated financial data as of December 31, 2002 and 2001
and for each of the years in the three year period ended December 31, 2002 have
been derived from the Company's Consolidated Financial Statements included
elsewhere in this Form 10-K which have been audited by Deloitte & Touche LLP,
independent auditors, whose report thereon is also included herein. The selected
consolidated financial data as of December 31, 2000, 1999 and 1998 and for the
fiscal years ended December 31, 1999 and 1998 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.
7
Year Ended
------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
1998 1999 2000 2001 2002
------------------------------------------------------------------------------
(In thousands, except per share data)
Consolidated Statement of Operations
Data:
Net sales..................... $197,861 $173,749 $151,055 $152,180 $107,102
Cost of sales................ 157,069 138,816 124,073 117,497 80,345
------- ------- ------- ------- ------
Gross profit................. 40,792 34,933 26,982 34,683 26,757
Selling, general and
Administrative expenses..... 38,221 33,002 28,194 28,367 22,339
Amortization of goodwill and other
related acquisition costs (2)......... 1,321 1,390 1,437 1,489 -
Provision for settlement of litigation. - 5,875 599 - -
Write-down of assets held for sale - - - 300 150
Restructuring Charge 1,180 - 500 - -
----- ----- ----- ----- -----
Operating income (loss) 70 (5,334) (3,748) 4,527 4,268
Interest expense, net 4,778 4,007 5,097 4,703 2,039
----- ----- ----- ----- -----
Income (loss) before income taxes (4,708) (9,341) (8,845) (176) 2,229
Income tax expense (benefit) (644) 87 88 (220) 36
----- ----- ----- ----- -----
Income (loss) before cumulative effect
in change in accounting principle (4,064) (9,428) (8,933) 44 2,193
Cumulative effect in change in
accounting principle (2) - - - - 28,744
----- ----- ----- ----- -----
Net income (loss) $(4,064) $(9,428) $(8,933) $44 $(26,551)
======== ======== ======== === =========
Basic income (loss) per Common Share (1):
Income (loss) before accounting change $(1.15) $(2.65) $(2.26) $0.01 $0.50
Cumulative effect of accounting change (2) - - - - (6.58)
----- ----- ----- ----- -----
Net income (loss) $(1.15) $(2.65) $(2.26) $0.01 $(6.08)
======= ======= ======= ===== =======
Shares used in the calculation of
basic income (loss) per share...... 3,538 3,552 3,957 4,367 4,367
===== ===== ===== ===== =====
Diluted income (loss) per Common Share (1):
Income (loss) before accounting change $(1.15) $(2.65) $(2.26) $0.01 $0.50
Cumulative effect of accounting change (2) - - - - (6.58)
----- ----- ----- ----- -----
Net income (loss) $(1.15) $(2.65) $(2.26) $0.01 $(6.08)
======= ======= ======= ===== =======
Shares used in the calculation of
basic income (loss) per share...... 3,538 3,552 3,957 4,388 4,418
===== ===== ===== ===== =====
Consolidated Balance Sheet Data:
Working capital.................... $42,661 $48,302 $39,199 $34,891 $25,306
Total assets....................... 100,215 101,837 91,343 82,400 43,439
Long-term debt, including current portion 32,055 42,775 42,147 35,777 23,983
Stockholders' equity............... 49,258 41,881 33,653 33,697 7,146
- -------------------
(1) All per share amounts and the shares used in the calculation of basic and
diluted (loss) per share have been retroactively restated to reflect the one
for four reverse stock split effective April 20, 2000.
(2) As discussed in Notes 1 and 4 to the Consolidated Financial Statements, in
2002, the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement on Financial Accounting Standards
("SFAS") No. 142 and recorded a charge of $28.7 million.
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:
8
December 31,
-----------------------------------
Year Ended 2000 2001 2002
- ---------------------------------------------------------------------------------------------------------------------
Net sales.................................................................... 100.0% 100.0% 100.0%
Cost of sales................................................................ 82.1 77.2 75.0
---- ---- ----
Gross profit................................................................. 17.9 22.8 25.0
Selling, general and administrative expenses................................. 18.7 18.6 20.9
Amortization of goodwill and other related acquisition costs................. 1.0 1.0 -
Provision for settlement of litigation....................................... 0.4 - -
Write-down of assets held for sale........................................... - 0.2 0.1
Restructuring charge......................................................... 0.3 - -
---- ---- ----
Operating income/(loss)...................................................... (2.5) 3.0 4.0
Interest expense, net........................................................ 3.4 3.1 1.9
---- ---- ----
Income (loss) before income taxes............................................ (5.9) (0.1) 2.1
Income tax (benefit)......................................................... - (0.1) 0.1
---- ---- ----
Income (loss) before cumulative effect of change in accounting principle..... - - 2.0
Cumulative effect of change in accounting principle.......................... - - 26.8
---- ---- ----
Net income (loss)............................................................ (5.9%) 0.0% (24.8%)
===== ==== =====
Comparison of Fiscal 2002 with Fiscal 2001
Net Sales
Net Sales decreased by $45.1 million or 29.6% from $152.2 million in Fiscal
2001 to $107.1 million in Fiscal 2002. The decline in net sales was primarily
due to the elimination of certain product lines including the Decade dress line,
a significant cashmere program, career private labels, the de-emphasis and
consolidation of Pierre Cardin Options into Pierre Cardin and the continuing
slow retail environment, which caused a drop in the Company's core business.
Gross Profit
Gross profit for Fiscal 2002 was $26.8 million, or 25.0% of net sales,
compared to $34.7 million, or 22.8% of net sales, for Fiscal 2001. The increase
in gross profit as a percentage of net sales was primarily attributable to
decreases in the levels and sales of non-current inventory and the continued
effort to improve sourcing.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased to $22.3
million in Fiscal 2002 from $28.4 million in Fiscal 2001. The decrease in
selling, general and administrative expenses was primarily due to reductions in
headcount and reductions in distribution, sales, design and product-related
expenses.
Amortization of Goodwill and Other Related Acquisition Costs
As a result of the Company's adoption of SFAS No. 142 the Company ceased
the amortization of goodwill and other intangible assets with indefinite lives
in 2002 as compared to amortization of $1.5 million in 2001 (see Recent
Accounting Pronouncements and Note 4 to the Consolidated Financial Statements).
Write-down of Assets Held For Sale
In Fiscal 2002, the Company recorded a charge of $0.2 million related to
the write-down of assets held for sale as compared to $0.3 million in Fiscal
2001.
Operating Income
In Fiscal 2002, the Company had operating income of $4.3 million versus
$4.5 million for Fiscal 2001.
9
Interest Expense
In Fiscal 2002, interest expense was $2.0 million versus $4.7 million in
2001. The decrease was attributable to lower borrowings under the credit
agreement due to decreased inventory purchases and lower operating expenses and
a decrease in the Company's interest rate.
Provision For Income Taxes
The Company recorded a provision for state and local income taxes of $0.04
million in 2002 compared to an income tax benefit of $0.2 million in 2001. In
Fiscal 2001, the IRS and the Joint Committee on Taxation completed the audit of
the Company's amended prior year tax returns. As a result, the Company received
net refunds of approximately $0.2 million. No federal income tax provision was
recorded due to the Company's net operating loss carryforwards.
Net Income Before Cumulative Effect of Change in Accounting Principle
In Fiscal 2002 the Company reported net income before cumulative effect of
change in accounting principle of $2.2 million or $0.50 per share versus net
income of $44,000, or $0.01 per share in Fiscal 2001.
Cumulative Effect of Change in Accounting Principle
In the first quarter of 2002, the Company recorded an impairment charge
related to goodwill and intangible assets of $28.7 million as a change in
accounting principle upon the adoption of SFAS No. 142 (See Notes 1 and 4 to the
Consolidated Financial Statements).
As a result of adopting SFAS No. 142 on January 1, 2002, the Company ceased
the amortization of goodwill and determined that the value of its intangible
assets had been impaired. The impairment charge of $28.7 million was calculated
based upon a valuation of the Company's market capitalization on January 1,
2002, adjusted for an estimated premium that a willing buyer would assign the
market capitalization in the event of a sale of the Company. The premium was
based on an average of such premiums paid in similar transactions in the
industry. The impairment charge consists of $25.4 million related to goodwill
and $3.3 million related to intangible assets.
Net Income (Loss)
In Fiscal 2002 the Company reported a net loss of $26.6 million or $(6.08)
per share versus net income of $44,000, or $0.01 per share in Fiscal 2001.
Comparison of Fiscal 2001 with Fiscal 2000
Net Sales
Net Sales increased by $1.1 million or 0.7% from $151.1 million in Fiscal
2000 to $152.2 million in Fiscal 2001. The increase in net sales was due to
increases in the Donnkenny line of $6.8 million, the Pierre Cardin line of $11.9
million, the Pierre Cardin Options line of $5.3 million and the Ann Travis line
of $5.8 million. The increases were partially offset by declines in the Victoria
Jones line of $7.2 million and $21.5 million in the Casey & Max line.
Gross Profit
Gross profit for Fiscal 2001 was $34.7 million, or 22.8% of net sales,
compared to $27.0 million, or 17.9% of net sales, for Fiscal 2000. The increase
in gross profit dollars and as a percentage of net sales was attributable to the
Company's Pierre Cardin, Donnkenny Apparel and Victoria Jones lines, decreases
in the sales of non-current inventory due to lower non-current inventory levels
on hand, the favorable impact of the plant closures in Fiscal 2000 and improved
sourcing.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $28.4 million in
Fiscal 2001 from $28.2 million in Fiscal 2000. As a percentage of net sales,
these costs decreased from 18.7% in Fiscal 2000 to 18.6% in Fiscal 2001.
10
Write-down of Assets Held for Sale
In the fourth quarter of Fiscal 2001, the Company recorded a charge of $0.3
million related to the write-down of assets held for sale.
Restructuring Charge
In Fiscal 2000, the Company recorded a charge of $0.5 million related to
the closure of its domestic manufacturing facilities.
Operating Income
In Fiscal 2001, the Company reported operating income of $4.5 million
versus a loss of $3.7 million for Fiscal 2000.
Interest Expense
In Fiscal 2001, interest expense was $4.7 million versus $5.1 million in
2000. The decrease was attributable to lower borrowings under the Credit
Agreement and a decrease in the Company's interest rate.
Provision For Income Taxes
The Company recorded an income tax benefit of $0.2 million in Fiscal 2001.
In Fiscal 2001, the IRS and the Joint Committee on Taxation completed the audit
of the Company's amended prior year tax returns. As a result, the Company
received net refunds of approximately $0.2 million.
The Company recorded a provision for state and local income taxes of $0.1
million in Fiscal 2000.
Net Income (loss)
In Fiscal 2001 the Company reported net income of $44,000 or $0.01 per
share, versus a net loss of $8.9 million, or ($2.26) per share in Fiscal 2000.
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 $0.5 million for Fiscal 2002, primarily for
computer software and hardware, compared to $1.4 million in Fiscal 2001. In
Fiscal 2002, the Company was permitted to spend up to $2.0 million on capital
investments in accordance with the Credit Agreement described below.
At the end of Fiscal 2002, direct borrowings under the revolving credit
facility were $23.7 million and term loans amounted to $0.3 million.
Additionally, the Company had letters of credit outstanding of $11.8 million,
with an unused facility of $23.2 million. At the end of Fiscal 2001, direct
borrowings, term loans and letters of credit outstanding under the credit
facility were $34.4 million, $1.4 million and $9.0 million, respectively.
On June 29, 1999, the Company and its operating subsidiaries signed a
three-year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services. The Credit Agreement provides the Company with a $75 million facility
comprised of a $72 million revolver with sublimits up to $52 million for direct
borrowings, $35 million for letters of credit, certain overadvances and a $3
million term loan which was paid in full as of June 30, 2002.
The Credit Agreement provides for advances of (i) up to 90% of eligible
accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to
60% of the undrawn amount of all outstanding letters of credit plus (iv)
allowable overadvances. The Credit Agreement as amended expires on June 30,
2004.
Collateral for the Credit Agreement includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in its operating subsidiaries, Donnkenny Apparel, Inc. and
Beldoch Industries Corporation.
11
The Credit Agreement contains numerous financial and operational covenants,
including limitations on additional indebtedness, liens, dividends, stock
repurchases and capital expenditures. In addition, the Company is required to
maintain specified levels of tangible net worth and comply with a requirement
for minimum earnings before depreciation, amortization, interest and taxes
(EBITDA) and a minimum interest coverage ratio, all based upon the Company's
annual business plan approved by the lender.
During Fiscal 2000, the Company entered into various amendments and
agreements to waive the Company's noncompliance with financial covenants on
certain dates and to reset overadvanced amounts and covenants. These amendments
and agreements also increased the interest rate on borrowings.
On July 6, 2000, the Company entered into an Amendment to finance the
acquisition of the Ann Travis business (see Note 18 to the Consolidated
Financial Statements) by the issuance of an additional $1.3 million term loan.
The new term loan bears interest at the prime rate plus 2.0% and is repayable
over thirty-six months commencing January 1, 2001. A fee of $100,000 was paid
for the Amendment.
On March 28, 2001, the Company entered into an Amendment and Waiver
Agreement to extend the Final Maturity Date of the original agreement to June
30, 2004, to waive existing events of default under the Credit Agreement as of
December 31, 2000 with respect to the Company's non-compliance with covenants
related to minimum interest coverage, EBITDA and Tangible Net Worth, and to
amend certain other provisions of the Credit Agreement including covenants and
the level of allowable overadvances to support the Company's 2001 business plan.
Pursuant to this amendment, the interest rate on borrowings was increased to
2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid
in connection with the Amendment and Waiver.
Effective January 1, 2002, the Company established covenants and the level
of allowable overadvances with the lender to support its 2002 business plan.
This Amendment and Waiver Agreement also amended the interest rate on the
revolving credit borrowings to the prime rate plus one and three quarters
percent and provide for an additional interest rate reduction effective July 1,
2002 if certain objectives were achieved. No fee was paid in connection with the
Amendment and Waiver. The Company has achieved the objectives and received an
additional rate reduction effective July 1, 2002. The interest rate on the
revolving credit borrowings is now prime plus one and one-half percent (5.75% at
December 31, 2002).
On June 30, 2002, the Company made the final payment on the $3 million term
loan in accordance with the terms of the Credit Agreement.
Effective January 1, 2003, the Company established covenants and the level
of allowable overadvances with the lender, through an amendment to the Credit
Agreement dated March 27, 2003, to support its 2003 business plan. The Amendment
also amended the interest rate on the revolving credit borrowings to the prime
rate plus one and one-quarter percent. No fee was paid in connection with the
Amendment.
The Company also has a factoring agreement with CIT Group/Commercial
Services. The factoring agreement provides for a factoring commission equal to
..35% of gross sales, plus certain customary charges. The agreement is in effect
through December 31, 2004.
During Fiscal 2002, cash provided by operating activities was $12.2
million, principally as the result of decreases in inventory and accounts
receivable and increases in accounts payable offset by decreases in accrued
expenses and other current liabilities. During Fiscal 2001, cash provided by
operating activities was $7.7 million, principally as the result of decreases in
inventory and accounts receivable and increases in accrued expenses and other
current liabilities offset by decreases in accounts payable. During Fiscal 2000,
cash provided by operating activities was $2.9 million, principally as the
result of decreases in inventory and increases in accounts payable.
Cash used in investing activities in Fiscal 2002 included $0.5 million for
the purchase of fixed assets, principally computer equipment and related
software, offset by $0.1 million from the sale of property, plant and equipment.
Cash used in investing activities in Fiscal 2001 included $1.4 million for the
purchase of fixed assets, principally computer equipment and related software,
offset by $0.1 million from the sale of property, plant and equipment. Cash used
in investing activities in Fiscal 2000 included $1.5 million for the acquisition
of the Ann Travis business, and $1.1 million for the purchase of fixed assets,
offset by $0.2 million from the sale of fixed assets.
12
Cash used in financing activities in Fiscal 2002 was $11.8 million which
represents net repayments under the revolver of $10.7 million and repayments of
$1.1 million of the term loan. Cash used in financing activities in Fiscal 2001
was $6.4 million which represents net repayments under the revolver of $4.8
million, repayments of $1.4 million of the term loan, and repayments of $0.1
million of a secured term loan. Cash used in financing activities in Fiscal 2000
was $0.6 million which represents net repayments under the revolver of $0.8
million, repayments of $1.0 million of the term loan, and repayments of $0.2
million of a secured term loan offset by net borrowings of a new term loan of
$1.3 million to finance the Ann Travis acquisition
The Company believes that cash flows from operations and amounts available
under the revolving credit agreement will be sufficient for its needs for the
foreseeable future.
Contractual Commitments and Contingent Liabilities
The following table summarizes the Company's contractual commitments and
contingent liabilities at December 31, 2002:
Contractual Obligations
(In Thousands) Payments due Less than More than
by period 1 year 1-3 years 3-5 years 5 years
------------ --------- --------- --------- ---------
Total
Long Term debt (1) $ 23,983 $ 253 $ 23,730 - -
Operating Leases (2) $ 11,561 $ 2,652 $ 6,559 $ 2,350 -
Guaranteed Minimum Royalties (3) $ 802 $ 195 $ 427 $ 180 -
Letters of Credit (4) $ 11,800 $ 11,800 - - -
--------- --------- ------- ------ -----
Total $ 48,146 $ 14,900 $ 30,716 $ 2,530 -
(1)- See Note 6 to the Consolidated Financial Statements
(2)- See Note 8 to the Consolidated Financial Statements
(3)- The Company has guaranteed minimum royalties which represent those minimum
amounts due in connection with the Pierre Cardin and Harve Benard
Licenses. The minimum guarantee for the Harve Benard license is
contractual. The minimum guarantee for the Pierre Cardin license is
calculated each year. As of December 31, 2002, the Company has estimated
minimum guaranteed royalties of approximately $0.8 million, reflecting the
contractual amount for the Harve Benard Licenses and the minimum
calculated amounts pursuant to the Pierre Cardin license for fiscal 2003.
(4)- As of December 31, 2002, the Company was contingently liable for
outstanding letters of credit (See Note 6 to the Consolidated Financial
Statements).
Other Items Affecting the Company
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line wholesalers (such as the Company) and a
larger number of specialty manufacturers. The Company faces substantial
competition in its markets in both categories.
13
Apparel Industry Cycles and other Economic Factors
The apparel industry historically has been subject to substantial cyclical
variation, with consumer spending on apparel tending to decline during
recessionary periods. A continuing decline in the general economy or
uncertainties regarding future economic prospects may affect consumer spending
habits, which in turn, could have a material adverse effect on the Company's
results of operations and its financial condition.
Retail Environment
Various retailers, including some of the Company's customers, have
experienced declines in revenue and profits in recent periods and some have been
forced to file for bankruptcy protection. Retailers are now placing smaller
orders and ordering closer to need. To the extent that these current market
conditions continue, there can be no assurance that the Company's financial
condition and results of operations will not be adversely affected.
Seasonality of Business and Fashion Risk
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as one
year in advance and manufactured approximately one season in advance of the
related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability to successfully anticipate the needs
of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
Foreign Operations
The Company's foreign sourcing operations are subject to various risks of
doing business abroad, including indirect vulnerability to currency
fluctuations, quotas and, in certain parts of the world, political instability.
Any substantial disruption of its relationships with its foreign suppliers could
adversely affect the Company's operations. In order to partially mitigate this
risk, all of the Company's foreign purchasing is done in U.S. dollars through a
number of foreign suppliers. Virtually all of the Company's imported merchandise
is subject to United States Customs duties. In addition, bilateral agreements
between the major exporting countries and the United States impose quotas, which
limit the amount of certain categories of merchandise that may be imported into
the United States. Any material increase in duty levels, material decrease in
quota levels or material decrease in available quota allocation could adversely
affect the Company's operations. Approximately 81% of the products sold by the
Company in Fiscal 2002 were manufactured in Asia.
Factors that May Affect Future Results and Financial Condition
The Company's future operating results and financial condition are
dependent upon its ability to successfully design, import and market apparel.
Also impacting the Company and its operations are a variety of economic, social
and political factors, including the following:
- - Risks associated with war and terrorists activities, including reduced
shopping activity as a result of public safety concerns and disruption in
the receipt and delivery of merchandise;
- - Changes in national and global microeconomic conditions in the markets
where the Company sells or sources its products, including the levels of
consumer confidence and discretionary spending, consumer income growth,
personal debt levels, rising energy costs and energy shortages;
- - Risks of increased sourcing costs;
- - Any significant disruption in the Company's relationships with its
suppliers, manufacturers and employees.
Reverse Stock Split
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to its shareholders a one-for-four reverse stock split as part of
an effort to maintain continued listing of the Company's common stock on the
NASDAQ Market.
The reverse stock split recommendation was approved by the Company's
shareholders at a special meeting held on April 18, 2000. The reverse split
became effective on April 20, 2000. As a result of the split, each four shares
of common stock applicable to shareholders on the effective date of the split
were converted into one share of stock.
Prior to the split, the Company had 14,229,540 shares outstanding. As a
result of the split, the Company had 3,557,385 shares outstanding. Earnings
(loss) per share and share amounts have been restated to reflect the reverse
split for all periods presented.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
14
No. 17, "Intangible Assets". It changed the accounting for goodwill from an
amortization method to an impairment only approach. SFAS 142 is effective for
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. The
Company ceased the amortization of goodwill and intangible assets with
indefinite lives on January 1, 2002 as required by SFAS No. 142 and recorded an
impairment charge of $28.7 million related to goodwill and intangible assets as
a change in accounting principle upon the adoption of this statement (See Note 4
to the Consolidated Financial Statements). Amortization expense was $1.5 million
during Fiscal 2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Adoption of SFAS No. 143 on January 1, 2002 did not have an impact on the
Company's Consolidated Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Adoption of SFAS No. 144 on January
1, 2002 did not have an impact on the Company's Consolidated Financial
Statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that
require companies to classify certain gains and losses from debt extinguishments
as extraordinary items, eliminates the provisions of SFAS No. 44 regarding the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The adoption of SFAS No. 145 is not expected to have a material
impact, if any, on the Company's Consolidated Financial Statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This Statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company will adopt
SFAS 146 on January 1, 2003 and does not expect this Statement to have a
material impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure amendments to Statement 123 contained in SFAS No. 148 are effective
for financial statements for fiscal years ending after December 15, 2002 (see
Note 11 to the Consolidated Financial Statements).
15
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described in
Note 1 to the Consolidated Financial Statements. Certain of the Company's
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on historical experience, observation of
trends in the industry, information provided by customers and information
available from other outside sources, as appropriate. Critical accounting
policies include:
Revenue Recognition - The Company recognizes sales upon shipment of
products to customers as title and risk of loss passes upon shipment. Provisions
for estimated uncollectible accounts, discounts and returns and allowances are
provided when sales are recorded based upon historical experience and current
trends. While such amounts have been within expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same rates as in the past.
Accounts Receivable - Accounts Receivable as shown on the Consolidated
Balance Sheets, is net of allowances and anticipated discounts. An allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessments of
collectibility based on historic trends and an evaluation of the impact of
economic conditions. This amount is not significant since the Company has a
factoring agreement. An allowance for discounts is based on those discounts
relating to open invoices where trade discounts have been extended to customers.
Costs associated with potential returns of products as well as allowable
customer markdowns and operational charge backs, net of expected recoveries, are
included as a reduction to net sales and are part of the provision for
allowances included in Accounts Receivable. These provisions result from
seasonal negotiations as well as historic deduction trends net expected
recoveries and the evaluation of current market conditions. The Company's
historical estimates of these costs have not differed materially from actual
results.
Inventories - Inventory is stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Reserves for slow moving and
aged merchandise are provided based on historical experience and current product
demand. Inventory reserves for slow moving and aged merchandise were $1.3
million and $1.1 million at December 31, 2002 and 2001, respectively. Inventory
reserves increased due to the current business climate. The Company evaluates
the adequacy of the reserves quarterly. While markdowns have been within
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same level of markdowns as in the past.
Valuation of Long-Lived Assets - The Company periodically reviews the
carrying value of its long-lived assets for continued appropriateness. This
review is based upon projections of anticipated future undiscounted cash flows.
While the Company believes that its estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially
affect evaluations.
Income Taxes - The Company provides for income taxes only to the extent
that it expects to pay taxes (primarily state and local taxes). The Company's
cumulative net operating loss (NOL) carryforward of $18.3 million for federal
income taxes and $29.4 million for state income taxes, have resulted in
estimated tax benefits of $7.6 million as of December 31, 2002 being recorded as
a deferred tax asset. The Company has recorded a valuation allowance against the
entire net deferred tax asset balance due to the size of the NOL carryforward
and the Company's history of unprofitable operations. However, should the
Company conclude that future profitability is reasonably assured, the value of
the deferred tax asset would be increased by eliminating some or all of the
valuation allowance. Subsequent revisions to the estimated value of the deferred
tax asset could cause the Company's provision for income taxes to vary from
period to period; payments would remain unaffected until the benefit of the NOL
is utilized.
Forward Looking Statements
This Form 10-K (including but not limited to the sections hereof entitled
"Business" and "Management's Discussion and Analysis") contains or incorporates
by reference forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that assumed facts or bases
almost always vary from the actual results, and the differences between assumed
16
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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Interest Rate Risk - The Company is subject to market risk from exposure to
changes in interest rates based primarily on its financing activities. The
market risk inherent in the financial instruments represents the potential loss
in earnings or cash flows arising from adverse changes in interest rates. These
debt obligations with interest rates tied to the prime rate are described in
"Liquidity and Capital Resources", as well as Note 6 to the Consolidated
Financial Statements. The Company manages these exposures through regular
operating and financing activities. The Company has not entered into any
derivative financial instruments for hedging or other purposes. The following
quantitative disclosures are based on the prevailing prime rate. These
quantitative disclosures do not represent the maximum possible loss or any
expected loss that may occur, since actual results may differ from these
estimates.
At December 31, 2002 and 2001, the carrying amounts of the Company's
revolving credit borrowings and term loans approximated fair value. Effective
July 1, 2002, the Company's revolving credit borrowings under its Credit
Agreement bear interest at the prime rate plus one and one-half percent (5.75%
at December 31, 2002). The Company's acquisition term loan bears interest at the
prime rate plus two percent (6.25% at December 31, 2002). As of December 31,
2002, a hypothetical immediate 10% adverse change in prime interest rates (from
4.25% to 4.68%) relating to the Company's revolving credit borrowings and term
loan would have a $0.1 million unfavorable impact on the Company's earnings and
cash flows over a one-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Financial Statements following Item 15 of this Annual Report of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
Daniel H. Levy, a director of the Company since 1997, became Chairman of
the Board and Chief Executive Officer of the Company on January 1, 2000. Prior
thereto, he had been a principal of and consultant to LBK Consulting Inc., a
retail consulting business, since January 1997 and during the period of 1994 to
April 1996. From April 1996 through January 1997, he served as Chairman of the
Board and Chief Executive Officer of Best Products, Inc., a retail sales company
which filed for bankruptcy in September 1996. From 1993 through 1994, Mr. Levy
served as Chairman of the Board and Chief Executive Officer of Conran's, a
retail home furnishings company. From 1991 to 1993, he was Vice Chairman and
Chief Operating Officer of Montgomery Ward, a retail sales company. Mr. Levy is
a director of Whitehall Jewellers, Inc. Mr. Levy is 59 years old.
Lynn Siemers, a director of the Company since 1997, became President and
Chief Operating Officer of the Company on April 14, 1997. Prior thereto, for
more than five years, she was President of the Oak Hill Division of the Company.
Ms. Siemers is 44 years old.
17
Maureen d. Schimmenti, has been Vice President and Chief Financial Officer
of the Company since June 2001. She joined the Company in May 2000 as its
Corporate Controller. Prior thereto, she was the Executive Vice President and
Corporate Controller of the Anne Klein Company from 1986 to 2000. Ms. Schimmenti
also serves as Secretary of the Company. Ms. Schimmenti is 51 years old.
Sheridan C. Biggs, a director of the Company since 1997, is
Executive-in-Residence at the Graduate Management Institute at Union College.
Prior to that, he was a senior partner of Price Waterhouse, the accounting and
consulting firm; he was with that firm for thirty-one years until his retirement
in 1994. During his career at Price Waterhouse, Mr. Biggs served as a Vice
Chairman and member of the firm's management committee. Mr. Biggs is 68 years
old.
Harvey Horowitz, a director of the Company since 1994, served as Vice
President, and General Counsel of the Company from October 1, 1996 to February
28, 1998. Mr. Horowitz is of counsel to the law firm of Mintz & Gold LLP, which
provides legal services to the Company. For more than five years, prior to
October 1, 1996, he was a partner of the law firm Squadron, Ellenoff, Plesent &
Sheinfeld, LLP. Mr. Horowitz is 60 years old.
Robert A. Kasenter, a director of the Company since 2001, is the President
and Chief Executive Officer of Strategic Executive Actions, a consulting firm
specializing in human resources crisis management issues. Prior to that, he was
the Executive Vice President, Human Resources & Corporate Communication for
Montgomery Ward. He was employed by Montgomery Ward from June, 1968 until May,
1999 in various field and corporate positions. Mr. Kasenter is 56 years old.
Harry A. Katz, a director of the Company since 2000, served as its
Executive Vice President and Chief Administrative Officer from June 2001 until
September 2002. Since September 2002, Mr. Katz has served as a consultant to the
Company. He is also Managing Partner of Retail Resources, L.P., a national
distributor of supplies for retail chain stores. Prior thereto, he was Vice
President and acting Chief Financial Officer of Best Products. Mr. Katz is 52
years old.
Richard C. Rusthoven, a director of the Company since 2000, is a retired
retail Executive with a 35-year career in the retail and apparel business. He
was President and Chief Operating Officer of Stix, Baer and Fuller, a retail
department store in St. Louis, Missouri. He was also Chairman and Chief
Executive Officer of the Outlet Department Store and Denby Apparel chain store
of Providence, Rhode Island. He was President and Chief Executive Officer of
TG&Y stores, a discount chain store in Oklahoma City, Oklahoma. He was President
of Gentlemen's Warehouse, a men's specialty chain in New Bedford, Massachusetts
and most recently was Executive Vice President of Apparel for Montgomery Ward &
Company, Inc., a former retail chain based in Chicago, Illinois. Mr. Rusthoven
is 62 years old.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. Officers,
directors and greater than ten percent shareholders are required to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during the fiscal year ended December 31, 2002,
all Section 16(a) reporting requirements applicable to the Company's officers,
directors and greater than ten percent shareholders were in compliance.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth compensation paid in the fiscal years ended
December 31, 2002, December 31, 2001, and December 31, 2000 to those persons who
were, at December 31, 2002 (i) the chief executive officer and (ii) the other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers"). The information in the following tables with
respect to the number of shares of Common Stock underlying options, option
exercise prices and the number of shares of Common Stock acquired upon the
exercise of options has been retroactively restated to reflect the one-for-four
reverse stock split effective April 20, 2000.
18
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
------------------- --------------------------------- ------------------
Securities
Underlying All Other
Fiscal Restricted Options/SARs Compensation
Name and Principal Position Year Salary Bonus Stock Awards (5) (1)
- ---------------------------------------------------------------------------------------------------------------------------
Daniel H. Levy (2) 2002 $895,054 $350,000 $7,449
Chairman of the Board and 2001 $715,928 $200,000 $2,580
Chief Executive Officer 2000 $429,902 $ 25,000 37,500 $2,580
Lynn Siemers 2002 $632,532 $200,000 $4,325
President and Chief Operating 2001 $517,487 $ 50,000 $ 600
Officer 2000 $502,652 $ 600
Harry A. Katz (3) (4) 2002 $324,352 $234,156 $4,189
Executive Vice President and 2001 $185,389 $ 739
Chief Administrative Officer
Maureen d. Schimmenti (3) 2002 $243,210 $ 43,702 $1,192
Vice President and Chief 2001 $204,039 $ 10,000 $1,104
Financial Officer
(1) Represents insurance premiums paid by, or on behalf of, the Company during
the covered fiscal year with respect to term life insurance for the benefit
of the Named Executive Officer.
(2) This individual became an Executive Officer of the Company in 2000. The
Company paid Mr. Levy a relocation bonus of $25,000 in 2000 with a gross-up
for the tax effect of this bonus.
(3) This individual became an Executive Officer in June 2001.
(4) Compensation in 2001 represents prorated compensation from date of hire in
June 2001. Compensation for 2002 represents salary through September 6,
2002, the last day of Mr. Katz served as an employee of the Company.
(5) All options have been retroactively restated to reflect the one-for-four
reverse stock split effective April 20, 2000.
Employment Agreements
Daniel H. Levy
As of January 1, 2000, Mr. Levy entered into an employment agreement with
the Company to serve as its Chairman of the Board and Chief Executive Officer.
Mr. Levy's employment agreement provided for a base annual salary of
$500,000, as well as a discretionary performance bonus based on the achievement
of goals to be set by the Compensation Committee of the Company's Board of
Directors, and certain insurance benefits which are grossed up for tax impact.
The Company paid Mr. Levy a relocation bonus of $25,000, with a gross-up for the
tax effect of this bonus.
In connection with the execution of the employment agreement, the
Compensation Committee granted Mr. Levy 37,500 restricted shares of the
Company's stock, which would vest on December 31, 2002. The employment agreement
further provided for the issuance of another 37,500 restricted shares of the
Company's stock if Mr. Levy was employed by the Company on June 30, 2002, which
shares would also vest on December 31, 2002. Mr. Levy also was granted options
19
to purchase 37,500 shares of the Company's Common Stock, at a purchase price of
$2.75 a share. 25,000 of these stock options vested on June 30, 2000 and the
balance of 12,500 vested on December 31, 2000. The employment agreement provided
that the restricted shares and the options granted would have accelerated
vesting in the event of a change in control of the Company.
The agreement provided that in the event Mr. Levy's employment was
terminated (except in certain limited circumstances) following a change in
control of the Company, Mr. Levy would have the right to receive severance
benefits equal to three times the sum of his then annual salary inclusive of any
performance bonus. On February 26, 2001 Mr. Levy's employment agreement was
amended to eliminate the restricted stock award referred to in his original
agreement, and increased his annual base salary to $700,000 effective January 1,
2001.
As of January 1, 2002, Mr. Levy entered into a new employment agreement
with the Company to serve as its Chairman of the Board and Chief Executive
Officer. The term of the employment agreement is for an ongoing and continuous
term of three years, with an automatic extension and renewal each day subsequent
to January 1, 2002, so that at all times after January 1, 2002, the remaining
term shall be three years.
Mr. Levy's employment agreement provides for a base annual salary of
$850,000, a performance bonus based on participation in the bonus plan in effect
for all other senior executives of the Company and certain insurance and other
benefits which are grossed up for tax impact. In addition, commencing January 1,
2003 and on each January 1 thereafter Mr. Levy shall be eligible for an increase
in his base annual salary equal to the greater of either the percentage increase
in the Cost of Living Index (as defined) or at such higher rate as the
Compensation Committee of the Board of Directors at its discretion designates.
The agreement further states that if Mr. Levy's employment is terminated (except
in certain limited circumstances) following a Change of Control, as defined,
then Mr. Levy shall be entitled to receive severance benefits equal to three
times the sum of his then base annual salary inclusive of performance bonus
payable. Mr. Levy and his eligible dependents will be provided with medical
insurance coverage at the Company's expense for a maximum of five years.
Lynn Siemers
On June 12, 1997, Ms. Siemers entered into a four-year employment agreement
with the Company to serve as its President and Chief Operating Officer. The
agreement provided for a base annual salary of $500,000, a discretionary
performance bonus based on the achievement of goals to be set annually by the
Compensation Committee, as well as certain insurance and other benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee granted to Ms. Siemers 37,500 restricted shares and
options to purchase an aggregate of 37,500 additional shares at a price equal to
the closing price of the Common Stock on the date of grant. The agreement
further provided for an incentive cash bonus equal to the appreciation over five
years of 12,500 shares of stock. The restricted shares, options and right to
receive the incentive cash bonus vest over the term of the agreement, subject to
acceleration in the event of a change in control of the Company.
The agreement provided that in the event Ms. Siemers' employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Siemers will have the right to receive severance
benefits equal to three times the sum of the last annual salary inclusive of
performance bonus (but not incentive bonus). On October 11, 2000, Ms. Siemers'
agreement was extended to December 31, 2002. The extension agreement grants
severance benefits to three times the sum of the annual base salary in effect on
the date of termination, provided that Ms. Siemers exercises her termination
rights within ninety (90) days following a change of control.
As of January 1, 2002, Ms. Siemers entered into a new employment agreement
with the Company to serve as its President and Chief Operating Officer. The term
of the employment agreement is for an ongoing and continuous term of two years,
with an automatic extension and renewal each day subsequent to January 1, 2002,
so that at all times after January 1, 2002, the remaining term shall be two
years.
Ms. Siemers' employment agreement provides for a base annual salary of
$600,000, a performance bonus based on participation in the bonus plan in effect
for all other senior executives of the Company and certain insurance and other
20
benefits which are grossed up for tax impact. In addition, commencing
January 1, 2003 and on each January 1 thereafter, Ms. Siemers shall be eligible
for an increase in her base annual salary equal to the greater of either the
percentage increase in the Cost of Living Index (as defined) or at such higher
rate as the Compensation Committee of the Board of Directors at its discretion
designates.
The agreement further states that if Ms. Siemers' employment is terminated
(except in certain limited circumstances) following a Change of Control, as
defined, then Ms. Siemers shall be entitled to receive severance benefits equal
to three times the sum of her then base annual salary inclusive of performance
bonus payable. Ms. Siemers and her eligible dependents will be provided with
medical insurance coverage at the Company's expense for a maximum of five years.
2002 Stock Options Grants
The Company's long-term performance ultimately determines compensation from
stock options because stock option value is entirely dependent on the long-term
growth of the Company's common stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers and
Directors during Fiscal 2002, including information concerning the potential
realizable value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants Option Term (1)
----------------------------------------------------------- ------------------------------
Number of
Securities % of Total Exercise
Underlying # of Options Price (3) Expiration
Name Option (#) Granted in 2002 ($/Sh) Date 5% ($) 10% ($)
---- ---------- --------------- ------ ---- ------ -------
Sheridan C. Biggs (2) 1,250 0.9% 0.9000 05/23/12 708 1793
Harvey Horowitz (2) 1,250 0.9% 0.9000 05/23/12 708 1793
Richard Rusthoven (2) 1,250 0.9% 0.9000 05/23/12 708 1793
Robert A. Kasenter (2) 1,250 0.9% 0.9000 05/23/12 708 1793
Maureen d. Schimmenti (4) 25,000 18.3% 0.8400 01/02/12 13,207 33,469
Lynn Siemers (4) 100,000 73.4% 0.8400 01/02/12 52,827 133,874
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the SEC and, therefore, are not intended to forecast
possible future appreciation, if any, of the Company's stock price.
(2) Represents options granted as directors pursuant to the Company's 1994
Non-Employee Director Option Plan.
(3) All options were granted at an exercise price equal to the market value of
the Company's Common Stock on the date of grant.
(4) Represents options granted as employees pursuant to the Company's 1992 Stock
Option Plan.
21
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, 2002 December 31, 2002 (2)
On Exercise Value ----------------- ---------------------
(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---------- -------- ---------- -------------- ----------- -------------
Daniel H. Levy (3) -- -- 43,750 -- -- --
Lynn Siemers (4) -- -- 54,375 110,000 -- 101,000
Maureen d. Schimmenti (5) -- -- 4,000 31,000 4,040 31,310
Sheridan C. Biggs -- -- 28,750 -- 22,725 --
Harvey Horowitz -- -- 10,625 -- 2,525 --
Robert A. Kasenter -- -- 5,000 -- 5,050 --
Harry A. Katz -- -- 5,000 -- 1,262 --
Richard C. Rusthoven -- -- 6,250 -- 2,525 --
(1) All options were granted at an exercise price equal to market value of the
Common Stock on the date of grant.
(2) Amount reflects the market value of the underlying shares of common stock
at the closing sales price reported on the Over-the-Counter Market on
December 31, 2002 ($1.01 per share).
(3) Represents 6,250 options granted to him under the Company's 1994
Non-Employee Director Option Plan and 37,500 options granted to him in
connection with the execution of his employment agreement.
(4) Represents 1,875 options granted to her under the Company's 1992 Stock
Option Plan, 37,500 options granted in connection with the execution of her
employment agreement, 25,000 options granted as part of her Fiscal 1998
compensation, and 100,000 options granted in 2002.
(5) Represents 10,000 options granted pursuant to her employment under the
Company's 1992 Stock Option Plan, and 25,000 options, which were granted in
2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------
The following table sets forth certain information, as of March 14, 2003,
with respect to beneficial ownership of the Company's Common Stock by: (i) each
of the Company's directors, (ii) each of the Company's Named Executive Officers,
(iii) each person who is known by the Company beneficially to own more than 5%
of the Company's Common Stock, and (iv) by all directors and executive officers
who served as directors or executive officers as of March 14, 2003 as a group.
All information in the table below with respect to the Common Stock of the
Company has been restated to reflect the two-for-one stock split paid to all
holders of Common Stock of record on December 4, 1995 and a one-for-four reverse
stock split effective April 20, 2000. For purposes of this table, beneficial
ownership is defined in accordance with 13d-3 under the Securities Exchange Act
of 1934, as amended and means generally the power to vote or dispose of the
securities, regardless of any economic interest therein.
22
Name and Address Common Stock
of Beneficial Owner Beneficially Owned Percentage Owned (1)
- ------------------- ------------------ --------------------
Daniel H. Levy 715,569 (2) 16.38%
Bruce Galloway 285,650 (3) 6.54%
1325 Avenue of the Americas
New York, NY 10019
Roger Tullberg 286,000 (4) 6.55%
11 Knight Way
Mansfield, MA 02048
Lynn Siemers 214,225 (5) 4.91%
Sheridan C. Biggs 39,000 (6) *
Harvey Horowitz 11,250 (7) *
Harry A. Katz 674,319 (8) 15.44%
Robert A. Kasenter 8,500 (9) *
Richard C. Rusthoven 15,750 (10) *
Maureen d. Schimmenti 9,000 (11) *
All directors and officers as a group (8 persons) 1,687,613 38.6%
- -------
* Less than 1%.
(1) Percentage to be based on the number of shares of Common Stock
outstanding as of March 14, 2003.
(2) Based on the Company's records and information filed in Schedule 13D/A
filed with the Company on March 13, 2002, Daniel H. Levy is the
beneficial owner of 715,569 shares of Common Stock, or 16.38% of the
outstanding Common Stock, consisting of 671,819 shares of Common Stock
owned directly by Mr. Levy, and 43,750 shares of Common Stock which Mr.
Levy has a right to acquire pursuant to presently exercisable stock
options which were issued to Mr. Levy pursuant to the Company's 1994
Non-Employee Director Option Plan.
(3) Based on information contained in Schedule 13G/A filed with the Company
on January 17, 2001.
(4) Based on information contained in Schedule 13G/A filed with the Company
on July 10, 2002.
(5) Includes 96,100 shares owned by Ms. Siemers, 1,875 shares of underlying
options, which were granted on April 19, 1996 to Ms. Siemers pursuant to
the Company's 1992 Stock Option Plan, 15,000 shares underlying options
granted pursuant to Ms. Siemers' Fiscal 1998 compensation, and
37,500 shares underlying options which were granted pursuant to Ms.
Siemers' employment agreement, 37,500, restricted shares granted to Ms.
Siemers pursuant to her employment agreement, and 6,250 shares of stock
issued as part of her Fiscal 1997 compensation. Not included are 10,000
shares underlying options issued as part of Fiscal 1998 compensation,
which are exercisable in 2003 and 2004, and 80,000 shares underlying
options which were granted in March 2002, which are exercisable in
January 2003, 2004, 2005, 2006 and 2007.
(6) Includes 10,250 shares owned by Sheridan C. Biggs and 28,750 shares
underlying options, which were granted to Mr. Biggs pursuant to the
Company's 1994 Non-Employee Director Option Plan. Such options are
currently exercisable.
(7) Includes 625 shares owned by Harvey Horowitz and 10,625 shares
underlying options, which were granted to Mr. Horowitz pursuant to the
Company's 1994 Non-Employee Director Option Plan. Such options are
currently exercisable.
(8) Includes 669,319 shares owned by Harry A. Katz and 5,000 shares
underlying options, which were granted to Mr. Katz pursuant to the
Company's 1994 Non-Employee Director Plan. Such options are currently
exercisable.
(9) Includes 3,500 shares owned by Robert A. Kasenter and 5,000 shares
underlying options which were granted to Mr. Kasenter pursuant to the
Company's 1994 Non-Employee Director Option Plan. Such options are
currently exercisable.
23
(10) Includes 9,500 shares owned by Richard C. Rusthoven and 6,250 shares
underlying options, which were granted to Richard C. Rusthoven pursuant
to the Company's 1994 Non-Employee Director Option Plan. Such options
are currently exercisable.
(11) Includes 4,000 shares underlying options granted to Maureen d.
Schimmenti pursuant to her employment under the Company's 1992 Stock
Option Plan and 5,000 shares granted in March 2002. Not included are
6,000 shares underlying options issued pursuant to her employment, which
are exercisable 2003, 2004 and 2005, and 20,000 underlying options which
were granted in March 2002, which are exercisable in January 2003, 2004,
2005, 2006 and 2007.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Mr. Katz was employed by the Company under an employment agreement which
converted to a consulting agreement. During 2002, Mr. Katz received compensation
as reported in Item 11. - Executive Compensation plus $124,300 in consulting
----------------------
fees.
Mr. Horowitz is of counsel to the law firm of Mintz & Gold LLP, which
provides legal services to the Company. Mintz & Gold LLP received $177,800 in
fees during 2002 for legal services rendered to the Company.
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
Based on the evaluation of the Company's disclosure controls and procedures
as of a date within 90 days of the filing date of this annual report, each of
Daniel H. Levy, the Chief Executive Officer of the Company, and Maureen d.
Schimmenti, the Chief Financial Officer of the Company, has concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities and Exchange Act of 1934, as amended, is
properly recorded and reported.
There were no significant changes in the Company's internal controls or in
other factors that could materially affect these controls subsequent to the date
of their evaluation, including any corrective actions with regard to
deficiencies and weaknesses.
ITEM 15. 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, 2002 and 2001
Consolidated Statements of Operations for the Years ended December
31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years ended December
31, 2002, 2001 and 2000
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
2002.
24
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 28, 2003
DONNKENNY, INC.
By: /s/ Daniel H. Levy
-------------------------------------------------
Daniel H. Levy, Chairman of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities and on the dates indicated.
/s/ Daniel H. Levy
Dated: March 28, 2003 ----------------------------------------
Daniel H. Levy, Chairman of the Board of
Directors and Chief Executive
Officer (Principal Executive Officer)
/s/ Lynn Siemers
Dated: March 28, 2003 -----------------------------------------
Lynn Siemers, President and Chief
Operating Officer
/s/ Maureen d. Schimmenti
Dated: March 28, 2003 -----------------------------------------
Maureen d. Schimmenti, Chief Financial
Officer, Vice President-Finance and
Secretary (Principal Financial and
Accounting Officer)
/s/ Sheridan C. Biggs
Dated: March 28, 2003 -----------------------------------------
Sheridan C. Biggs, Director
/s/ Harvey Horowitz
Dated: March 28, 2003 -----------------------------------------
Harvey Horowitz, Director
/s/ Robert A. Kasenter
Dated: March 28, 2003 -----------------------------------------
Robert A. Kasenter, Director
/s/ Harry A. Katz
Dated: March 28, 2003 -----------------------------------------
Harry A. Katz, Director
/s/ Richard C. Rusthoven
Dated: March 28, 2003 -----------------------------------------
Richard C. Rusthoven, Director
25
EXHIBIT INDEX
Exhibit Description Sequentially
No. of Exhibit Numbered Page
- ------- ----------- -------------
3.1 Amended and Restated Certificate of Incorporation of Donnkenny,
Inc., dated May 15, 1992. 1
3.3 Certificate of Ownership and Merger of DHC Holding Corporation into
Donnkenny, Inc. 1
3.4 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Donnkenny, Inc., dated May 18, 1993. 2
3.5 By-laws of Donnkenny, Inc., dated May 18, 1993. 2
4.1 Specimen form of Common Stock Certificate. 4
10.12 Amended and Restated Donnkenny, Inc. 1992 Stock Option Plan. 9
10.13 Form of Indemnification Agreement with Directors and Executive
Officers. 2
10.14 Donnkenny, Inc. Employees Savings 401(k) Plan. 1
10.28 Asset Purchase Agreement between Oak Hill Sportswear Corporation and
Donnkenny Apparel, Inc., dated as of May 23, 1995,5 together with
Amendment No. 1 thereto, dated as of June 26, 1995. 7
10.29 Stock Purchase Agreement among Donnkenny Apparel, Inc. and all of
the Shareholders of Beldoch Industries Corporation, dated June 5,
1995. 6
10.32 Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors. 8
10.33 Donnkenny, Inc. 1996 Restricted Stock Plan. 9
10.41 Employment Agreement between Harvey A. Appelle and the Company,
dated April 14, 1997. 10
10.42 Employment Agreement between Lynn Siemers and the Company, dated
April 14, 1997. 10
10.46 Employment Agreement between Beverly Eichel and the Company dated
September 28, 1998. 11
10.48 Commission's Order Instituting Public Administrative Proceedings,
Make Findings and Instituting a Cease-and-Desist Order and Offer of
Settlement of Donnkenny, Inc. released on February 2, 1999. 12
10.49 Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries
Corporation, the Guarantors Named therein, the Lenders Named therein
and the CIT Group/Commercial Services, Inc., dated as of June 29,
1999. 13
10.50 The Waiver and First Amendment to Credit Agreement, dated as of
November 11, 1999 among the Company, the Lenders Named therein and
the CIT Group/Commercial Services, Inc. 14
26
10.51 The Second Amendment Agreement, dated as of December 23, 1999 among
the Company, the Lenders Named therein and the CIT Group/Commercial
Services, Inc. 15
10.52 Employment agreement between Daniel H. Levy and the Company, dated
January 1, 2000. 15
10.53 The Third Amendment and Waiver Agreement, dated as of February 29,
2000 among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc. 15
10.54 The Fourth Amendment and Waiver Agreement, dated as of April 13,
2000 among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc. 15
10.55 Asset Purchase Agreement between Ann Travis, Inc. and Donnkenny
Apparel, Inc. dated as of June 1, 2000. 16
10.56 The Fifth Amendment and Waiver Agreement, dated as of July 6, 2000
among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc. 16
10.57 The First Amendment to the Employment Agreement between Daniel H.
Levy and the Company dated May 17, 2000. 16
10.58 Employment Agreement between Beverly Eichel and the Company dated
June 6, 2000. 16
10.59 The Sixth Amendment and Waiver Agreement, dated as of November 13,
2000, among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc. 17
10.60 Employment Agreement between Lynn Siemers and the Company dated
October 11, 2000. 17
10.61 Amendment to Rights Agreement dated January 4, 2001 between
Donnkenny, Inc. and Mellon Investor Services. 18
10.62 The Second Amendment to the Employment Agreement between Daniel H.
Levy and the Company dated February 26, 2001. 19
10.63 The Seventh Amendment and Waiver Agreement dated as of March 28,
2001, among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc. 19
10.64 The Eighth Amendment and Waiver agreement dated as of March 13,
2002, among the Company, the Lenders Named therein and the CIT
Group/Commercial Services, Inc. 20
10.65 Amended and restated employment agreement between Daniel H. Levy and
the Company dated January 1, 2002. 20
10.66 Employment agreement between Harry A. Katz and the Company dated
January 1, 2002. 20
10.67 Amended and restated employment agreement between Lynn Siemers and
the Company dated January 1, 2002. 20
10.68 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21
10.69 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21
10.70 The Ninth Amendment dated as of March 27, 2003, among the
Company Lenders named therein and the CIT Group/commercial
Services Inc. (23)
27
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 22
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 22
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 23
99.4 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 23
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 August 8, 1995.
8 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 2, 1995.
9 Incorporated herein by reference to the Company's 1996 Proxy Statement,
filed March 22, 1996.
10 Incorporated herein by reference to the Company's Report on Form 10-Q,
filed with the Commission on August 6, 1997.
11 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on November 15, 1998.
12 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
13 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on August 15, 1999.
14 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on November 15, 1999.
15 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
16 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on August 25, 2000.
17 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on November 14, 2000.
18 Incorporated herein by reference to the Company's Report on Form 8-K filed
with the Commission on January 10, 2001.
28
19 Incorporated herein by reference to the Company's Report on Form 10-K for
the fiscal year ended December 31, 2000.
20 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on May 15, 2002.
21 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on August 13, 2002.
22 Incorporated herein by reference to the Company's Report on Form 10-Q filed
with the Commission on November 12, 2002.
23 Filed herewith.
29
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
Christiansburg Garment Company Delaware
Donnkenny Apparel, Inc. Delaware
Beldoch Industries Corporation Delaware
H Squared Dispositions, Inc. New York
30
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 (the "Company") as of December 31, 2002 and 2001, 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,
2002. Our audits also included the financial statement schedule listed in the
Index at Item 15(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects the consolidated financial position of the Company as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the fiscal years in the three-year period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Notes 1 and 4 to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
goodwill and other intangible assets, to conform to Statement of Financial
Accounting Standards No. 142.
/s/ Deloitte & Touche LLP
New York, New York
March 17, 2003
(March 27, 2003 as to Note 6)
F-1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
December 31, December 31,
2002 2001
------------------------------
ASSETS
CURRENT ASSETS:
Cash $66 $39
Accounts receivable, net of allowances for bad
debts of $116 and $104, respectively 20,634 25,225
Recoverable income taxes 203 381
Inventories, net 15,949 17,773
Deferred tax assets - 1,662
Prepaid expenses and other current assets 615 1,220
Assets held for sale 402 788
-------------- ---------------
Total current assets 37,869 47,088
PROPERTY, PLANT AND EQUIPMENT, NET 4,515 5,379
OTHER ASSETS 234 368
GOODWILL - 25,367
OTHER INTANGIBLE ASSETS 821 4,198
-------------- ---------------
TOTAL $43,439 $82,400
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $253 $933
Accounts payable 10,101 7,760
Accrued expenses and other current liabilities 2,209 3,504
-------------- ---------------
Total current liabilities 12,563 12,197
-------------- ---------------
LONG-TERM DEBT 23,730 34,844
DEFERRED TAX LIABILITIES - 1,662
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized 500
shares, issued none
Common stock, $.01 par value; authorized
20,000 shares, issued and outstanding 4,367 44 44
Additional paid-in capital 50,449 50,449
Accumulated deficit (43,347) (16,796)
-------------- ---------------
Total stockholders' equity 7,146 33,697
-------------- ---------------
TOTAL $43,439 $82,400
============== ===============
See accompanying notes to consolidated financial statements.
F-2
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
-------------------------------------------
NET SALES $ 107,102 $ 152,180 $ 151,055
COST OF SALES 80,345 117,497 124,073
------------- ------------- ---------------
Gross Profit 26,757 34,683 26,982
OPERATING EXPENSES:
Selling, general and administrative
expenses 22,339 28,367 28,194
Amortization of intangibles - 1,489 1,437
Provision for settlement of litigation - - 599
Write-down of assets held for sale 150 300 -
Restructuring charge - - 500
------------- ------------- ---------------
Operating income (loss) 4,268 4,527 (3,748)
OTHER EXPENSE:
Interest expense 2,039 4,703 5,097
------------- ------------- ---------------
Income (loss) before income taxes 2,229 (176) (8,845)
INCOME TAX EXPENSE (BENEFIT) 36 (220) 88
------------- ------------- ---------------
Income (loss) before cumulative effect of
change in accounting principle 2,193 44 (8,933)
Cumulative effect of change in accounting
principle (no tax benefit recognized) 28,744 - -
------------- ------------- ---------------
NET INCOME (LOSS) $ (26,551) $ 44 $ (8,933)
============= ============= ===============
Basic earnings per common share:
Income (loss) before accounting change $ 0.50 $ 0.01 $ (2.26)
Cumulative effect of accounting change (6.58) - -
------------- ------------- ---------------
Net income (loss) $ (6.08) $ 0.01 $ (2.26)
============= ============= ===============
Diluted earnings per common share:
Income (loss) before accounting change $ 0.50 $ 0.01 $ (2.26)
Cumulative effect of accounting change (6.58) - -
------------- ------------- ---------------
Net income (loss) $ (6.08) $ 0.01 $ (2.26)
============= ============= ===============
Shares used in the calculation of earnings per share:
Basic 4,367,417 4,367,417 3,956,679
============= ============= ===============
Diluted 4,417,796 4,387,685 3,956,679
============= ============= ===============
See accompanying notes to consolidated financial statements.
F-3
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
Preferred Common Additional Issuable Retained Total
Stock Stock Paid-in Shares for Earnings Stockholders'
Capital Litigation (Deficit) Equity
Settlement
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $- $36 $47,877 $1,875 ($7,907) $41,881
Issuance of common stock - - 705 - - 705
Issuance of shares for litigation
settlement - 8 1,867 (1,875) - -
Net Loss - - - - (8,933) (8,933)
--------- --------- --------- --------- ---------- -------------
BALANCE, DECEMBER 31, 2000 - 44 50,449 - (16,840) 33,653
Net Income - - - - 44 44
--------- --------- --------- --------- ---------- -------------
BALANCE, DECEMBER 31, 2001 - 44 50,449 - (16,796) 33,697
Net Loss - - - - (26,551) (26,551)
--------- --------- --------- --------- ---------- -------------
BALANCE, DECEMBER 31, 2002 $- $44 $50,449 $ - ($43,347) $ 7,146
========= ========= ========= ========= ========== =============
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,
2002 2001 2000
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(26,551) $ 44 $(8,933)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of plant,
property and equipment 1,499 1,140 820
Loss on disposal of fixed assets - 3 -
Amortization of intangibles and other assets - 1,489 1,437
Write-down of assets held for sale and
restructuring charge 150 300 200
Cumulative effect of change in accounting
principle 28,744 - -
Provision for losses on accounts receivable 20 20 22
Changes in assets and liabilities, net of the
effects of acquisitions and disposals:
(Increase) decrease in accounts receivable 4,571 5,723 (968)
(Increase) decrease in recoverable income
taxes 178 (226) 149
Decrease in inventories 1,824 1,957 10,144
Decrease (increase) in prepaid expenses and
other current assets 605 (43) (541)
Decrease in other non-current assets 134 62 116
(Decrease) increase in accounts payable 2,341 (3,991) 1,400
(Decrease) increase in accrued expenses and
other current liabilities (1,295) 1,194 (950)
------ ------ -----
Net cash provided by operating activities 12,220 7,672 2,896
------ ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (542) (1,395) (1,054)
Proceeds from sale of property, plant and
equipment 143 67 189
Acquisition of business - - (1,518)
------------- --------- --------
Net cash used in investing activities (399) (1,328) (2,383)
------------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of long-term debt (1,113) (1,523) (1,168)
Borrowings for acquisition - - 1,300
Borrowings under revolving credit line 102,112 153,960 154,042
Repayments under revolving credit line (112,793) (158,807) 154,802
-------------- --------- -------
Net cash used in financing activities (11,794) (6,370) (628)
-------------- --------- ------
NET INCREASE (DECREASE) IN CASH 27 (26) (115)
CASH, AT BEGINNING OF YEAR 39 65 180
-------------- --------- ------
CASH, AT END OF YEAR $ 66 $ 39 $ 65
============== ========= ======
Supplemental Disclosures
Income taxes paid $ 77 $ 78 $ 61
============================= ======
Interest paid $2,048 $4,722 $4,527
============================= ======
Supplemental schedule of non-cash financing
activities
Issuance of common stock $ - $ - $ 705
============================= ======
See accompanying notes to consolidated financial statements.
F-5
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company designs, imports and markets a broad line
of moderately priced women's sportswear and operates in one business segment.
The Company's products are primarily sold throughout the United States by retail
chains, department stores and smaller specialty shops.
Principles of Consolidation - The Consolidated Financial Statements include
the accounts of Donnkenny, Inc. and its wholly-owned subsidiaries (collectively,
the "Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities (such as accounts receivable, inventories and valuation allowances
for income taxes), and disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition - The Company recognizes sales upon shipment of
products to customers as title and risk of loss passes upon shipment. Provisions
for estimated uncollectible accounts, discounts and returns and allowances are
provided when sales are recorded based upon historical experience and current
trends.
Accounts Receivable - Accounts Receivable as shown on the Consolidated
Balance Sheets, is net of allowances and anticipated discounts. An allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessments of
collectibility based on historic trends and an evaluation of the impact of
economic conditions. This amount is not significant since the Company has a
factoring agreement. An allowance for discounts is based on those discounts
relating to open invoices where trade discounts have been extended to customers.
Costs associated with potential returns of products as well as allowable
customer markdowns and operational charge backs, net of expected recoveries, are
included as a reduction to net sales and are part of the provision for
allowances included in Accounts Receivable. These provisions result from
seasonal negotiations as well as historic deduction trends, net expected
recoveries and the evaluation of current market conditions. The Company's
historical estimates of these costs have not differed materially from actual
results.
Inventories - Inventories are stated at the lower of cost or market using
the first-in, first-out method (FIFO) (see Note 2 to the Consolidated Financial
Statements).
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 to the Consolidated Financial Statements).
Estimated useful lives are as follows:
Buildings....................... 9 to 38 years
Machinery and equipment.......... 3 to 10 years
Furniture and fixtures........... 7 to 10 years
Leasehold improvements........... 7 to 10 years
(or lease term if shorter)
Other Assets - Other Assets at December 31, 2002 and 2001 of $0.2 million
and $0.4 million, respectively, represent net deferred financing costs, which
are amortized over the term of the related debt agreement.
Goodwill and Other Intangible Assets - Goodwill represented the excess
purchase price over fair value of net assets acquired related to the acquisition
of the Company in 1989 following a change in control, the sportswear division of
Oak Hill Sportswear Corporation ("Oak Hill"), Beldoch Industries Corporation
("Beldoch") in 1995, and Ann Travis in 2000 (see Note 18 to the Consolidated
Financial Statements). Goodwill was amortized on a straight-line basis over the
expected periods to be benefited, ranging from 10 to 40 years. Other Intangible
Assets are costs related to licenses acquired by the Company, which were being
amortized on a straight-line basis over 20 years. In 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets", which changed the accounting for goodwill and other
intangible assets to an impairment only approach. The Company ceased the
amortization of goodwill and other intangible assets with indefinite lives as of
January 1, 2002 (see Note 4 to the Consolidated Financial Statements).
F-6
Assessment of Asset Impairment - The Company periodically assesses the
recoverability of the carrying value of long-lived assets, including
identifiable intangible assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
assessment of recoverability of the carrying amount of an asset is based on
estimated undiscounted future cash flows from the use of the asset and eventual
disposition. If the estimated undiscounted future cash flows are less than the
carrying value, an impairment loss is charged to operations based on the
difference between the carrying amount and the fair value of the asset.
Shipping and Handling Costs - Shipping and handling costs are recorded as a
component of selling, general and administrative expenses in the consolidated
statements of operations. Shipping and handling costs approximated $3.3 million,
$4.7 million, and $4.8 million in Fiscal years 2002, 2001 and 2000,
respectively.
Stock Based Compensation - The Company accounts for its stock-based
employee compensation plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the Common Stock on the date of
grant. The following table details the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, to
stock-based employee compensation.
2002 2001 2000
-------- -------- -------
(in thousands, except
per share amounts)
Net income (loss), as reported $(26,551) $ 44 $(8,933)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method,
net of tax effects 195 578 784
-------- ------- -------
Pro-forma net income (loss) $(26,746) $ (534) $(9,717)
======== ======= =======
Earnings (loss) per share:
Basic - as reported $ (6.08) $ 0.01 $ (2.26)
======== ====== =======
Basic - pro-forma $ (6.12) $(0.12) $ (2.46)
======== ======= =======
Diluted - as reported $ (6.08) $ 0.01 $ (2.26)
======== ======= =======
Diluted - Pro-forma $ (6.13) $(0.12) $ (2.46)
======== ======= =======
The weighted-average Black-Scholes values of the options granted during 2002,
2001 and 2000, which were used to calculate the pro-forma compensation expense
were $0.83, $0.54 and $1.47, respectively. The following weighted-average
assumptions were used in the Black-Scholes option-pricing model
F-7
for grants in 2002, 2001 and 2000 respectively: dividend yield of 0% for all
periods, volatility of 253%, 246%, and 130%; risk-free interest rate of 2.40%,
4.05% and 5.24%; and an expected life of 5, 5, and 10 years.
Advertising Expense - Advertising costs are expensed when incurred.
Advertising expenses of $1.1 million, $1.0 million and $0.8 million were
recorded in the Company's Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000, respectively.
Income Taxes - The Company accounts for income taxes in accordance with an
asset and liability method. Deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date. The deferred tax assets are reduced by a valuation allowance if
it is more likely than not that some portion or all of the deferred tax assets
will not be realized (see Note 7 to the Consolidated Financial Statements).
Fair Value of Financial Instruments - The carrying amount of significant
financial instruments, which includes accounts receivable, accounts payable and
accrued expenses, approximated fair value as of December 31, 2002 and December
31, 2001 due to their short-term maturities. Long-term debt approximates fair
value due to its variable interest rate.
Recent Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17, "Intangible
Assets". It changed the accounting for goodwill and other intangible assets from
an amortization method to an impairment only approach. The Company ceased the
amortization of goodwill and other intangible assets with indefinite lives, on
January 1, 2002 as required by SFAS No. 142 and recorded an impairment charge of
$28.7 million related to goodwill and intangible assets with indefinite lives as
a change in accounting principle upon the adoption of this statement (See Note 4
to the Consolidated Financial Statements).
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Early adoption is encouraged. The adoption of SFAS No. 143 on January 1, 2002,
did not have an impact on the Company's Consolidated Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of" and provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Adoption of SFAS No. 144 on January
1, 2002 did not have an impact on the Company's Consolidated Financial
Statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that
require companies to classify certain gains and losses from debt extinguishments
as extraordinary items, eliminates the provisions of SFAS No. 44 regarding the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishment is
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The adoption of SFAS No. 145 is not expected to have a material
impact, if any, on the Company's Consolidated Financial Statements.
F-8
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This Statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company will adopt
SFAS No. 146 on January 1, 2003 and does not expect this Statement to have a
material impact on its Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure amendments to Statement 123 contained in SFAS No. 148 are effective
for financial statements for fiscal years ending after December 15, 2002.
Reclassifications - Certain reclassifications have been made in 2001 and
2000 Consolidated Financial Statements to conform to the 2002 presentation.
2. INVENTORIES
Inventories consisted of the following at December 31, 2002 and December
31, 2001:
(in thousands)
---------------------
2002 2001
------- --------
Raw materials...................... $ 701 $ 840
Work in process.................... 143 331
Finished goods..................... 16,411 17,709
Reserves........................... (1,306) (1,107)
------- --------
$15,949 $ 17,773
======= ========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2002 and December 31, 2001:
(in thousands)
-----------------
2002 2001
------ ------
Land and land improvements............................ $ 131 $ 179
Buildings and leasehold improvements.................. 4,530 4,512
Machinery and equipment............................... 6,044 5,678
Furniture and fixtures................................ 1,224 1,216
------ ------
11,929 11,585
Less accumulated depreciation and amortization........ 7,414 6,206
------ ------
$4,515 $5,379
====== ======
F-9
Assets Held for Sale
During 2000 the Company announced and completed the closing of all of its
domestic manufacturing plants and put these facilities up for sale. In Fiscal
2002, the Company recorded a charge of $0.2 million related to the write-down of
assets held for sale. As of December 31, 2002, assets held for sale included a
total of two facilities.
In Fiscal 2001, the Company recorded a charge of $0.3 million related to
the write-down of assets held for sale. As of December 31, 2001, assets held for
sale included a total of three facilities. One of these facilities was sold on
March 7, 2002.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2002 and December 31, 2001:
(in thousands)
---------------------
2002 2001
------ ------
Goodwill...................................................... $ - $36,241
Licenses...................................................... 821 6,325
-------- -------
821 42,566
Less accumulated amortization............................ - 13,001
-------- -------
$821 $29,565
======== ========
Prior to January 1, 2002, the Company had net intangible assets of $29.6
million on its Consolidated Balance Sheet. The intangible assets included
goodwill of $25.4 million, which represented the excess purchase price over fair
value of net assets acquired. The assets acquired related to the acquisitions of
the Company in 1989 following a change in control, the sportswear division of
Oak Hill Sportswear Corporation ("Oak Hill"), Beldoch Industries Corporation
("Beldoch") in 1995, and Ann Travis in 2000. Goodwill was amortized on a
straight-line basis over expected periods to be benefited, ranging from 10 to 40
years. Also included in the intangible assets were $4.2 million of costs related
to the Pierre Cardin license acquired by the Company in connection with the
Beldoch acquisition, which were amortized on a straight-line basis over 20
years.
As a result of adopting SFAS No. 142 on January 1, 2002, the Company ceased
the amortization of goodwill and other intangible assets with indefinite lives
and determined that the value of its intangible assets had been impaired. The
impairment charge of $28.7 million was calculated based upon a valuation of the
Company's market capitalization on January 1, 2002, adjusted for an estimated
premium that a willing buyer would assign to the market capitalization in the
event of a sale of the Company. The premium was based on an average of such
premiums paid in similar transactions in the industry. The impairment charge
consists of $25.4 million related to goodwill and $3.3 million related to the
license. The Company did not record an income tax benefit related to this
charge.
The remaining value of intangible assets of $0.8 million is attributable to
those intangible assets acquired related to the Pierre Cardin license from the
Beldoch acquisition, and is classified as an intangible asset with an indefinite
life on the Company's December 31, 2002 Consolidated Balance Sheet.
Actual results of operations for the year ended December 31, 2002 and
pro-forma results of operations for the years ended December 31, 2001 and 2000
had the Company applied the non-amortization provisions of SFAS No. 142 in that
period follows (in thousands, except per share amounts):
F-10
For the Year Ended December 31,
(in thousands)
--------------------------
2002 2001 2000
------ ------ -------
Income (loss) before accounting change $ 2,193 $ 44 $(8,933)
Add: Amortization of goodwill and intangibles - 1,489 1,437
-------- ------ -------
Adjusted income (loss) before accounting change 2,193 1,533 (7,496)
Cumulative effect of accounting change 28,744 - -
-------- ------ -------
Adjusted net income (loss) $(26,551) $1,533 $(7,496)
======== ====== =======
Basic and diluted net income (loss) per share:
Income (loss) before accounting change $ 0.50 $ 0.01 $ (2.26)
Add: Amortization of goodwill and intangibles - 0.34 0.36
-------- ------ -------
Adjusted income (loss) before accounting change 0.50 0.35 (1.90)
Cumulative effect of accounting change (6.58) - -
Adjusted net income (loss) $ (6.08) $ 0.35 $ (1.90)
======== ====== =======
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at
December 31, 2002 and December 31, 2001:
(in thousands)
-----------------------
2002 2001
------- --------
Accrued salaries, benefits and bonus..................... $ 973 $2,032
Other accrued expenses................................... 1,236 1,472
------- --------
Total.................................................... $ 2,209 $3,504
======= ========
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2002 and December 31, 2001:
(in thousands)
--------------------------
2002 2001
------- -------
Revolving Credit Borrowings............................ $23,730 $34,411
Senior Term Loans...................................... 253 1,366
------- -------
Total.................................................. $23,983 $35,777
------- -------
Less current maturities................................ 253 933
------- -------
$23,730 $34,844
======== =======
Annual maturities of long-term debt are as follows:
2003..................... 253
2004..................... 23,730
-------
$23,983
=======
On June 29, 1999, the Company and its operating subsidiaries signed a
three-year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services. The Credit Agreement provides the Company with a $75 million facility
comprised of a $72 million revolver with sub limits up to $52 million for direct
borrowings, $35 million for letters of credit, certain overadvances and a $3
million term loan which was paid in full as of June 30, 2002.
F-11
The Credit Agreement provides for advances of (i) up to 90% of eligible
accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to
60% of the undrawn amount of all outstanding letters of credit plus (iv)
allowable overadvances. The Credit Agreement as amended expires on June 30,
2004.
Collateral for the Credit Agreement includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc.
and Beldoch Industries Corporation.
The Credit Agreement contains numerous financial and operational covenants,
including limitations on additional indebtedness, liens, dividends, stock
repurchases and capital expenditures. In addition, the Company is required to
maintain specified levels of tangible net worth and comply with a requirement
for minimum earnings before depreciation, amortization, interest and taxes
(EBITDA) and a minimum interest coverage ratio, all based upon the Company's
annual business plan approved by the lender.
During Fiscal 2000, the Company entered into various amendments and
agreements to waive the Company's noncompliance with financial covenants on
certain dates and to reset overadvanced amounts and covenants. These amendments
and agreements also increased the interest rate on borrowings.
On July 6, 2000, the Company entered into an Amendment to finance the
acquisition of the Ann Travis business (see Note 18 to the Consolidated
Financial Statements) by the issuance of an additional $1.3 million term loan.
The new term loan bears interest at the prime rate plus 2.0% and is repayable
over thirty-six months commencing January 1, 2001. A fee of $100,000 was paid
for the Amendment.
On March 28, 2001, the Company entered into an Amendment and Waiver
Agreement to extend the Final Maturity Date of the original agreement to June
30, 2004, to waive existing events of default under the Credit Agreement as of
December 31, 2000 with respect to the Company's non-compliance with covenants
related to minimum interest coverage, EBITDA and Tangible Net Worth, and to
amend certain other provisions of the Credit Agreement including covenants and
the level of allowable overadvances to support the Company's 2001 business plan.
Pursuant to this amendment, the interest rate on borrowings was increased to
2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid
in connection with the Amendment and Waiver.
Effective January 1, 2002, the Company established covenants and the level
of allowable overadvances with the lender to support its 2002 business plan.
This Amendment and Waiver Agreement also amended the interest rate on the
revolving credit borrowings to the prime rate plus one and three-quarters
percent and provide for an additional interest rate reduction effective July 1,
2002 if certain objectives were achieved. No fee was paid in connection with the
Amendment and Waiver. The Company has achieved the objectives and received an
additional rate reduction effective July 1, 2002. The interest rate on the
revolving credit borrowings is now prime plus one and one-half percent (5.75% at
December 31, 2002).
On June 30, 2002, the Company made the final payment on the $3 million term
loan in accordance with the terms of the Credit Agreement.
Effective January 1, 2003, the Company established covenants and the level
of allowable overadvances with the lender, through an Amendment to the Credit
aggreement dated March 27, 2003, to support its 2003 business plan. The
Amendment also amended the interest rate on the revoloving credit borrowings to
the prime rate plus one and one-quarter percent. No fee was paid in connection
with the Amendment.
The Company also has a factoring agreement with CIT Group/Commercial
Services. The factoring agreement provides for a factoring commission equal to
..35% of gross sales, plus certain customary charges. The agreement is in effect
through December 31, 2004.
At December 31, 2002 and 2001, the Company was contingently liable for
outstanding letters of credit issued amounting to $11.8 million and $9.0
million, respectively.
7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2002, 2001
and 2000 is comprised of the following:
F-12
(in thousands)
-----------------------
2002 2001 2000
----- ----- -----
Current:
Federal............................ $ - $ (277) $ -
State and local................... 36 57 88
Deferred............................. - - -
----- ------- -----
$ 36 $ (220) $ 88
===== ======= =====
In Fiscal 2001, the IRS and the Joint Committee on Taxation completed the
audit of amended prior year tax returns. As a result, the Company received net
refunds of $0.2 million in Fiscal 2002.
A reconciliation of the statutory Federal tax rate and the effective rate
is as follows:
2002 2001 2000
---- ---- ----
Federal statutory tax rate......................... (34)% (34)% (34)%
State and local taxes, net of federal
income tax benefit............................. (1) 28 (2)
Federal tax benefit of amended returns and
other........................................... - (157) -
Nondeductible items................................ 28 207 12
(Decrease)/increase of valuation allowance......... 7 (169) 25
----- ----- -----
0% (125)% 1%
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
(in thousands)
--------------
December 31, December 31,
2002 2001
---- ----
Deferred tax assets:
Accounts receivable allowances..................... $ 45 $ 40
Inventory valuation................................ 685 688
Intangibles........................................ 393 -
Accrued expenses................................... 449 837
State operating loss carryforwards................. 1,350 1,425
Federal operating loss carryforwards 6,208 6,702
Other.............................................. 97 97
------ ------
Deferred tax assets................ 9,227 9,789
------ ------
Deferred tax liabilities:
Property, plant and equipment...................... (980) (1,147)
Intangibles........................................ - (2,195)
------ ------
Deferred tax liabilities (980) (3,342)
------ ------
Net deferred tax asset................................. 8,247 6,447
Less valuation allowance............................... (8,247) (6,447)
------ ------
Net Deferred taxes .................................... $ - $ -
====== ======
As of December 31, 2002 and 2001, the Company recorded a valuation
allowance against the net deferred tax assets due to uncertainty of their
realization.
As of December 31, 2002, the following Federal and State net operating
loss carryforwards were available:
F-13
Net Operating Losses
--------------------
(in thousands)
-----------------------------------------
Expiration Dates Federal State
-------------------- ---------------
2011........................................................ $ - $ 6,071
2012........................................................ - 5,074
2013........................................................ - 2,290
2014........................................................ - 2,616
2015........................................................ - 13,315
2016-2017................................................... - -
2018........................................................ 2,326 -
2019........................................................ 2,616 -
2020........................................................ 13,315 -
8. LEASES
Rental expense for operating leases for the years ended December 31, 2002,
2001 and 2000 approximated $3.0 million, $3.2 million, and $3.3 million
respectively. Minimum future rental payments as of December 31, 2002 for
operating leases with initial noncancelable lease terms in excess of one year,
are as follows:
Amount
Year Ending December 31, (in thousands)
------------------------ --------------
2003 .................................................... 2,652
2004 .................................................... 2,537
2005 .................................................... 2,427
2006 .................................................... 1,595
2007 .................................................... 1,329
Thereafter.................................................... 1,021
-------
$11,561
=======
9. EMPLOYEE BENEFIT PLAN
The Company sponsors an Employees' Savings 401(k) Plan (the "Plan")
covering substantially all of its employees. Contributions to the Plan are made
by the Company at the discretion of the Board of Directors. The Company matched
the employee contributions for fiscal 2002, 2001 and 2000 in cash in the amounts
of $126,000, $44,000 and $43,000 respectively.
10. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income or loss
attributable to common stockholders by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock (warrants to
purchase common stock and common stock options using the treasury stock method)
were exercised or converted into common stock. Potentially issuable common
shares in the diluted EPS computation are excluded in net loss periods, as their
effect would be antidilutive. See Note 17 to the Consolidated Financial
Statements regarding the reverse stock spilt.
In the years ended December 31, 2002 and December 31, 2001, shares under
stock plans of 50,379 and 20,268, respectively, were considered for the diluted
earnings per share calculations. In the year ended December 31, 2000 there were
no incremental shares under stock plans included in the diluted earnings per
share calculation due to their antidilutive effect. Accordingly, the amounts
reported for basic and diluted earnings per share are the same for that year.
F-14
11. STOCK BASED COMPENSATION
a. Stock Options
The Company has a stock award and incentive program that permits the
issuance of up to 500,000 options to employees on terms as determined by the
Board of Directors. In addition, the Company has an award program that permits
option grants to Directors up to a maximum of 75,000 shares. Effective April 20,
2000, the Company had a one-for-four reverse stock split (see Note 17 to the
Consolidated Financial Statements).
Under the terms of the plan, options granted may be either non-qualified or
incentive stock options and the exercise price, determined by the Compensation
committee, may not be less than the fair market value of the Company's Common
Stock on the date of the grant.
Information regarding the Company's stock option plan is summarized below.
Option amounts are stated in thousands.
2002 2001 2000
--------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding at beginning of the
year.......................... 294,253 $8.75 404,130 $9.85 383,225 $12.56
Granted....................... 136,250 0.84 53,750 0.54 151,250 1.52
Exercised..................... - - - - - -
Cancelled..................... (63,076) $9.81 (163,627) 8.44 (130,345) 14.43
------- ----- ------- ----- ------- -----
Outstanding at end of year... 367,427 $5.64 294,253 $8.75 404,130 $9.85
======= =======
Exercisable at end of year ... 198,177 $9.55 212,603 $10.77 212,701
======= =======
Available for grant at year
end........................... 107,748 180,922 71,045
======= ======= ======
The options outstanding at December 31, 2002 range in price as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- ------------------------------------
Range of Weighted-Average
Exercise Outstanding as Remaining Weighted-Average Exercisable as Weighted-Average
Prices of 12/31/2002 Contractual Life Exercise Price of 12/31/2002 Exercise Price
------ ------------- --------------- -------------- -------------- --------------
0.00 - 7.23 283,125 7.3 $ 1.50 114,000 $ 2.19
7.23 - 14.45 42,776 4.3 $ 11.74 42,651 $ 11.74
14.45 - 21.68 30,000 3.6 $ 16.13 30,000 $ 16.13
21.68 - 36.13 1,750 2.3 $ 33.25 1,750 $ 33.25
36.13 - 50.58 3,751 1.3 $ 44.25 3,751 $ 44.25
50.58 - 72.25 6,025 3.0 $ 72.25 6,025 $ 72.25
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the Common Stock on the
date of grant.
b. Restricted Stock
In 1996, the Company adopted a plan to issue up to 250,000 shares (as
adjusted for the reverse stock split in April 2000) of restricted stock to
employees of the Company. During 1997, 76,250 shares with a fair market value of
$11.76 per share were granted to employees of the Company at no cost to the
employees. Of the total number granted, 1,250 shares vested immediately and the
remaining 75,000 restricted shares vest as follows: 15,000 on March 31, 1999 and
F-15
60,000 shares on March 31, 2000. In January 2000, 37,500 shares of restricted
stock were granted to an executive of the Company in connection with his
employment agreement at no cost to him. The executive's employment agreement was
amended effective January 1, 2001 to rescind the 37,500 restricted stock grant.
Compensation cost recorded in 2002, 2001 and 2000 were $0, $0 and $94,000
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 18,750 shares
(as adjusted for the reverse stock split in April 2000) of Common Stock at
$20.00 per share to the principal of a company to rescind an acquisition
transaction. The warrants are immediately exercisable and will expire July 23,
2004.
d. Stock Appreciation Rights
In 1997, the Company awarded stock appreciation rights to an Executive
Officer. This agreement expired in 2002. No compensation expense was recorded
for these stock appreciation rights in 2002, 2001 and 2000.
12. RESTRUCTURING CHARGE
On March 15, 2000, the Company announced that it would close all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. During the first quarter ended March 31, 2000, the
Company recorded a restructuring charge of $0.5 million which included the
following:
(i) $0.2 million to write down property, plant and equipment; and (ii)
$0.3 million related to the cost of providing severance payments to
approximately 200 employees terminated as a result of the facility
closures, which has been paid out to employees. The plant closings
were completed by end of May 2000. The Company has put these
facilities up for sale.
13. PROVISION FOR SETTLEMENT OF LITIGATION
In Fiscal 2000, the Company recorded a litigation provision of $0.6 million
relative to legal proceedings arising in the ordinary course of business.
14. COMMITMENT AND CONTINGENCIES
a. On April 27, 1998, Wanda King, a former employee of the Company, commenced
an action against the Company in the United States District Court for the
Western District of Virginia. In her complaint, the Plaintiff sought
damages in excess of $8.0 million claiming that she was constructively
discharged by the Company. The Company interposed an Answer to the amended
Complaint denying the material allegations asserted in the Complaint and
brought a motion for summary judgment to dismiss the case. On October 22,
2001, the Magistrate Judge, after considering the Motion for Summary
Judgment, recommended to the United States District Court that the case
against the Company be dismissed in its entirety. The Plaintiff objected to
the recommendation of the Magistrate Judge. By Order dated February 25,
2002, the United States District Judge granted the Company's motion for
summary judgment and the case was dismissed. The Plaintiff has appealed
this dismissal to the United States Court of Appeals for the Fourth
Circuit.
b. The Company is also a party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse
effect on financial condition, results of operations, liquidity or business
of the Company.
c. The Company has guaranteed minimum royalties which represent those minimum
amounts due in connection with the Pierre Cardin and Harve Benard Licenses.
The minimum guarantee for the Harve Benard license is contractual. The
minimum guarantee for the Pierre Cardin license is calculated each year. As
F-16
of December 31, 2002, the Company has estimated minimum guaranteed
royalties to be approximately $0.8 million, reflecting the contractual
amount for the Harve Benard License and the minimum calculated amounts
pursuant to the Pierre Cardin license for fiscal 2003. There are no maximum
guarantees.
15. BUSINESS CONCENTRATIONS
Substantially all of the Company's sales are made to customers in the
United States. Sales to one chain store retailer accounted for approximately
18%, 18% and 13% of the Company's sales in 2002, 2001 and 2000, respectively and
accounts receivable from this customer was $2.1 million at December 31, 2002.
Sales to one wholesale club were 27%, 24% and 17% in 2002, 2001 and 2000
respectively and accounts receivable from this customer were $13.1 million at
December 31, 2002. Sales to one catalog customer accounted for 8%, 9% and 6% of
the Company's sales in 2002, 2001 and 2000 respectively and accounts receivable
were $2.1 million at December 31, 2002. No other customers accounted for more
than 8% of the Company's sales in 2002, 2001 and 2000. The terms of the
Company's factoring agreement require the lender to approve the credit
worthiness of the Company's customers. The Company records an allowance for
doubtful accounts for those customers where it has exposure on the receivable.
16. Shareholders Rights Plan
On April 2, 1998, the Company's Board of Directors authorized a stockholder
rights plan. Under the terms of the Plan, stockholders of record at the close of
business on April 13, 1998 received a dividend distribution of one preferred
stock purchase right for each outstanding share of the Company's Common Stock
held. The rights will become exercisable only in the event, with certain
exceptions, an acquiring party accumulates fifteen percent or more of the
Company's voting stock, or if a party announces an offer to acquire fifteen
percent or more. The rights will expire on April 1, 2008.
Each right will entitle stockholders to buy one one-hundredth of a share of
a new series of preferred stock at an exercisable price of $14.00. In addition,
upon the occurrence of certain events, holders of the rights will be entitled to
purchase either the Company's stock or shares in an "acquiring entity" at half
of market value. Further, at any time after a person or group acquires fifteen
percent or more (but less than fifty percent) of the Company's outstanding
voting stock, the Board of Directors may, at its option, exchange part or all of
the rights (other than rights held by the acquiring person or group, which will
become void) for shares of the Company's Common Stock on a one-for-one basis.
The Company will be entitled to redeem the rights at $0.01 per right at any time
until the tenth day following the acquisition of a fifteen percent position in
its voting stock.
As of January 4, 2001, the Company amended its Rights Agreement to change
the definition of "Exempt Person." The definition of an Exempt Person now
includes a group consisting of an executive and director of the Company and
their affiliates, but only to the extent that such group does not become a
beneficial owner of an additional 1% or more of the voting stock of the Company.
17. REVERSE STOCK SPLIT
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to its shareholders a one-for-four reverse stock split as part of
an effort to maintain continued listing of the Company's Common Stock on the
NASDAQ Market.
The reverse stock split recommendation was approved by the Company's
shareholders at a special meeting held on April 18, 2000. The reverse split
became effective on April 20, 2000. As a result of the split, each four shares
of Common Stock applicable to shareholders on the effective date of the split
were converted into one share of stock.
Prior to the split, the Company had 14,229,540 shares outstanding. As a
result of the split, the Company had 3,557,385 shares outstanding. Earnings
(loss) per share and share amounts have been restated to reflect the reverse
split for all periods presented.
F-17
18. ANN TRAVIS ACQUISITION
On July 1, 2000, the Company acquired certain assets of Ann Travis Inc.
("Ann Travis") for $1.5 million, including costs incurred in the acquisition of
$0.3 million. Ann Travis designs, imports and markets women's sportswear. Assets
acquired included $0.5 million of certain merchandise inventory, the Ann Travis
and Decade Designs trademarks and the license rights for sales of women's
apparel under the Delta Burke trademark. The acquisition was accounted for as a
purchase. The purchase was funded by CIT under a new $1.3 million term loan
which requires payment in equal installments over three years commencing January
1, 2001 (see Note 6 to the Consolidated Financial Statements). Goodwill of $1.0
million was recorded in connection with this acquisition and was being amortized
over ten years (See Note 1 to the Consolidated Financial Statements - "Recent
Accounting Pronouncements"). The Company wrote off the goodwill in 2002 upon the
adoption of SFAS No. 142 (see Note 4 to the Consolidated Financial Statements).
Unaudited pro-forma net sales of the Company for Fiscal 2000, assuming the
acquisition had occurred as of January 1, 2000, were $161.0 million.
The pro-forma net loss for Fiscal 2000 for this acquisition, had the
acquisition occurred at the beginning of 2000, is not significant, and
accordingly, is not presented. The unaudited pro-forma net sales information is
not necessarily indicative of the results of operations of the combined
companies, had the acquisition occurred on the dates specified above, nor is it
indicative of future results of operations.
In October 2002, the Company terminated the license agreement for the sale
of women's apparel under the Delta Burke trademark.
19. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly financial information for Fiscal 2002 and Fiscal 2001
is set forth in the table below:
(in thousands, except per share amounts)
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
FISCAL 2002
Net Sales $ 24,438 $22,358 $30,688 $29,618
Gross Profit 6,417 5,188 7,933 7,219
Income (loss) before cumulative effect
of change in accounting principle $ 359 $ (347) $ 1,574 $ 607
------ ------- ------- ------
Cumulative effect of change of accounting principle 28,744 - - -
------ ------- ------- ------
Net Income (loss) $(28,385) $ (347) $ 1,574 $ 607
======== ======= ======= ======
Basic Income (loss) per Common Share
Income (loss) before accounting change $ 0.08 $ (0.08) $ 0.36 $ 0.14
Cumulative effect of accounting change (6.58) - - -
------ ------- ------- ------
Basic earnings (loss) per share $ (6.50) $ (0.08) $ 0.36 $ 0.14
======== ========== ======= ======
Diluted Income (loss) per Common Share
Income (loss) before accounting change $ 0.08 $ (0.08) $ 0.36 $ 0.14
Cumulative effect of accounting change (6.58) - - -
------ ------- ------- ------
Diluted earnings (loss) per share $ (6.50) $ (0.08) $ 0.36 $ 0.14
======== ======== ======= ======
F-18
FISCAL 2001
Net Sales $ 37,308 $ 30,539 $44,242 $40,091
Gross Profit 8,854 6,571 10,295 $ 8,961
Net Income (loss) $ 357 $ (1,432) $ 1,103 $ 15
Basic earnings (loss) per share $ 0.08 $ (0.33) $ 0.25 $ 0.00
Diluted earnings (loss) per share $ 0.08 $ (0.33) $ 0.25 $ 0.00
The sum of the quarterly net earnings per share amounts may not equal the
full-year amount since the computations of the weighted average number of
common-equivalent shares outstanding for each quarter and the full year are
made independently.
F-19
DONNKENNY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II Valuation and Qualifying Accounts.............................
SCHEDULE II
DONNKENNY, INC.
Valuation and Qualifying Accounts
For the Years ended
December 31, 2002, 2001 and 2000
Balance at Charged to
Beginning of Costs and Balance at End of
Period Expenses Deductions Period
----------------------------------------------------------------
Year ended December 31, 2002:
Reserve for bad debts $104,000 20,000 (8,000) $116,000
Reserve for discounts 12,000 (1,428,000) 1,416,000 -
----------------- -----------------
Subtotal for accounts
receivable $116,000 $116,000
================= =================
Reserve for inventory
markdowns $1,107,000 3,022,000 (2,823,000) $1,306,000
================= =================
Year ended December 31, 2001
Reserve for bad debts $93,000 20,000 (9,000) $104,000
Reserve for discounts 16,000 (1,569,000) 1,565,000 12,000
----------------- -----------------
Subtotal for accounts
receivable $109,000 $116,000
================= =================
Reserve for inventory
markdowns $1,684,000 3,590,000 (4,167,000) $1,107,000
================= =================
Year ended December 31, 2000
Reserve for bad debts $365,000 (22,000) (250,000) $93,000
Reserve for discounts 17,000 1,930,000 (1,931,000) 16,000
----------------- -----------------
Subtotal for accounts
receivable $382,000 $109,000
================= =================
Reserve for inventory
markdowns $1,921,000 4,290,000 (4,527,000) $1,684,000
================= =================
CERTIFICATION
-------------
I, Daniel H. Levy, certify that:
1. I have reviewed this annual report on Form 10-K of Donnkenny, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers/employees and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officers/employees and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officers/employees and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Daniel H. Levy
-------------------------------
Daniel H. Levy
Chairman of the Board,
Chief Executive Officer
CERTIFICATION
-------------
I, Maureen d. Schimmenti, certify that:
1. I have reviewed this annual report on Form 10-K of Donnkenny, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers/employees and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officers/employees and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officers/employees and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Maureen d. Schimmenti
--------------------------------
Maureen d. Schimmenti
Vice President
and Chief Financial Officer,
(Principal Financial Officer)
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Donnkenny, Inc. (the "Company") on Form
10-K for the period ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Daniel H. Levy, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Daniel H. Levy
Daniel H. Levy
Chief Executive Officer
March 28, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Donnkenny, Inc. (the "Company") on Form
10-K for the period ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Maureen d. Schimmenti,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Maureen d. Schimmenti
Maureen d. Schimmenti
Chief Financial Officer
March 28, 2003
[EXECUTION FINAL]
NINTH AMENDMENT TO CREDIT AGREEMENT
NINTH AMENDMENT TO CREDIT AGREEMENT, dated as of March 27, 2003 (this
"Amendment"), to the Credit Agreement dated as of June 29, 1999 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement")
among DONNKENNY APPAREL, INC. a Delaware corporation ("DKA"), BELDOCH INDUSTRIES
CORPORATION, a Delaware corporation ("BIC"; together with DKA, and severally,
the "Borrowers"), the Guarantors party thereto, the Lenders party thereto and
THE CIT GROUP/COMMERCIAL SERVICES, INC. as agent for the Lenders (in such
capacity, the "Agent").
The Borrowers, the Guarantors, the Lenders and the Agent are parties to the
Credit Agreement.
The Borrowers have requested that the Lenders (a) amend the Interest Rate
applicable to Revolving Credit Loans and (b) agree to continue providing
Overadvances to Borrowers during Borrowers' 2003 Fiscal Year, and the Borrowers,
Lenders and Agent desire to amend certain of the financial covenants provided
for in the Credit Agreement. The Lenders are willing to (a) amend the Interest
Rate applicable to Revolving Credit Loans and (b) continue providing
Overadvances to Borrowers, and in addition, the Borrowers, Lenders and Agent
have agreed to amend certain of the financial covenants provided for in the
Credit Agreement, all upon the terms and subject to the conditions set forth in
this Amendment.
Accordingly, in consideration of the mutual agreements set forth herein,
and for good and other valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Initially capitalized terms used and not otherwise
defined herein shall have their respective meanings as defined in the Credit
Agreement.
2. Amendment of Interest Rate. (a) The definition of Interest Rate set
forth in the Credit Agreement is hereby amended and restated in its entirety to
read as follows:
"'Interest Rate' shall mean, from and after January 1, 2003, (a) as to the
Supplemental Term Loan, a rate of two (2%) percent per annum in excess of the
Prime Rate and (b) as to Revolving Credit Loans, a rate of one and one-quarter
(1.25%) percent per annum in excess of the Prime Rate (the "Revolving Credit
Interest Rate"); provided, that:
(i) the Interest Rate shall be increased by two (2%) percent per annum in
excess of the Interest Rate otherwise in effect, at Agent's option,
without notice, (A) for the period on and after (1) the date of
termination hereof and until such time as all Obligations are paid in
full (notwithstanding entry of any judgment against Borrowers) or (2)
the date of the occurrence of any Event of Default and for so long as
such Event of Default is continuing, and (B) on the Revolving Credit
Loans at any time outstanding in excess of the Availability (whether
or not such excess(es) arise or are made with or without Agent's
knowledge or consent (but expressly excluding Overadvances that are
made and are permitted to be outstanding pursuant to Section 2.01(c)
of this Agreement), and whether made before or after an Event of
Default).
3. Overadvances During 2003 Fiscal Year. Borrowers have previously
delivered to Agent Borrowers' budget for their 2003 Fiscal Year, dated March 13,
2003 (the "2003 Budget"), in contemplation of the making of this Amendment.
Borrowers have advised Agent that, in order to achieve the results of operations
projected by the 2003 Budget, Borrowers contemplate requesting Agent to make
Overadvances from time to time, as detailed in the 2003 Budget. Borrowers have
therefore requested that Agent and Lenders amend Section 2.01(c) to continue
providing Overadvances during Borrowers' 2003 Fiscal Year, based on the
Overadvance amounts set forth in the 2003 Budget, and Agent and Lenders have
agreed to amend Section 2.01(c) as set forth hereinbelow; provided, however,
that Borrowers understand and expressly acknowledge and agree that,
notwithstanding that the amendment and restatement of Section 2.01(c) set forth
hereinbelow is based on the Overadvance amounts contained in the 2003 Budget,
such amendment and restatement of Section 2.01(c) shall not be deemed and does
not in
any manner constitute a commitment by Agent and/or Lenders to make any
Overadvances whatsoever. Subject to the foregoing, Section 2.01(c) of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:
"(c) Notwithstanding anything to the contrary contained in this Agreement
or any of the other Loan Documents, at the request of the Borrowers at
any time during Borrowers' 2003 Fiscal Year, the Agent may, in its
sole and absolute discretion, subject to the Total Revolving Credit
Commitment, make Revolving Credit Loans and issue Letter of Credit
Guarantees to the Borrowers on behalf of the Lenders in excess of the
Availability ("Overadvance"), which Overadvance shall be repayable on
demand; provided, however, if the Overadvance is not sooner demanded
and if Borrowers shall have failed to deliver to Agent on or before
January 2, 2004 the summary of business plans and financial operations
projections that Borrowers are obligated to deliver to Agent for
Borrowers' 2004 fiscal year pursuant to Section 6.05 of the Credit
Agreement, then the Overadvance shall be repayable without notice or
demand no later than January 2, 2004. Each Lender shall be obligated
to pay the Agent the amount of its ratable share of any such
additional Revolving Credit Loans or Letter of Credit Guaranties.
Provided no Event of Default shall have occurred and be continuing,
notwithstanding anything to the contrary contained in the Credit
Agreement, Overadvances shall not bear interest at the applicable
Interest Rate set forth in clause (i) of the proviso in the definition
of Interest Rate (the "Default Rate"). Any Overadvance not repaid on
demand or when otherwise due and payable shall, however, without
waiving any Event of Default which has occurred thereby, bear interest
at the Default Rate. The making of an Overadvance by the Agent shall
in no way limit, waive or otherwise affect the Agent's right with
respect to the making of any additional Overadvance."
4. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is
amended and restated in its entirety to read as follows:
"Section 7.10 Minimum Interest Coverage Ratio. Permit the Interest
Coverage Ratio of the Parent and its Subsidiaries on a Consolidated basis
for the trailing four (4) fiscal quarters ending on the last day of each of
the fiscal quarters set forth below to be less than the ratio set forth
below opposite such fiscal quarter:
Minimum Interest
Quarterly Period Ending Coverage Ratio
----------------------- --------------
March 31, 2003 2.37 to 1:00
June 30, 2003 2.14 to 1:00
September 30, 2003 2.09 to 1:00
December 31, 2003 2.19 to 1:00"
5. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
"Section 7.11 EBITDA. Permit EBITDA of the Parent and its Subsidiaries (in
each case computed and calculated in accordance with GAAP) on a Consolidated
basis for the trailing four (4) fiscal quarters ending on the last day of each
of the fiscal quarters set forth below to be less than the amount set forth
below opposite each such fiscal quarter:
Quarterly Period Ending EBITDA
----------------------- ------
March 31, 2003 $4,203,000
June 30, 2003 $3,749,000
September 30, 2003 $3,708,000
December 31, 2003 $4,054,000"
6. Amendment of Section 7.12A. Section 7.12A of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
"Section 7.12A Tangible Net Worth. Permit the Tangible Net Worth of the
Parent and its Subsidiaries (in each case computed and calculated in accordance
with GAAP) on a Consolidated basis as of the end of each of the fiscal quarters
set forth below to be less than the amount set forth below opposite each such
fiscal quarter:
Quarterly Period Ending Tangible Net Worth
----------------------- ------------------
March 31, 2003 $5,146,000
June 30, 2003 $4,431,000
September 30, 2003 $5,683,000
December 31, 2003 $6,349,000"
7. Future Amendment of Financial Covenants. Agent, Lenders and Borrowers
agree that, for each year for which financial covenants have been provided for
under the Credit Agreement, on or before March 15 of the year immediately
following such year, the parties will agree upon further amendment of Sections
7.11 (EBITDA), 7.10 (Minimum Interest Coverage Ratio) and 7.12A (Tangible Net
Worth) of the Credit Agreement for Borrowers' next fiscal year, based upon the
summary of business plans and financial operations projections that Borrowers
are obligated to deliver to Agent for each such subsequent fiscal year pursuant
to Section 6.05 of the Credit Agreement. Such further amendments will be
calculated by Agent in a manner consistent with the calculation of the revisions
to such financial covenants provided for in this Amendment.
8. Representations and Warranties. Borrowers hereby represent and warrant
to Lenders that the representations and warranties set forth in Article IV of
the Credit Agreement are true on and as of the date hereof, as if made on and as
of the date hereof, after giving effect to this Amendment, except to the extent
that any such representation or warranty expressly relates to a prior date, and
breach of any of the representations and warranties made in this paragraph 8
shall constitute an Event of Default under Article VIII(a) of the Credit
Agreement. Borrowers further represent and warrant that, after giving effect to
this Amendment, no Event of Default or event which, with the lapse of time or
the giving of notice or both, would become an Event of Default has occurred and
is continuing.
9. Effectiveness. This Amendment shall become effective on the date Agent
shall have received counterparts of this Amendment duly executed and delivered
by each of the parties hereto.
10. Continuing Effect of Credit Agreement. This Amendment shall not
constitute a waiver or amendment of any provision of the Credit Agreement not
expressly referred to herein and shall not be construed as a consent to any
further or future action on the part of either of the Borrowers that would
require consent of Lenders. Except as expressly amended by this Amendment, the
provisions of the Credit Agreement are and shall remain in full force and
effect.
11. Applicable Law. This Amendment shall be construed in accordance with
and governed by the laws of the State of New York (other than the conflicts of
law principles thereof).
12. Counterparts; Facsimile Signature. This Amendment may be executed in
counterparts, each of which shall constitute an original and all of which when
taken together shall constitute but one contract. Delivery of an executed
counterpart of the signature page of this Amendment by facsimile shall be
effective as delivery of a manually executed signature page hereto.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective authorized officers as of the
day and year first above written.
DONNKENNY APPAREL, INC., as a BELDOCH INDUSTRIES CORPORATION,
Borrower and a Guarantor as a Borrower and a Guarantor
By: /s/ Maureen d Schimmenti By: /s/ Maureen d Schimmenti
------------------------ ------------------------
Name: Maureen d Schimmenti Name: Maureen d Schimmenti
-------------------- --------------------
Title: Vice President and Chief Financial Officer Title: Vice President and Chief Financial Officer
------------------------------------------ ------------------------------------------
CHRISTIANSBURG GARMENT H SQUARED DISPOSITIONS, INC., as a
COMPANY, INCORPORATED, as a Guarantor
Guarantor
By: /s/ Maureen d Schimmenti
------------------------
By: /s/ Maureen d Schimmenti Name: Maureen d Schimmenti
------------------------ --------------------
Name: Maureen d Schimmenti Title: Vice President and Chief Financial Officer
-------------------- ------------------------------------------
Title: Vice President and Chief Financial Officer
------------------------------------------
THE CIT GROUP/COMMERCIAL THE CIT GROUP/COMMERCIAL
SERVICES, INC., as Agent SERVICES, INC., as a Lender
By: /s/ John M. Szwalek By: /s/ John M. Szwalek
------------------- -------------------
Name: John M. Szwalek Name: John M. Szwalek
--------------- --------------------
Title: Vice President Title: Vice President
-------------- --------------
CENTURY BUSINESS CREDIT
CORPORATION, as a Lender
By: /s/ Steven Stone
----------------
Name: Steven Stone
------------
Title: Executive Vice President
------------------------