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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
-----------------
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.
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(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 30,
2003, the last business day of the registrant'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-affiliates of the registrant on such date was
approximately $2,552,043.
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 12, 2004 of $2.58 per share, was approximately
$8,894,302*. As of March 12, 2004, 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 and
better priced women's sportswear and coats. The Company's major labels include
Pierre Cardin (R), Donnkenny (R), Bill Blass (R), Bill Blass Signature (R),
Blassport (R), Casey & Max (R), Victoria Jones (R), and Harve Benard (R). In
2003 the Company's products were marketed through the following divisions:
Pierre Cardin (R), Donnkenny(R), Casey & Max (R), Victoria Jones (R), Robyn
Meredith (R) and Donnkenny Coats.
Pierre Cardin
The division sells better women's knitwear and sweaters 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 Macy's East, Macy's West, Chadwick's Catalog, Stein Mart, Sam's Club,
BJ's Wholesale Club, Marshalls and Newton Buying. In addition, it sells
exclusive private label products to customers such as Lerner Direct and the Bon
Ton. Approximately 97% of these products are imported, predominately from Hong
Kong, China, Korea and Vietnam.
Donnkenny
Donnkenny sells moderately priced women's career and casual pants and tops
for missy, petites and large sizes. Its major customers include J.C. Penney,
Kmart, 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. The balance is sourced in
the Far East.
Casey & Max
Casey & Max sells 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 Catherine's, Kohl's,
Goody's, Gottschalks, Peebles, Bealls, Stage Stores, Stein Mart and May Company.
The products are marketed for missy, large sizes and petites. In addition, it
sells exclusive private label products. The majority of these products are
imported, predominately from India, Nepal, Hong Kong and Vietnam.
Victoria Jones
Victoria Jones sells moderately-priced women's knit and sweater products
which are sold to department stores, specialty stores and chains including May
Company, Catherine's, Macy's West, Bon Marche, Goody's, Peebles, Dillard's,
Stage Stores 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, Hong Kong,
Bangladesh and Nepal.
Robyn Meredith
On October 1, 2003, the Company acquired certain assets of Robyn Meredith
Inc. The Company's Robyn Meredith division sells moderately priced women's
career and casual sportswear for missy, petites and large sizes. The majority of
its products are exclusive private label products for department stores,
specialty stores and catalogs. Its major customers include Coldwater Creek,
Mervyn's, Chadwick's of Boston, Nordstrom, Ross Stores and B. Moss. These
products are imported predominantly from China, Mexico and India.
2
Donnkenny Coats
On May 1, 2003, the Company entered into a licensing agreement to
manufacture and sell coats under the Bill Blass label. The coats are sold to
department and specialty stores. Its major customers include Saks Fifth Avenue,
Burlington Coat Factory, and Loehmann's. Substantially all of the coats are
manufactured in Poland and Belarus.
Manufacturing and Importing
Almost all of the Company's products sold in Fiscal 2003 were produced
abroad and imported into the United States, principally from Guatemala, Hong
Kong, India, China, Belarus, Vietnam, Mexico, Korea, Bangladesh, Poland and
Nepal.
The Company's purchases from its foreign suppliers are affected 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. Three foreign
contractors, one in India and two in Guatemala, accounted for 24% of the
Company's purchases, but no other domestic or foreign contractor manufactured
more than 6% of the Company's purchases in Fiscal 2003.
Attendant with the Company's increased reliance on foreign manufacturing
is a risk of excess inventory. On some products the Company must commit to its
foreign manufacturers and suppliers four to six months in advance of its selling
season, often 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. Additionally, 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. 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. 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. The Company's operations have not been materially
affected by any of these 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 2003, the Company shipped orders to approximately 10,100 stores
in the United States. This customer base represents approximately 650 accounts.
Of the Company's net sales for Fiscal 2003, department stores accounted for
approximately 56%, wholesale clubs approximately 15%, catalog customers
approximately 11%, mass merchants approximately 2%, chain stores approximately
2%, specialty retailers approximately 5% and other customers approximately 9%.
3
The Company markets its products to department stores, including J. C.
Penney, May Company, Federated, Mervyn's, 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 Coldwater Creek and mass
merchants including K-Mart. The Company also sells exclusive private label
products to catalog specialty retailers and suppliers.
In Fiscal 2003, sales to J.C. Penney accounted for 28% and sales to Sam's
Club accounted for 14% of the Company's net sales. The loss of or significantly
decreased sales to these customers could have a material adverse effect on the
Company's consolidated financial condition and results of operations.
The Company's Electronic Data Interchange computer system ("EDI") connects
the Company to approximately 48 of its large customers and, in Fiscal 2003, was
used to place 59% of the Company's order dollars. The Company is also linked by
EDI to several of its major fabric suppliers, which allows the Company to review
purchase orders for fabric on a weekly basis.
Sales and Marketing
At March 12, 2004, the Company had an 11 person sales force; 10 of them
were Company employees and one was an independent commissioned sales
representative. 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
2003, 89% 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),
Beldoch Popper (R) and Robyn Meredith (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. On February 12, 2004, the Company entered into a new
License Agreement with the Pierre Cardin organization to provide for a license
term of three years to conclude on December 31, 2006.
On January 1, 2001 the Company signed a license agreement with Harve
Benard to produce and sell a knitwear line. The Company began shipments in the
fourth quarter of 2001. The Harve Benard trademark will not be used by the
Company after the conclusion of this agreement on September 30, 2004. The
Company does not believe that the discontinuance of this trademark will have a
material effect on its operations.
On May 1, 2003, the Company entered into a licensing agreement to
manufacture and sell women's coats under the Bill Blass (R), Bill Blass
Signature (R), and Blassport (R) labels. The three year licensing agreement has
an automatic three year renewable term with additional renewable terms,
thereafter.
4
On June 16, 2003, the Company entered into a three year licensing
agreement to manufacture knits, sweaters, and woven tops under the Z. Cavaricci
label. The Company intends to begin shipments with the Spring 2004 season.
On September 10, 2003, the Company entered into a three year licensing
agreement to manufacture and sell women's coats under various Nicole Miller
labels. The Company intends to begin shipments of coats under this agreement
with the Fall 2004 season.
The guaranteed minimum royalties for these licenses are $7.6 million over
the terms of the agreements through 2009.
Backlog
At March 12, 2004, the Company had unfilled, confirmed customer orders of
approximately $30.4 million, compared to approximately $24.8 million of such
orders at March 14, 2003, 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 may not necessarily be meaningful nor be indicative of eventual actual
shipments. There can be no assurance that cancellations, rejections and returns
will not reduce the amount of sales realized from the backlog of orders.
Competition
The women's apparel business is highly competitive and consists of many
manufacturers and distributors, none of which accounts for a significant
percentage of total sales in the overall market, but many of which are larger
and have substantially greater resources than the Company. The Company competes
with both domestic manufacturers and importers, primarily on an item-by-item
basis, with respect to brand name recognition, price, quality and availability.
Employees
As of March 12, 2004 the Company had 203 full-time employees, 134 of whom
were salaried and 69 were paid on an hourly basis. The Company had 8 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.
5
ITEM 2. PROPERTIES
The following table indicates the facilities owned or leased at December
31, 2003. The Company owns two facilities in Virginia, and leases five
additional facilities: one in Summerville, South Carolina, one in New York
State, one in Burlington, New Jersey, one in Poland and one in Hong Kong.
Owned
Approximate 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
Burlington, New Jersey (3)....... 18,216 Administration Leased
Hong Kong (4).................... 2,200 Administration, sourcing, quality control Leased
Poland........................... 1,000 Administration, sourcing, quality control Leased
Floyd, Virginia.................. 79,600 Currently for sale Owned
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TOTAL 505,850
1) This facility is leased, with annual rental payments totaling $491,727,
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) This facility is leased, with annual rental payments totaling $113,850,
until September 30, 2006, at which time the lease expires.
4) Lease expires in 2004. The Company will lease a new facility beginning in
March 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. This
action is scheduled to go to trial in May 2004.
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.
6
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 12, 2004.
Period High Low
- ------ ---- ---
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
First Quarter ....................... $ 1.30 0.67
Second Quarter ...................... 1.10 0.77
Third Quarter ....................... 1.48 0.77
Fourth Quarter ...................... 3.00 1.30
Fiscal 2004
Eleven Weeks Ended March 12, 2004 ... $ 2.70 $ 1.84
On March 12, 2004, the closing price for a share of Common Stock was $2.58
per share.
The number of holders of record for the Company's Common Stock as of March
9, 2004 was 51.
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 it 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, 2003 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of Donnkenny, Inc. are authorized for issuance.
7
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
Plan Category warrants and rights warrants and rights equity compensation plans Total
- ---------------------------- ----------------------- -------------------- ------------------------- -----------
Equity Compensation Plans
Approved by Security Holders
- Stock Options (1) 160,026 $5.16 315,149 475,175
- 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 178,776 N/A 315,149 493,925
======================= ==================== ========================= ===========
(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 plans, 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 dates 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 on July 23, 2004.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the year
ended December 31, 2003 has been derived from the Company's Consolidated
Financial Statements included elsewhere in this Form 10-K which have been
audited by Mahoney Cohen and Company, CPA, P.C., independent auditors, whose
report thereon is also included herein. The selected consolidated financial data
as of December 31, 2002 and for each of the years in the two year period ended
December 31, 2002 have been derived from the Company's Consolidated Financial
Statements which have been audited by Deloitte & Touche LLP, the Company's
former independent auditors whose report is also included herein. The selected
consolidated financial data as of December 31, 2001, 2000 and 1999 and for the
fiscal years ended December 31, 2000 and 1999 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.
8
Year Ended
============================================================================
December 31, December 31, December 31, December 31, December 31,
1999 2000 2001 2002 2003
============================================================================
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net sales ................................ $ 173,749 $ 151,055 $ 152,180 $ 107,102 $ 92,351
Cost of sales ............................ 138,816 124,073 117,497 80,345 70,895
--------- --------- --------- --------- ---------
Gross profit ............................. 34,933 26,982 34,683 26,757 21,456
Selling, general and
Administrative expenses .................. 33,002 28,194 28,367 22,339 22,011
Amortization of goodwill and other
related acquisition costs (2) ........... 1,390 1,437 1,489 -- 51
Provision for settlement of litigation ... 5,875 599 -- -- --
Write-down of assets held for sale ....... -- -- 300 150 36
Restructuring Charge ..................... -- 500 -- -- --
--------- --------- --------- --------- ---------
Operating income (loss) .................. (5,334) (3,748) 4,527 4,268 (642)
Interest expense, net .................... 4,007 5,097 4,703 2,039 1,535
--------- --------- --------- --------- ---------
Income (loss) before income taxes ........ (9,341) (8,845) (176) 2,229 (2,177)
Income tax expense (benefit) ............. 87 88 (220) 36 (55)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect
in change in accounting principle ....... (9,428) (8,933) 44 2,193 (2,122)
Cumulative effect of change in
accounting principle (2) ................ -- -- -- 28,744 --
--------- --------- --------- --------- ---------
Net income (loss) ........................ $ (9,428) $ (8,933) $ 44 $ (26,551) $ (2,122)
========= ========= ========= ========= =========
Basic income (loss) per Common Share (1):
Income (loss) before accounting change ... $ (2.65) $ (2.26) $ 0.01 $ 0.50 $ (0.49)
Cumulative effect of accounting change(2) -- -- -- (6.58) --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ (2.65) $ (2.26) $ 0.01 $ (6.08) $ (0.49)
========= ========= ========= ========= =========
Shares used in the calculation of
basic income (loss) per share ........... 3,552 3,957 4,367 4,367 4,367
========= ========= ========= ========= =========
Diluted income (loss) per Common Share (1):
Income (loss) before accounting change ... $ (2.65) $ (2.26) $ 0.01 $ 0.50 $ (0.49)
Cumulative effect of accounting change(2) -- -- -- (6.58) --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ (2.65) $ (2.26) $ 0.01 $ (6.08) $ (0.49)
========= ========= ========= ========= =========
Shares used in the calculation of
diluted income (loss) per share ......... 3,552 3,957 4,388 4,418 4,367
========= ========= ========= ========= =========
Consolidated Balance Sheet Data:
Working capital .......................... $ 48,302 $ 39,199 34,891 $ 25,306 $ 33,761
Total assets ............................. 101,837 91,343 82,400 43,439 50,765
Long-term debt, including current portion 42,775 42,147 35,777 23,983 36,060
Stockholders' equity ..................... 41,881 33,653 33,697 7,146 5,024
- ----------
(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.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introductory Overview
The Company is engaged in the women's apparel business. The Company's
business consists of importing and marketing women's apparel, consisting
primarily of women's sportswear and coats, to its retail customers who in turn
sell the Company's products to the ultimate retail consumer. The business of the
Company is highly competitive. The Company's products consist of its own brand
names ("Branded Products") as well as those produced under a licensing
arrangement for the use of Pierre Cardin(R), Harve Benard(R), Bill Blass(R), Z.
Cavaricci(R) and Nicole Miller(R) trademarks ("Trademark Products"). In addition
to selling its Branded and Trademark Products to its customers, the Company
develops specific product ("Private Label Products") for some of its larger
accounts, such as mass merchandisers and national chains.
The women's apparel business is characterized by a large number of small
companies selling unbranded merchandise, and by several large companies that
have developed widespread consumer recognition of the trademarks and brand names
associated with merchandise sold by these companies. In addition, retailers to
whom the Company sells its products have sought to expand the development and
marketing of their own brands and to obtain women's apparel products directly
from the same sources from which the Company obtains its products.
The Company's women's apparel business provides product for department
stores, specialty stores, regional chains, discounters and warehouse clubs.
Sportswear is marketed for four selling seasons a year. The Company's women's
coat products, consisting of outerwear and rainwear, are marketed for two
specific selling seasons. To be competitive, the Company is required to create a
substantially new line of products for each selling season. In this competitive
environment, the Company's Branded Products, which do not have widespread
consumer recognition, although they are well known by the Company's retail
customers, must compete with widely recognized brand names of product produced
by the Company's competitors. The Company's Trademark Products have widespread
brand recognition but they must compete against other widely know brands. In
addition, the Company makes presentations throughout the year to Private Label
accounts. The Company does not have long-term contracts with any of its
customers and, therefore, its business is subject to unpredictable increases and
decreases in sales depending upon the size and number of orders that the Company
receives each time it presents its products to its customers.
In this climate, the Company must constantly change its product mix to
sell to its customers. This requires the Company not only to design products
which it anticipates will have commercial appeal, but also to develop, acquire
and sometimes discontinue the use of Brands and Trademarks. Thus, for the year
ended December 31, 2002, the Company's Net Sales were $107.1 million, of which
approximately 44% consisted of sales of Trademark Product, 48% consisted of
Branded Product and the balance of Private Label Product. For the year ended
December 31, 2003, the Company's Net Sales were $92.3 million, of which
approximately 35% consisted of sales of Trademark Product, 40% consisted of
Branded Product and the balance of Private Label Product.
In 2003 the Company discontinued the marketing of products under the
Rebecca Jones Brand and acquired the Z. Cavaricci(R), Nicole Miller(R) and Bill
Blass(R) Trademarks for certain products. The Company's 2003 Net Sales for
discontinued Brands were $1.5 million. Net Sales under the Bill Blass(R)
trademarks in 2003, were approximately $7.0 million. Sales under the Company's
Z. Cavaricci(R) and Nicole Miller(R) Trademarks are planned to begin in 2004. On
October 1, 2003, the Company acquired its Robyn Meredith Division, which
primarily sells Private Label Brands. In the fourth quarter this division
accounted for 25.6% of the fourth quarter sales and 8.9% of sales for the entire
year.
Of the Company's net sales for Fiscal 2003, department stores accounted
for approximately 56%, wholesale clubs approximately 15%, catalog customers
approximately 11%, mass merchants approximately 2%, chain stores approximately
2%, specialty retailers approximately 5% and other customers approximately 9%.
10
At March 12, 2004, the Company had unfilled, confirmed customer orders of
approximately $30.4 million, compared to approximately $24.8 million of such
orders at March 14, 2003, with such orders generally scheduled for delivery
within three to six months of confirmation, although some extend until the end
of the 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 may not necessarily be meaningful nor be indicative of eventual actual
shipments. There can be no assurance that cancellations, rejections and returns
will not reduce the amount of sales realized from the backlog of orders. In
addition, much of the Company's products are unbranded and based upon the
current retail conditions, customers are placing orders for product closer to
need. Therefore, it is difficult for the Company to estimate its future
performance based upon the back log of current orders.
Because of the challenges faced by the foregoing changing factors, the
Company's management is constantly assessing the acceptance of its product mix
and making adjustments accordingly.
Results of Operations
The following table sets forth selected operating data of the Company as
percentages of net sales, for the periods indicated below:
December 31,
------------
Year Ended 2001 2002 2003
- --------------------------------------------------------------------------------------------
Net sales ......................................... 100.0% 100.0% 100.0%
Cost of sales ..................................... 77.2 75.0 76.8
------ ------ ------
Gross profit ...................................... 22.8 25.0 23.2
Selling, general and administrative expenses ...... 18.6 20.9 23.8
Amortization of intangibles ....................... 1.0 -- 0.1
Write-down of assets held for sale ................ 0.2 0.1 --
------ ------ ------
Operating income (loss)............................ 3.0 4.0 (0.7)
Interest expense, net ............................. 3.1 1.9 1.7
------ ------ ------
Income (loss) before income taxes ................. (0.1) 2.1 (2.4)
Income tax (benefit) .............................. (0.1) 0.1 (0.1)
------ ------ ------
Income (loss) before cumulative effect of change in
accounting principle .............................. -- 2.0 (2.3)
Cumulative effect of change in accounting principle -- 26.8 --
------ ------ ------
Net income (loss) ................................. 0.0% (24.8%) (2.3%)
====== ====== ======
11
Comparison of Fiscal 2003 with Fiscal 2002
Net Sales
Net Sales decreased by $14.8 million or 13.8% from $107.1 million in
Fiscal 2002 to $92.3 million in Fiscal 2003. The net decrease in sales was
caused by a deterioration of some of the Company's non-branded products appeal
in the marketplace, increased competition from customers' own labels and the
continuing slow retail environment. In addition, the Company experienced a
decrease in orders for certain products made under licensed trademarks in favor
of competitors whose brand names provided more appeal. To a certain degree,
these decreases were offset by increases in the Company's private label
businesses and by the sales generated by the two divisions acquired late in the
year; Robyn Meredith and Donnkenny Coats.
Gross Profit
Gross profit in 2003 was $21.4 million, or 23.2% of net sales, compared to
$26.8 million, or 25.0% of net sales, in 2002. The decrease in gross profit as a
percentage of net sales was primarily attributable to the sale of excess
inventory and strong price competition in the marketplace.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased to $22.0
million in 2003 from $22.3 million in 2002. 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. These
reductions were offset by additional expenses incurred attributable to the two
divisions acquired late in the year, Robyn Meredith and Donnkenny Coats. In
addition, in 2003, the Company recorded a provision for bad debts not sold to
its commercial factor of $0.9 million due to the fact that the ultimate
collection of the balance of a certain receivable is in dispute. The Company
intends to vigorously pursue the collection of this receivable.
Operating Income
In 2003, the Company had operating income of $0.6 million versus $4.3
million for 2002.
Interest Expense
In 2003, interest expense was $1.5 million versus $2.0 million in 2002.
The decrease was attributable to lower borrowings under the Company's credit
agreement due to decreased inventory purchases and lower operating expenses and
a decrease in the Company's interest rate.
Net Income (Loss)
In 2003, the Company reported a net loss of $2.1 million or $(0.49) per
share versus a net loss of $26.6 million, or $(6.08) per share in 2002.
Fiscal 2002 Compared to 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 the net sales was
primarily due to the elimination of certain product lines including the Decade
dress line, a significant cashmere program, career private label, 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.
12
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 the 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.
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 of $0.50 per share versus a net
income of $44,000, or $0.01 per share in Fiscal 2001.
13
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 a net income of $44,000, or $0.01 per share in Fiscal 2001.
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.
On June 29, 1999, the Company and its operating subsidiaries signed a
Credit Agreement (the "Credit Agreement") with CIT Group/Commercial Services
(the "Lender"). The Credit Agreement initially provided 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.
Collateral for the Credit Agreement includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in its operating subsidiaries, Donnkenny Apparel, Inc. and
Beldoch Industries Corporation.
The Credit Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain specified levels of tangible net worth and comply with a 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.
14
In July 2000, the Credit Agreement was amended to provide for an
additional $1.3 million term loan to finance an acquisition. This term loan bore
interest at the prime rate plus 2% and was paid from January 1, 2001 to March
2003, at which time this term loan was paid.
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 (6.50% at January 1, 2002). No fee was
paid in connection with the Amendment and Waiver. The Company had achieved the
objectives and received an additional rate reduction effective July 1, 2002. The
interest rate on the revolving credit borrowings was now prime plus one and
one-half percent (5.75% at December 31, 2002).
Effective January 1, 2003, the Company established convenants 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 and one-quarter percent. No fee was paid in connection with
this amendment.
Effective June 30, 2003, the Company through an Amendment and Waiver
Agreement dated August 11, 2003, extended the Credit Agreement to June 30, 2007.
This Amendment provides the Company with a $65 million facility with the
original sublimits remaining the same. The interest rate on the revolving credit
borrowings is the current prime rate plus one and one-quarter percent (5.25% at
December 31, 2003). Fees paid in connection with this Amendment were $243,750.
All other terms and conditions of the Credit Agreement remained unchanged.
As of December 31, 2003, the Company was not in compliance with the
quarterly financial covenants. The Lender has waived this non-compliance. The
Company paid a fee of $100,000 in connection with this waiver.
At the end of Fiscal 2003, direct borrowings under its Credit Agreement
were $35 million. Additionally, the Company had letters of credit outstanding of
$6.6 million, with an unused facility of $23.4 million. At the end of Fiscal
2002, direct borrowings, term loan balance and letters of credit outstanding
under the credit facility were $23.7 million, $0.3 million and $11.8 million,
respectively.
Effective January 1, 2004, the Company established covenants and the level
of allowable overadvances with the lender, through an Amendment to the Credit
Agreement dated March 26, 2004, to support its 2004 business plan. No fee was
paid in connection with the Amendment.
The Company also has a factoring agreement with CIT Group/Commercial
Services. The Company sells a substantial portion of its trade receivables to
CIT Group without recourse, up to maximum credit limits established by CIT Group
for each individual account. The factoring agreement provides for a factoring
commission equal to .35% of gross sales, plus certain customary charges. The
factoring agreement renews annually in June each year unless either party gives
appropriate notice of nonrenewal.
In connection with the acquisition of Robyn Meredith (see note 14 to the
Consolidated Financial Statements), a note payable of $1.1 million was incurred.
This note is payable in monthly installments of $33,333 including imputed
interest at an interest rate of 5.25%. The final payment will be due October
2006.
During Fiscal 2003, cash used by operating activities was $6.7 million,
principally as the result of decreases in accounts payable and increases in
inventory, accounts receivable and due from factor. During Fiscal 2002, cash
provided by operating activities was $12.2 million, principally as the result of
decreases in inventory and due from factor and increases in accounts payable
offset by decreases in accrued expenses and other current liabilities.
15
Cash used in investing activities in Fiscal 2003 included $0.4 million for
the purchase of fixed assets, principally computer equipment and related
software, the acquisition of Robyn Meredith of $3.4 million (including inventory
acquired ) and the acquisition of the Bill Blass licenses of $0.5 million. 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 received from the sale of property, plant and equipment.
In Fiscal 2003, the Company was permitted to spend up to $2.0 million on the
combination of capital investments or the repurchase of its own stock in
accordance with the Credit Agreement described below.
Cash provided by financing activities in Fiscal 2003 was $11.0 million
which represents net borrowings under the Credit Agreement of $11.3 million
partially offset by repayments of $0.3 million of a term loan and a note
payable. Cash used in financing activities in Fiscal 2002 was $11.8 million
which represents net repayments under the Credit Agreement of $10.7 million, and
repayments of $1.1 million of a term loan.
16
The Company believes that cash flows from operations and amounts available
under the Credit Agreement will be sufficient for its needs for the next twelve
months.
Contractual Commitments and Contingent Liabilities
The following table summarizes the Company's contractual commitments and
contingent liabilities at December 31, 2003:
Contractual Obligations Payments due by Less than 1-3 years 3-5 years More than
(In Thousands) period 1 year 5 years
Total
Long Term debt (1) $36,142 $ 400 $ 733 $35,009 --
Operating Leases (2) $ 9,530 $ 2,767 $ 4,372 $ 2,391 --
Guaranteed Minimum Royalties (3) $ 7,643 $ 1,798 $ 5,020 $ 550 $ 275
Letters of Credit (4) $ 6,570 $ 6,570 -- -- --
Inventory Purchase Agreement (5) $ 1,100 $ 1,100 -- -- --
------- ------- ------- ------- -------
Total $60,985 $12,635 $10,125 $37,950 $ 275
(1) See Note 6 to the Consolidated Financial Statements
(2) See Note 11e to the Consolidated Financial Statements
(3) The Company has guaranteed minimum royalties which represent those minimum
amounts due in connection with the Pierre Cardin, Harve Benard, Bill
Blass, Z. Cavaricci and Nicole Miller licenses.
(4) As of December 31, 2003, the Company was contingently liable for
outstanding letters of credit (See Note 6 to the Consolidated Financial
Statements).
(5) See Note 11d to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt or
operating its business. The Company does not have any arrangements or
relationships with related entities that are not consolidated into the Company's
financial statements that are reasonably likely to materially affect the
Company's liquidity or the availability of capital resources.
On May 1, 2003, the Company purchased certain assets from Rose Cloak &
Suit Co., Inc. ("Rose Cloak"), an unrelated company. The purchased assets were
used by the Company to establish its Donnkenny Coats Division. Two of the
principals of Rose Cloak became full time employees of the Company and were
allowed to continue their ownership interest in Rose Cloak. In connection with
the asset purchase transaction, the Company agreed to purchase from Rose Cloak
raw materials inventory for $2.7 million of which $1.6 million was purchased in
2003 and the balance is to be purchased in 2004. The Company believes that this
was an arms length, commercially reasonable transaction. (See Contractual
Commitments and Contingent Liabilities above).
17
Other Items Affecting the Company
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line wholesalers (such as the Company) and a
larger number of specialty manufacturers. The Company faces substantial
competition in its markets in both categories.
Apparel Industry Cycles and other Economic Factors
The apparel industry historically has been subject to substantial cyclical
variation, with consumer spending on apparel tending to decline during
recessionary periods. A continuing decline in the general economy or
uncertainties regarding future economic prospects may affect consumer spending
habits, which in turn, could have a material adverse effect on the Company's
results of operations and its financial condition.
Retail Environment
Various retailers, including some of the Company's customers, have
experienced declines in revenue and profits in recent periods and some have been
forced to file for bankruptcy protection. Retailers are now placing smaller
orders and ordering closer to need. To the extent that these current market
conditions continue, there can be no assurance that the Company's financial
condition and results of operations will not be adversely affected.
Seasonality of Business and Fashion Risk
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as one
year in advance and manufactured approximately one season in advance of the
related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability to successfully anticipate the needs
of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
Foreign Operations
Attendant with the Company's increased reliance on foreign manufacturing
is a risk of excess inventory. On some products the Company must commit to its
foreign manufacturers and suppliers four to six months in advance of its selling
season, often 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
18
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. Additionally, 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. 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. 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. The Company's operations have not been materially
affected by any of these 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.
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:
o Risks associated with war and terrorist activities, including
reduced shopping activity as a result of public safety concerns and
disruption in the receipt and delivery of merchandise;
o 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;
o Risks of increased sourcing costs;
o Any significant disruption in the Company's relationships with its
suppliers, manufacturers and employees.
o Risk of foreign currency fluctuations.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). FIN 46 requires that a variable interest entity be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements apply to the
first fiscal year or interim period ending after March 31, 2004. The Company
believes the adoption FIN 46 will not have a material impact on its reported
consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No.133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133. "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The Company does not expect adoption of SFAS No.
149 to have an impact on the consolidated financial statements as the Company
does not engage in derivative or hedging activity.
19
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). The adoption of SFAS No.150 will
not have an impact on the Company's reported consolidated financial position,
results of operations or cash flows.
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 and Due from Factor - Accounts Receivable and due from
factor as shown on the Consolidated Balance Sheets, are 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, an
evaluation of the impact of economic conditions and other factors. The Company
sells a substantial portion of its trade receivables to a commercial factor,
without recourse, up to maximum credit limits established by the factor for each
individual account. Receivables sold in excess of these limitations are subject
to recourse in the event of non-payment by the customer. 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. 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 at December 31, 2003 and 2002. 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. These
reviews are 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.
20
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 $20.0 million for federal
income taxes and $31.0 million for state income taxes, have resulted in
estimated tax benefits of $8.2 million as of December 31, 2003 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 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
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. Those
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, 2003 and 2002, the carrying amounts of the Company's
revolving credit borrowings and term loans approximated fair value. The
Company's revolving credit borrowings under its Credit Agreement bear interest
at the prime rate plus one and one-quarter percent (5.25% at December 31, 2003).
As of December 31, 2003, a hypothetical immediate 10% adverse change in prime
interest rates (from 4.0% to 4.4%) 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.
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective August 26, 2003 the Company discharged Deloitte & Touche LLP as
its independent accountants. The reports of Deloitte & Touche LLP on the
Company's consolidated financial statements for the past two fiscal years did
not contain an adverse or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. The Company's
Audit Committee participated in and approved the decision to change independent
accountants.
In connection with its audits for the two most recent fiscal years and
through August 26, 2003, the Company had no disagreements with Deloitte & Touche
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports.
The Company requested that Deloitte & Touche LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above statement.
A letter from Deloitte & Touche LLP dated September 10, 2003 was provided, and
an amended Form 8K/A dated September 11, 2003 containing that letter was filed
with the Securities and Exchange Commission.
The Company has engaged Mahoney Cohen & Company, CPA, P.C. as its new
independent accountants. During the two most recent fiscal years and through
August 26, 2003 the Company has not consulted with Mahoney Cohen & Company, CPA,
P.C. regarding (i) the application of accounting principles to a specified
transaction either completed or proposed, or the type of audit opinion that
might be rendered on the Company's consolidated financial statements, and no
written report or oral advice was provided to the Company concluding there was
an important factor to be considered by the Company in reaching a decision as to
an accounting, auditing, or financial reporting issue; (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item 304(a) (1)
(iv) of Regulation S-K and the related instruction to Item 304 of Regulation
S-K, or a reportable event, as that term is defined in Item 304(a) (1) (iv) of
Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management with the participation of Daniel H. Levy, the
Chief Executive Officer and Maureen d. Schimmenti, the Chief Financial Officer
has evaluated the effectiveness of the Company's disclosure controls and
procedures as of the year covered by this report. Based on this evaluation the
Company's Chief Executive Officer and Chief Financial Officer, concluded that
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information required to be included in the reports
that it files or submits under the Securities and Exchange Act of 1934, as
amended. Such evaluation did not identify any change in the Company's internal
controls over financial reporting that occurred during the year ended December
31, 2003, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
22
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 60 years old.
Maureen d. Schimmenti, has been Vice President and Chief Financial Officer
of the Company since June 2001. She joined the Company in May 2000 as its
Corporate Controller. Prior thereto, she was the Executive Vice President and
Corporate Controller of the Anne Klein Company from 1986 to 2000. Ms. Schimmenti
also serves as Secretary of the Company. Ms. Schimmenti is 52 years old.
Sheridan C. Biggs, a director of the Company since 1997, is
Executive-in-Residence at the Graduate College of Union University. 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 69 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 61 years old.
Robert A. Kasenter, a director of the Company since 2001, is the Vice
President of Human Resources for EZ Corp., a company in the specialty consumer
finance industry. He is also 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 57 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 63 years old.
23
Robert W. Schwartz, a director of the company since July 1, 2003, is a
Managing Director and founder of Schwartz Heslin Group, Inc. which specializes
in corporate planning, finance and development. Mr. Schwartz was elected to the
Board to fill the vacancy created by the resignation of Lynn Siemers. Mr.
Schwartz also is a director of Docucon, Inc. a NASDAQ company. Mr. Schwartz is
58 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, 2003,
all Section 16(a) reporting requirements applicable to the Company's officers,
directors and greater than ten percent shareholders were in compliance.
Audit Committee and Financial Reports
The Board of Directors of the Company has established an Audit Committee
from among its members consisting of Sheridan C. Biggs, Chair, Richard C.
Rusthoven and Robert W. Schwartz. Each member of the Audit Committee meets the
independence requirements of the Securities Exchange Act of 1934. Each member of
the Audit Committee is financially literate, knowledgeable and qualified to
review financial statements. The "audit committee financial expert" designated
by the Company's Board of Directors is Sheridan C. Biggs, Chair of the Audit
Committee and a former senior partner of Price Waterhouse, the accounting and
consulting firm.
Code of Ethics
The Company has adopted a code of business conduct and ethics applicable
to the Company's Directors, Officers (including the Company's principal
executive officer and principal financial officer) and all other Company
employees known as the Standards of Business Conduct. A copy of the Company's
Standards of Business Conduct is being filed with the Securities and Exchange
Commission as exhibit 32.3 to this Annual Report on Form 10-K. The Company
undertakes to provide to any person without charge, upon request, a copy of the
Company's Standards of Business Conduct. Requests for such copy should be made
in writing to the Company at its principal office, which is set forth on the
first page of this Form 10-K, attention Chief Financial Officer.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid in the fiscal years ended
December 31, 2003, December 31, 2002, and December 31, 2001 to those persons who
were, at December 31, 2003 (i) the chief executive officer and (ii) the chief
financial officer.
SUMMARY COMPENSATION TABLE
-------------------------------
Long Term
Annual Compensation Compensation Awards
----------------------------------------------------------------------------
Securities All Other
Fiscal Restricted Underlying Compensation
Name and Principal Position Year Salary Bonus Stock Awards Options/SARs (1)
- --------------------------------------------------------------------------------------------------------------------------
Daniel H. Levy 2003 $924,383 $191,250 $40,595
Chairman of the Board and 2002 $895,054 $350,000 $ 7,449
Chief Executive Officer 2001 $715,928 $200,000 $ 2,580
Maureen d. Schimmenti (2) 2003 $256,230 $ 22,591 $ 1,220
Vice President and Chief 2002 $243,210 $ 43,702 $ 1,192
Financial Officer 2001 $204,039 $ 10,000 $ 1,104
- ----------
(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 in June 2001.
24
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 in 2000, 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
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
$850,000, a performance bonus based on participation in the bonus plan in effect
for all other senior executives of the Company and certain insurance and other
benefits which are grossed up for tax impact. In addition, commencing January 1,
2003 and on each January 1 thereafter Mr. Levy shall be eligible for an increase
in his base annual salary equal to the greater of either the percentage increase
in the Cost of Living Index (as defined) or at such higher rate as the
Compensation Committee of the Board of Directors at its discretion designates.
The agreement further states that if Mr. Levy's employment is terminated
(except in certain limited circumstances) following a Change of Control, as
defined, then Mr. Levy shall be entitled to receive severance benefits equal to
three times the sum of his then base annual salary inclusive of performance
bonus payable. Mr. Levy and his eligible dependents will be provided with
medical insurance coverage at the Company's expense for a maximum of five years
following termination.
25
2003 Stock Options Grants
The Company's long-term performance ultimately determines compensation
from stock options because stock option value is entirely dependent on the
long-term growth of the Company's Common Stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers and
Directors during Fiscal 2003, including information concerning the potential
realizable value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed Annual
Rates of Stock
Price Appreciation for
Individual Grants Option Term (1)
---------------------------------------------------------- ------------------------
Number of
Securities % of Total Exercise
Underlying # of Options Price (3) Expiration
Name Option (#) Granted in 2003 ($/Sh) Date 5% ($) 10% ($)
---- ---------- --------------- ------ ---- ------ -------
Sheridan C. Biggs (2) 1,250 11.1% 0.7800 09/22/13 613 1,554
Harvey Horowitz (2) 1,250 11.1% 0.7800 09/22/13 613 1,554
Richard Rusthoven (2) 1,250 11.1% 0.7800 09/22/13 613 1,554
Robert A. Kasenter (2) 1,250 11.1% 0.7800 09/22/13 613 1,554
Harry A. Katz (2) (4) 1,250 11.1% 0.7800 10/01/04 48 98
Robert W. Schwartz (2) 3,750 33.3% 0.9700 07/01/13 2,288 5,797
Robert W. Schwartz (2) 1,250 11.1% 0.7800 09/22/13 613 1,554
- ----------
(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) Mr. Katz resigned as a member of the Company's Board of Directors
effective October 1, 2003.
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, 2003 December 31, 2003 (2)
On Exercise Value ----------------- ---------------------
(#) Realized Exercisable Unexercisable Exercisable Unexercisable
--- -------- ----------- ------------- ----------- -------------
Daniel H. Levy (3) 43,750 -- -- --
Maureen d. Schimmenti (4) 16,000 19,000 34,400 40,850
Sheridan C. Biggs 30,000 -- 51,063 --
Harvey Horowitz 11,876 -- 8,063 --
Robert A. Kasenter 6,250 -- 13,438 --
Harry A. Katz 6,250 -- 5,375 --
Richard C. Rusthoven 7,500 -- 16,125 --
Robert W. Schwartz 5,000 -- 10,750 --
- ----------
(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, 2003 ($2.15 per share).
26
(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 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 12, 2004,
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 12, 2004 as a group.
For purposes of this table, beneficial ownership is defined in accordance with
13d-3 under the Securities Exchange Act of 1934, as amended and means generally
the power to vote or dispose of the securities, regardless of any economic
interest therein.
Name and Address Common Stock Percentage of Outstanding
of Beneficial Owner Beneficially Owned Shares
- ------------------- ------------------ ------
Daniel H. Levy 849,888 (1) 19.46%
Bruce Galloway 285,650 (2) 6.54%
1325 Avenue of the Americas
New York, NY 10019
Roger Tullberg 8.71%
11 Knight Way 380,450 (3)
Mansfield, MA 02048
Sheridan C. Biggs 65,250 (4) 1.49%
Harvey Horowitz 37,500 (5) *
Robert A. Kasenter 9,750 (6) *
Richard C. Rusthoven 42,000 (7) *
Robert W. Schwartz 5,000 (8) *
Maureen d. Schimmenti 31,000 (9) *
All directors and officers as a group (7 persons) 1,040,388 23.82%
- ----------
* Less than 1%.
(1) Based on the Company's records and information filed in Schedule
13D/A filed with the Company on September 25, 2003, Daniel H. Levy
is the beneficial owner of 849,888 shares of Common Stock, or 19.46%
of the outstanding Common Stock, consisting of 806,138 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.
(2) Based on information contained in Schedule 13G/A filed with the
Company on January 17, 2001.
(3) Based on information contained in Schedule 13G/A filed with the
Company on April 2, 2003.
(4) Includes 35,250 shares owned by Sheridan C. Biggs and 30,000 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.
27
(5) Includes 25,625 shares owned by Harvey Horowitz and 11,875 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.
(6) Includes 3,500 shares owned by Robert A. Kasenter and 6,250 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.
(7) Includes 34,500 shares owned by Richard C. Rusthoven and 7,500
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.
(8) Includes 5,000 shares underlying options, which were granted to
Robert W. Schwartz pursuant to the Company's 1994 Non-Employee
Director Option Plan Such options are currently exercisable.
(9) Includes 15,000 shares owned by Maureen Schimmenti and 6,000 shares
underlying options granted to Maureen d. Schimmenti pursuant to her
employment under the Company's 1992 Stock Option Plan and 10,000
shares granted in March 2002. Not included are 4,000 shares
underlying options issued pursuant to her employment, which are
exercisable 2004 and 2005, and 15,000 underlying options which were
granted in March 2002, which are exercisable in January 2005, 2006
and 2007.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Horowitz is of counsel to the law firm of Mintz & Gold LLP, which
provides legal services to the Company. Mintz & Gold LLP received $287,624
in fees during 2003 for legal services rendered to the Company.
On October 1, 2003, the Company purchased certain assets from Robyn
Meredith, Inc. an unrelated company. The purchased assets were used by the
Company to establish its Robyn Meredith Division. The principals of Robyn
Meredith, Inc. became employees of the Company. Some of the principals of
Robyn Meredith, Inc. were also principals in H&W partnership, a company
which owned real estate facility in Burlington New Jersey. The Company
rents space for approximately $9,000 per month in the H&W building in
Burlington New Jersey under a lease which the Company believes was an arms
length, commercially reasonable transaction.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees billed to the Company for the year ended December 31, 2003
by the accounting firms retained during the year, Deloitte & Touche LLP and
Mahoney Cohen & Company, CPA, P.C., see Item 9, and aggregate fees billed for
the year ended December 31, 2002 by the accounting firm Deloitte & Touche, LLP.
Year Ended Year Ended
December 31, 2003 December 31, 2002
Audit Fees (a) ........................... $208,000 $226,000
Audit Related Fees (b) (d) ............... $143,000 $ 46,000
Other Fees (c) (d) ....................... $ 6,000 $ 30,000
(a) Includes fees in connection with the audit of the Company's consolidated
financial statements and reviews of the consolidated financial statements
included in the Company's Quarterly Reports on Form 10-Q.
(b) Includes fees for the audit of the Company's employee benefit plan, and
acquisition due diligence services.
(c) Other fees relate to tax advisory services.
(d) The Audit Committee has considered whether the provision of these services
is compatible with maintaining the principal accountant's independence and
has concluded that such services are compatible.
All fees paid were reviewed and approved by the Audit Committee.
28
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' Reports
Consolidated Balance Sheets at December 31, 2003 and 2002
Consolidated Statements of Operations for the Years ended December
31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years ended December
31, 2003, 2002 and 2001
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
On December 11, 2003, the Company filed a Current Report on Form 8-K-A to
amend Item 7 "Financial Statements, Pro Forma Financial Information and
Exhibits" to include the financial statements of the Robyn Meredith
Sportswear business (the business acquired).
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2004
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 30, 2004 Daniel H. Levy, Chairman of the Board of
Directors and Chief Executive Officer
(Principal Executive Officer)
/s/ Maureen d. Schimmenti
----------------------------------------
Dated: March 30, 2004 Maureen d. Schimmenti, Chief Financial
Officer, Vice President-Finance and
Secretary (Principal Financial and
Accounting Officer)
/s/ Sheridan C. Biggs
----------------------------------------
Dated: March 30, 2004 Sheridan C. Biggs, Director
/s/ Harvey Horowitz
----------------------------------------
Dated: March 30, 2004 Harvey Horowitz, Director
/s/ Robert A. Kasenter
----------------------------------------
Dated: March 30, 2004 Robert A. Kasenter, Director
/s/ Richard C. Rusthoven
----------------------------------------
Dated: March 30, 2004 Richard C. Rusthoven, Director
/s/ Robert W. Schwartz
----------------------------------------
Dated: March 30, 2004 Robert W. Schwartz, Director
30
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)
31
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)
32
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)
10.71 The Tenth Amendment among the Company Lenders named therein and
the CIT Group/Commercial Services Inc. dated August 11,
2003.(24)
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)
99.5 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(24)
99.6 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(24)
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (25),(26)
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.(25),(26)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(25),(26),(27)
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(25),(26),(27)
32.3 Donnkenny Standards of Business Conduct.(27)
32.4 The Eleventh Amendment and Waiver among the Company Lenders
named therein and the CIT Group/Commercial Services Inc. dated
March 26, 2004.(27)
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.
33
(7) Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on August 8, 1995.
(8) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 2, 1995.
(9) Incorporated herein by reference to the Company's 1996 Proxy Statement,
filed March 22, 1996.
(10) Incorporated herein by reference to the Company's Report on Form 10-Q,
filed with the Commission on August 6, 1997.
(11) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 15, 1998.
(12) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
(13) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on August 15, 1999.
(14) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 15, 1999.
(15) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
(16) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on August 25, 2000.
(17) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 14, 2000.
(18) Incorporated herein by reference to the Company's Report on Form 8-K filed
with the Commission on January 10, 2001.
(19) Incorporated herein by reference to the Company's Report on Form 10-K for
the fiscal year ended December 31, 2000.
(20) 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) Incorporated herein by reference to the Company's Report on Form 10-K
filed with the Commission on March 28, 2003.
(24) Incorporated herein by reference to the Company's Report on Form 10-K
filed with the Commission on May 14, 2003.
(25) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on August 13, 2003.
(26) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 13, 2003.
(27) Filed herewith.
34
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Donnkenny, Inc.:
We have audited the accompanying consolidated balance sheet of Donnkenny,
Inc. and subsidiaries as of December 31, 2003, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. Our audit 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Donnkenny, Inc. and subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the 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.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 15, 2004, except for Note 6,
as to which the date is March 26, 2004
F - 1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Donnkenny, Inc.
We have audited the accompanying consolidated balance sheet of Donnkenny,
Inc. and subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the fiscal years in the two-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 the results of its operations and its cash flows for each
of the fiscal years in the two-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 - 2
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
December 31, December 31,
2003 2002
--------------------------
ASSETS
CURRENT ASSETS:
Cash .............................................. $ 64 $ 66
Accounts receivable, net of allowances for doubtful 1,287 908
accounts of $933 and $116, respectively
Due from factor, net .............................. 20,730 19,726
Recoverable income taxes .......................... -- 203
Inventories, net .................................. 20,128 15,949
Prepaid expenses and other current assets ......... 1,256 615
Assets held for sale .............................. 270 402
-------- --------
Total current assets .............................. 43,735 37,869
PROPERTY, PLANT AND EQUIPMENT, NET ................... 3,631 4,515
OTHER ASSETS ......................................... 366 234
GOODWILL ............................................. 1,641 --
OTHER INTANGIBLE ASSETS .............................. 1,332 821
-------- --------
TOTAL ................................................ $ 50,705 $ 43,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ................. $ 353 $ 253
Accounts payable .................................. 7,713 10,101
Accrued expenses and other current liabilities .... 1,908 2,209
-------- --------
Total current liabilities ..................... 9,974 12,563
-------- --------
LONG-TERM DEBT ....................................... 35,707 23,730
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 ............................... (45,469) (43,347)
-------- --------
Total stockholders' equity ........................ 5,024 7,146
-------- --------
TOTAL ................................................ $ 50,705 $ 43,439
======== ========
See accompanying notes to consolidated financial statements.
F - 3
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,
2003 2002 2001
------------ ------------ ------------
NET SALES ............................................... $ 92,351 $ 107,102 $ 152,180
COST OF SALES ........................................... 70,895 80,345 117,497
----------- ----------- -----------
Gross Profit ..................................... 21,456 26,757 34,683
OPERATING EXPENSES:
Selling, general and administrative expenses ........ 22,011 22,339 28,367
Amortization of intangibles ......................... 51 -- 1,489
Write-down of assets held for sale .................. 36 150 300
----------- ----------- -----------
Operating (loss) income........................... (642) 4,268 4,527
OTHER EXPENSE:
Interest expense .................................... 1,535 2,039 4,703
----------- ----------- -----------
Income (loss) before income taxes ................ (2,177) 2,229 (176)
INCOME TAX EXPENSE (BENEFIT) ............................ (55) 36 (220)
----------- ----------- -----------
Income (loss) before cumulative effect of ............... (2,122) 2,193 44
change in accounting principle
Cumulative effect of change in accounting ........... -- 28,744 --
principle (no tax benefit recognized)
----------- ----------- -----------
NET INCOME (LOSS) ................................... $ (2,122) $ (26,551) $ 44
=========== =========== ===========
Basic earnings per common share:
Income (loss) before accounting change ........... $ (0.49) $ 0.50 $ 0.01
Cumulative effect of accounting change ........... -- (6.58) --
----------- ----------- -----------
Net income (loss) ............................. $ (0.49) $ (6.08) $ 0.01
=========== =========== ===========
Diluted earnings per common share:
Income (loss) before accounting change ........... $ (0.49) $ 0.50 $ 0.01
Cumulative effect of accounting change ........... -- (6.58) --
----------- ----------- -----------
Net income (loss) ............................. $ (0.49) $ (6.08) $ 0.01
=========== =========== ===========
Shares used in the calculation of earnings per share:
Basic ............................................ 4,367,417 4,367,417 4,367,417
=========== =========== ===========
Diluted .......................................... 4,367,417 4,417,796 4,387,685
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F - 4
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
Additional Total
Preferred Common Paid-in Accumulated Stockholders'
Stock Stock Capital Deficit Equity
---------- ---------- ---------- ----------- -------------
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
Net Loss ............. -- -- -- (2,122) (2,122)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2003 $ -- $ 44 $ 50,449 $ (45,469) $ 5,024
========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F - 5
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ (2,122) $ (26,551) $ 44
Adjustments to reconcile net income (loss) to net cash
provided by(used in)operating activities:
Depreciation and amortization of plant, property
and equipment ................................................... 1,313 1,499 1,140
Loss on disposal of assets held for sale ......................... 16 -- 3
Amortization of intangibles and other assets ..................... 51 -- 1,489
Write-down of assets held for sale ............................... 36 150 300
Cumulative effect of change in accounting principle .............. -- 28,744 --
Allowance for doubtful accounts .................................. 817 20 20
Changes in assets and liabilities, net of the effects
of acquisitions and disposals:
(Increase) decrease in accounts receivable ....................... (1,196) (15) 1,111
(Increase) decrease in due from factor ........................... (1,004) 4,586 4,612
(Increase) decrease in recoverable income taxes .................. 203 178 (226)
(Increase) decrease in inventories ............................... (1,331) 1,824 1,957
(Increase) decrease in prepaid expenses and other
current assets ................................................ (641) 605 (43)
(Increase) decrease in other non-current assets ................. (132) 134 62
(Decrease) increase in accounts payable .......................... (2,388) 2,341 (3,991)
(Decrease) increase in accrued expenses and
other current liabilities ..................................... (300) (1,295) 1,194
--------- --------- ---------
Net cash provided by (used in) operating activities............ (6,678) 12,220 7,672
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ......................... (429) (542) (1,395)
Proceeds from sale of assets held for sale ........................ 80 143 67
Acquisition of business ........................................... (3,432) -- --
License acquisition cost .......................................... (512) -- --
--------- --------- ---------
Net cash used in investing activities ......................... (4,293) (399) (1,328)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt ...................................... (310) (1,113) (1,523)
Borrowings under revolving credit line ............................ 103,483 102,112 153,960
Repayments under revolving credit line ............................ (92,204) (112,793) (158,807)
--------- --------- ---------
Net cash provided by (used in) financing activities ........... 10,969 (11,794) (6,370)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ....................................... (2) 27 (26)
CASH, AT BEGINNING OF YEAR ............................................ 66 39 65
--------- --------- ---------
CASH, AT END OF YEAR .................................................. $ 64 $ 66 $ 39
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Income taxes paid ................................................. $ 4 $ 77 $ 78
========= ========= =========
Interest paid ..................................................... $ 1,517 $ 2,048 $ 4,722
========= ========= =========
Supplemental schedule of non-cash financing activites
Issuance of note payable for the acquisition of
the RMI business .................................................. $ 1,108 $ -- $ --
========= ========= =========
See accompanying notes to consolidated financial statements.
F - 6
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
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 coats 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 accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities (such as accounts receivable, due from factor,
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 and Due from Factor - Accounts Receivable and due from
factor as shown on the Consolidated Balance Sheets, are 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, an
evaluation of the impact of economic conditions and other factors. The Company
sells a substantial portion of its trade receivables to a commercial factor,
without recourse, up to maximum credit limits established by the factor for each
individual account. Receivables sold in excess of these limitations are subject
to recourse in the event of non-payment by the customer. 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. 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 and improvements ..................... 9 to 38 years
Machinery and equipment including computer
equipment and software ......................... 3 to 10 years
Furniture and fixtures ......................... 7 to 10 years
Leasehold improvements ......................... 7 to 10 years
(or lease term if shorter)
F - 7
Other Assets - Other Assets at December 31, 2003 and 2002 of $0.4 million
and $0.2 million, respectively, represent net deferred financing costs, which
are amortized over the term of the related debt agreement.
Goodwill and Other Intangible Assets - At December 31, 2003, Goodwill and
Other Intangible Assets were comprised of goodwill related to acquisitions,
trademarks and licenses. At December 31, 2002, other Intangible Assets were
related to licenses. 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 periodically reviews its intangible assets
to insure compliance with SFAS No. 142. (See Note 4 to the Consolidated
Financial Statements). The Company ceased the amortization of goodwill and other
intangible assets with indefinite lives as of January 1, 2002. Prior to the
adoption of SFAS 142, goodwill and other intangible assets were amortized on a
straight-line basis over the expected periods to be benefitted.
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.
Indefinite lived intangible assets are subject to an annual impairment test,
which the Company performs in the fourth quarter of each fiscal year.
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 $3.4 million,
$3.3 million, and $4.7 million in years ended December 31, 2003, 2002 and 2001,
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 (loss) income, as all options granted under those plans
had an exercise price equal to the fair market value of the Common Stock on the
date of grant. The following table details the effect on net (loss) 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 using the Black-Scholes
method of calculation.
2003 2002 2001
--------- --------- ---------
(in thousands, except
per share amounts)
Net (loss) income, as reported $ (2,122) $ (26,551) $ 44
Deduct: Total stock-based employee
compensation expense determined
under fair value based method,
net of tax effects 35 195 578
--------- --------- ---------
Pro-forma net loss $ (2,157) $ (26,746) $ (534)
========= ========= =========
Earnings (loss) per share:
Basic- as reported $ (0.49) $ (6.08) $ 0.01
========= ========= =========
Basic - pro-forma $ (0.49) $ (6.12) $ (0.12)
========= ========= =========
Diluted - as reported $ (0.49) $ (6.08) $ 0.01
========= ========= =========
Diluted - Pro-forma $ (0.49) $ (6.13) $ (0.12)
========= ========= =========
F - 8
The weighted-average Black-Scholes values of the options granted during
2003, 2002 and 2001, which were used to calculate the pro-forma compensation
expense were $0.84, $0.83 and $0.54, respectively. The following
weighted-average assumptions were used in the Black-Scholes option-pricing model
for grants in 2003, 2002 and 2001 respectively: dividend yield of 0% for all
periods, volatility of 249%, 253%, and 246%; risk-free interest rate of 3.73%,
2.40% and 4.05%; and expected lives of 7, 5 and 5 years.
Advertising Expense - Advertising costs are expensed when incurred and are
included in selling, general and administrative expenses. Advertising expenses
of $1.2 million, $1.1 million and $1.0 million were recorded in the Company's
Consolidated Statements of Operations for the years ended December 31, 2003,
2002 and 2001, 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 amounts of significant
financial instruments, which includes accounts receivable, accounts payable and
accrued expenses, approximated fair value as of December 31, 2003 and December
31, 2002 due to their short-term maturities. Long-term debt approximates fair
value due to its variable interest rate.
Recent Accounting Pronouncements - In January 2003, the FASB issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires that a variable interest entity be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements apply to the first
fiscal year or interim period ending after March 31, 2004. The Company believes
the adoption of FIN 46 will not affect its consolidated financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No.133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133. "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The Company does not expect adoption of SFAS No.
149 to have an impact on the consolidated financial statements as the Company
does not engage in derivative or hedging activity.
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). The Adoption of SFAS No.150 will
not have an impact on the Company's reported consolidated financial position,
results of operations or cash flows.
Reclassifications - Certain reclassifications have been made in 2002 and
2001 Consolidated Financial Statements to conform to the 2003 presentation.
F - 9
2. INVENTORIES
Inventories consisted of the following at December 31, 2003 and,2002:
(in thousands)
--------------
2003 2002
---- ----
Raw materials ....................... $ 3,317 $ 701
Work in process ..................... 2,189 143
Finished goods ...................... 15,873 16,411
Reserves ............................ (1,251) (1,306)
-------- --------
$ 20,128 $ 15,949
======== ========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2003 and 2002:
(in thousands)
--------------
2003 2002
---- ----
Land and land improvements ............................... $ 213 $ 131
Buildings and leasehold improvements ..................... 3,773 4,530
Machinery and equipment including computer equipment and
software ................................................. 5,992 6,044
Furniture and fixtures ................................... 1,193 1,224
------- -------
11,171 11,929
Less accumulated depreciation and amortization .......... 7,540 7,414
------- -------
$ 3,631 $ 4,515
======= =======
Assets Held for Sale
During 2000 the Company completed the closing of all of its domestic
manufacturing plants and put these facilities up for sale. In the years ended
December 31,2003, 2002, and 2001, the Company recorded charges of $0.04 million,
$0.2 million, and $0.3 million, respectively, 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. One of these facilities was sold on August 27, 2003. At December 31,
2003, the assets held for sale are recorded at their estimated net realizable
value.
F - 10
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other Intangible Assets consisted of the following at
December 31, 2003 and 2002:
(In Thousands)
2003 2002
---- ----
Goodwill $ 1,641 $ --
Covenant not to Compete 50 --
License agreements 1,333 821
Accumulated amortization (51) --
------- -------
1,282 --
------- -------
$ 2,973 $ 821
======= =======
The goodwill which represented the excess purchase price over the fair
value of the net assets acquired and the covenant not to compete are
attributable to the acquisition of Robyn Meredith (see Note 14 to the
Consolidated Financial Statements). The covenant not to compete will be
amortized over the contract life of four years.
Intangible assets of $0.8 million are 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, 2003 and 2002 Consolidated Balance Sheets because the
Company held the license in perpetuity. On February 12, 2004, the Company signed
a new Pierre Cardin license to provide for a term of three years in exchange for
reduced future minimum payments. Beginning in 2004, this intangible asset will
be amortized over three years.
Intangible assets of $0.5 million are attributable to costs in connection
with the acquisition of the Company's licensing agreement to manufacture and
sell coats under the Bill Blass (R), Bill Blass Signature (R), and Blassport (R)
Labels. This intangible asset is being amortized over the expected lives of the
licenses through 2009.
Over the next five years, the amortization expense relating to intangible
assets will be $0.4 million, $0.4 million, $0.4 million, $0.09 million and $0.08
million, respectively.
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.
F - 11
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 consisted 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.
Pro-forma results of operations for the year ended December 31, 2001 had
the Company applied the non-amortization provisions of SFAS No. 142 in that
period follows (in thousands, except per share amounts):
For the Year Ended December 31,
(in thousands)
--------------
2001
----
Net income $ 44
Add: Amortization of goodwill and intangibles 1,489
---------
Adjusted net income $ 1,533
=========
Basic and diluted net income per common share:
Net income $ 0.01
Add: Amortization of goodwill and intangibles 0.34
---------
Adjusted net income $ 0.35
=========
F - 12
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at December 31, 2003 and 2002:
(in thousands)
--------------
2003 2002
---- ----
Accrued salaries, benefits and bonuses ..... $ 492 $ 973
Other accrued expenses ..................... 1,416 1,236
------ ------
Total ...................................... $1,908 $2,209
====== ======
At December 31,2003, the Company included $0.7 million of outstanding
checks in the Accounts Payable Balance.
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2003 and 2002:
(in thousands)
--------------
2003 2002
---- ----
Revolving Credit Borrowings .......... $35,009 $23,730
Note Payable ......................... 1,051 --
Senior Term Loans .................... -- 253
------- -------
Total ................................ 36,060 $23,983
Less current maturities .............. 353 253
------- -------
$35,707 $23,730
======= =======
Annual maturities of long-term debt are as follows:
2004..................... $ 353
2005..................... 372
2006..................... 326
2007..................... 35,009
-------
$36,060
=======
On June 29, 1999, the Company and its operating subsidiaries signed a
Credit Agreement (the "Credit Agreement") with CIT Group/Commercial Services
(the "Lender"). The Credit Agreement initially provided 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.
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.
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.
F - 13
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.
In July 2000, the Credit Agreement was amended to provide for an
additional $1.3 million term loan to finance an acquisition. This term loan bore
interest at the prime rate plus 2% and was paid from January 1, 2001 to March
2003, at which time this term loan was paid.
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 (6.50% at January 1, 2002). No fee was
paid in connection with the Amendment and Waiver. The Company had achieved the
objectives and received an additional rate reduction effective July 1, 2002. The
interest rate on the revolving credit borrowings was now prime plus one and
one-half percent (5.75% at December 31, 2002).
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.
Effective June 30, 2003, the Company through an Amendment and Waiver
Agreement dated August 11, 2003, extended the Credit Agreement to June 30, 2007.
This Amendment provides the Company with a $65 million facility; the sublimits
have remained the same. The interest rate on the revolving credit borrowings is
the current prime rate plus one and one-quarter percent (5.25% at December 31,
2003). Fees paid in connection with this Amendment were $243,750. All other
terms and conditions of the Revolving Credit Agreement remain unchanged.
As of December 31, 2003, the Company was not in compliance with the
quarterly financial covenants. The Lender has waived this non-compliance. The
Company paid a fee of $100,000 in connection with this waiver.
Effective January 1, 2004, the Company established covenants and the level
of allowable overadvances with the lender, through an Amendment to the Credit
Agreement dated March 26, 2004, to support its 2004 business plan. 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 factoring agreement
renews annually in June each year unless either party to the agreement gives
appropriate notice of non-renewal.
F - 14
In connection with the acquisition of Robyn Meredith (see Note 14 to the
Consolidated Financial Statements), a note payable of $1.1 million was incurred.
This note is payable in monthly installments of $33,333 including imputed
interest at an interest rate of 5.25%. The final payment will be due October
2006.
At December 31, 2003 and 2002, the Company was contingently liable for
outstanding letters of credit issued amounting to $6.6 million and $ 11.8
million, respectively.
F - 15
7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2003, 2002
and 2001 is comprised of the following:
(in thousands)
--------------
2003 2002 2001
---- ---- ----
Current:
Federal ................. $ -- $ -- $(277)
State and local ......... (55) 36 57
Deferred .................... -- -- --
----- ----- -----
$ (55) $ 36 $(220)
===== ===== =====
The Company received net refunds of $0.06 million in 2003 based upon the
completion of audits of amended prior year returns for the State of Virginia. In
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 2002.
A reconciliation of the statutory Federal tax rate and the effective rate
is as follows:
2003 2002 2001
---- ---- ----
Federal statutory tax rate ............... (34)% (34)% (34)%
State and local taxes, net of federal
income tax benefit ................... 2 (1) 28
Federal tax benefit of amended returns
and other ............................ -- -- (157)
Nondeductible items ...................... (3) 28 207
Increase (decrease) of valuation allowance 32 7 (169)
---- ---- ----
(3)% 0% (125)%
==== ==== ====
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,
2003 2002
---- ----
Deferred tax assets:
Accounts receivable allowances ..... $ 360 $ 45
Inventory valuation ................ 787 685
Intangibles ........................ 316 393
Accrued expenses ................... 54 449
State operating loss carryforwards . 1,426 1,350
Federal operating loss carryforwards 6,814 6,208
Other .............................. 97 97
------- -------
Deferred tax assets ............ 9,854 9,227
------- -------
Deferred tax liabilities:
Property, plant and equipment ...... (264) (980)
------- -------
Deferred tax liabilities ....... (264) (980)
------- -------
Net deferred tax asset ................. 9,590 8,247
Less valuation allowance ............... (9,590) (8,247)
------- -------
Net deferred taxes ..................... $ -- $ --
======= =======
F - 16
As of December 31, 2003 and 2002, the Company recorded a valuation
allowance against the net deferred tax assets due to uncertainty of their
realization.
As of December 31, 2003, the following Federal and State net operating
loss carryforwards were available:
Net Operating Losses
--------------------
(in thousands)
---------------------------
Expiration Dates Federal State
--------- ----------
2011...................................... $ -- $ 6,024
2012...................................... -- 5,281
2013...................................... -- 4,390
2014...................................... -- 2,323
2015...................................... -- 12,467
2016-2017................................. -- --
2018...................................... 2,442 511
2019...................................... 2,616 --
2020...................................... 13,315 --
2021-2022................................. -- --
2023...................................... 1,650 --
8. 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 the years ended 2003, 2002 and 2001 in cash in
the amounts of $105,000, $126,000 and $44,000, respectively.
9. 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.
For the year ended December 31, 2003, the effect of options to purchase
90,000 shares of the Company's common stock was not considered for the diluted
earnings per share calculation as their effect would be antidilutive. For the
years ended December 31, 2002 and 2001 shares under stock plans of 50,379 and
20,268 were considered for the diluted earnings per share calculations.
10. 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.
Under the terms of the plans, 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.
F - 17
Information regarding the Company's stock option plans is summarized
below.
2003 2002 2001
------------------------ ----------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at beginning of the
year............................ 367,427 $5.64 294,253 $8.75 404,130 $ 9.85
Granted......................... 11,250 $0.84 136,250 0.84 53,750 0.54
Cancelled....................... (218,651) $5.74 (63,076) $9.81 (163,627) 8.44
-------- ----- -------- ----- -------- ------
Outstanding at end of year...... 160,026 $5.16 367,427 $5.64 294,253 $ 8.75
======== ======== ========
Exercisable at end of year ..... 131,026 $6.12 198,177 $9.55 212,603 $10.77
======== ======== ========
Available for grant at year
end............................. 315,149 107,748 180,922
======== ======== ========
The options outstanding at December 31, 2003 range in price as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------------
Weighted-Average
Range of Exercise Outstanding as Remaining Contractual Weighted-Average Exercisable as of Weighted-Average
Prices of 12/31/2003 Life Exercise Price 12/31/2003 Exercise Price
------ ------------- ---- -------------- ---------- --------------
0.00 - 7.23 135,000 6.9 $ 1.39 106,000 $ 1.54
7.23 - 14.45 4,375 4.5 $ 11.29 4,375 $ 11.29
14.45 - 28.90 13,125 3.5 $ 16.61 13,125 $ 16.61
28.90 - 43.35 1,750 1.3 $ 33.25 1,750 $ 33.25
43.35 - 65.25 3,751 0.3 $ 44.25 3,751 $ 44.25
65.25 - 72.25 2,025 2.3 $ 72.25 2,025 $ 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 fair market value of the Common Stock
on the date of grant.
b. 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 currently exercisable and will expire
July 23, 2004.
F - 18
11. 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. This
action is scheduled to go to trial in May 2004.
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's License Agreements for the manufacture of garments under
licensed trademarks provide for payments of annual minimum royalty
amounts. The Company estimates that the minimum guaranteed royalties for
these Licenses are approximately $7.6 million as of December 31, 2003.
These minimum payments are payable over the terms of the Agreements,
including renewal periods, through 2009. There are no maximums to the
royalty amounts.
d. The Company has agreed to purchase $2.7 million of raw materials in
connection with the manufacturing of coats. As of December 31, 2003,
approximately $1.6 million has been purchased against this commitment. The
balance will be purchased and paid in full by June 30, 2004.
e. Rental expense for operating leases for the years ended December 31, 2003,
2002 and 2001 approximated $2.9 million, $3.0 million, and $3.2 million
respectively. Minimum future rental payments as of December 31, 2003 for
operating leases with initial non-cancelable lease terms in excess of one
year are as follows.
Year Ending December 31, Amount
------------------------ (in thousands)
--------------
2004 .................................................. 2,767
2005 .................................................. 2,626
2006 .................................................. 1,746
2007 .................................................. 1,366
2008 .................................................. 1,025
------
9,530
======
f. The Company has an ongoing employment agreement with its Chairman of the
Board and Chief Executive Officer for a continuous three year term with
automatic extensions. The agreement provides for a minimum base annual
salary of $850,000, a performance bonus based upon the bonus plan in
effect for all other senior executives of the Company and certain
insurance and other benefits.
12. 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
28%, 18% and 18% of the Company's sales in 2003, 2002 and 2001, respectively.
Sales to one wholesale club were 14%, 27% and 24% in 2003, 2002 and 2001
respectively. Sales to one catalog customer accounted for 5%, 8% and 9% of the
Company's sales in 2003, 2002 and 2001 respectively. The Company records an
allowance for doubtful accounts for those customers where it has exposure on the
receivable. In 2003 the Company recorded a provision for bad debts not sold to
its commercial factor of $0.9 million due to the fact that the ultimate
collection of the balance of a certain receivable is in dispute. The Company
intends to vigorously pursue the collection of this receivable. A substantial
portion of the trade receivables are sold to a commercial factor, without
recourse, and the risk of loss is minimal.
F - 19
13. 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 that, 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 persons who were at the time 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.
14. ROBYN MEREDITH ACQUISITION
On October 1, 2003, the Company acquired certain assets of Robyn Meredith
Inc. ("RMI") in connection with its strategy to expand the Company's avenues of
distribution. The assets that were acquired were the assets of RMI devoted to
its women's sportswear business and consisted principally of inventory of
finished goods, raw materials and trim and certain tradenames including the name
"Robyn Meredith". The Company intends to continue to use these assets for the
manufacture and distribution of women's sportswear. The purchase price paid to
RMI was $4.6 million which was determined by valuing the inventory and through
negotiations between the parties as to the balance of the purchase price.
The Company's acquisition of RMI was accounted for by the purchase method
of accounting, pursuant to which the acquisition consideration is allocated
among the tangible and intangible assets in accordance with their estimated fair
values on the date of acquisition. The results of operations of RMI since
October 1, 2003, are included in the Company's Consolidated Statement of
Operations. The total amount of goodwill is expected to be deductible for income
tax purposes. The acquisition consideration and allocation of that
consideration, which does not include any future purchase price adjustments
based on subsequent performance thresholds, are as follows (in thousands):
Acquisition consideration:
Cash consideration paid $3,168
Issuance of Promissory Note, discounted 1,108
Transaction related fees 283
------
Total acquisition consideration $4,559
======
Allocation of acquisition consideration:
Inventory $2,868
Goodwill related to
the acquisition 1,641
Other intangible assets 50
------
$4,559
======
F - 20
Pro Forma Financial Information:
The pro forma financial information (unaudited) presented below gives
effect to the Robyn Meredith acquisition as if it had occurred as of the
beginning of the Company's fiscal year 2002. The information presented below is
for illustrative purposes only and is not intended to be indicative of results
that would have been achieved or results which may be achieved in the future.
Pro Forma Financial Information
(in thousands, except share and per share data)
(unaudited)
Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Net sales $114,600 $134,223
(Loss) income before cumulative effect of (3,010) 1,407
change in accounting principle
Cumulative effect of change in accounting -- (28,744)
principle
-------- --------
Net loss ($3,010) ($27,337)
======== ========
Net (loss) income per share
Basic (loss) income per common share:
(Loss) income before accounting change ($0.69) $0.32
Cumulative effect of accounting change -- ($6.58)
-------- --------
Net loss ($0.69) ($6.26)
======== ========
Diluted (loss) income per common share:
Income (loss) before accounting change ($0.69) $0.32
Cumulative effect of accounting change -- (6.51)
-------- --------
Net loss ($0.69) ($6.19)
======== ========
F - 21
15. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly financial information for the years ended December 31,
2003 and 2002 is set forth in the table below:
(in thousands, except per share amounts)
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- -------- -------- --------
2003
Net Sales $ 18,954 $ 17,846 $ 23,436 $ 32,115
Gross Profit $ 5,705 $ 3,898 $ 5,160 $ 6,693
Net Income (loss) $ 55 $ (1,556) $ (386) $ (235)
Basic earnings (loss) per share $ 0.01 $ (0.36) $ (0.09) $ (0.05)
========== ======== ======== ========
Diluted earnings (loss) per share $ 0.01 $ (0.36) $ (0.09) $ (0.05)
========== ======== ======== ========
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 in accounting principle 28,744 -- -- --
---------- -------- -------- --------
Net (loss) income $ (28,385) $ (347) $ 1,574 $ 607
========== ======== ======== ========
Basic Income (loss) per Share
Income (loss) before accounting change $ 0.08 $ (0.08) $ 0.36 $ 0.14
Cumulative effect of accounting change (6.58) -- -- --
---------- -------- -------- --------
Basic (loss) earnings per share $ (6.50) $ (0.08) $ 0.36 $ 0.14
========== ======== ======== ========
Diluted Income (loss) per Share
Income (loss) before accounting change $ 0.08 $ (0.08) $ 0.36 $ 0.14
Cumulative effect of accounting change (6.58) -- -- --
---------- -------- -------- --------
Diluted (loss) earnings per share $ (6.50) $ (0.08) $ 0.36 $ 0.14
========== ======== ======== ========
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 - 22
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, 2003, 2002 and 2001
Balance at Charged to
Beginning of Costs and Balance at End
Period Expenses Deductions of Period
------------------ ------------------ ------------------ -----------------
Year ended December 31, 2003
Reserve for bad debts $116,000 817,000 0 $933,000
Reserve for discounts 0 (719,000) 719,000 0
------------------ -----------------
Subtotal for accounts receivable $116,000 $933,000
================== =================
Reserve for inventory markdowns $1,306,000 2,601,000 (2,656,000) $1,251,000
================== =================
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 0
------------------ -----------------
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
================== =================