-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dg5uMhDwmywj/KeqEyTZUqNUJbRmdtLVDYwL1uYJ/drqywV0ZbthGELbcYJDUhnU PvOdsJyu2YnvfIat2Wn/Qw== 0000950136-00-000534.txt : 20000417 0000950136-00-000534.hdr.sgml : 20000417 ACCESSION NUMBER: 0000950136-00-000534 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNKENNY INC CENTRAL INDEX KEY: 0000029693 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 510228891 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21940 FILM NUMBER: 601835 BUSINESS ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2127307770 MAIL ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 10-K 1 FORM 10-K 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-21940 DONNKENNY, INC. (Exact name of registrant as specified in its charter) Delaware 51-0228891 - ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1411 Broadway New York, New York 10018 - ------------------------------------------ ------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 790-3900 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant, based on a closing sale price of the Common Stock on the Nasdaq National Market on March 10, 2000 of $0.97 per share, was approximately $13,784,867*. As of March 10, 2000, 14,229,540, shares of Common Stock of Registrant were outstanding. * For purposes of this report, the number of shares held by non-affiliates was determined by aggregating the number of shares held by Officers and Directors of Registrant, and by others who, to Registrant's knowledge, own more than 10% of Registrant's Common Stock, and subtracting those shares from the total number of shares outstanding. 1 PART 1 ITEM 1. BUSINESS Donnkenny, Inc. (together with its subsidiaries, the "Registrant" or the "Company") was incorporated in Delaware in 1978 and is a holding company with four subsidiaries. Donnkenny Apparel, Inc. ("Donnkenny Apparel") and Beldoch Industries Corporation ("Beldoch") are the operating subsidiaries of the Company. The Company designs, manufactures, imports and markets a broad line of moderately priced women's sportswear labels, all of which are engaged in the same line of business. PRODUCTS The Company designs, manufactures, imports, and markets broad lines of moderately priced women's sportswear. The Company's major labels include Casey & Max(R), Donnkenny(R), Pierre Cardin(R)and Victoria Jones(R). Victoria Jones The Victoria Jones label represents moderately-priced womens' knit and sweater products which are sold to department stores, specialty stores and chains including May Company, Kohl's, Dillard's, Saks, Inc., Stage Stores, Catherine's, Goody's, Sam's Club, J.C. Penney and Sears. Its products are marketed for missy, large sizes and petites. Approximately 81% of these products are imported, predominately from Hong Kong, China and India. In addition, it sells exclusive private label products to such customers as QVC, Dillard's and Mervyn's. Casey & Max Casey & Max manufactures and imports novelty woven tops and sportswear. The Casey & Max line consists of moderately-priced products sold to department stores, specialty stores and chains including Kohl's, Dillard's, Federated, May Company, Saks, Inc., Stage Stores, Catherine's, Goody's, Sam's Club, J.C. Penney and Sears. The products are marketed for missy, large sizes and petites. Approximately 98% of these products are imported, predominately from Hong Kong, China and India. In addition, it sells exclusive private label products to such customers as QVC , Dillard's and Mervyn's. Donnkenny Donnkenny manufactures and imports moderately-priced women's career and casual pants for missy, petites and large sizes. Its major customers include Stage Stores, Saks, Inc., Sterns, Bealls, J.C. Penney and Sears. Donnkenny has been an established brand name for over 60 years. Approximately 50% of Donnkenny products are manufactured domestically. In addition, it also sells exclusive private label products to such customers as J.C. Penney. Pierre Cardin Pierre Cardin produces women's knitwear pursuant to a license. The Pierre Cardin product is sold to knitwear departments of department stores and specialty stores. Its major customers include Federated, Belk, Sam's Club, Saks, Inc., and the Chadwick's Catalog. Approximately 76% of these products are imported, predominately from Hong Kong, China and India. In addition, it also sells exclusive private label products to such customers as Saks, Inc. and the Bon Ton. MANUFACTURING AND IMPORTING Approximately 21% of the Company's products sold in the year ended December 31, 1999 ("Fiscal 1999") were manufactured in the United States, as compared with 29% in the year ended December 31, 1998 ("Fiscal 1998"). In Fiscal 1999, the Company's domestically produced products were manufactured at the Company's production facilities in Virginia and by several outside contractors. The remaining 79% of the Company's products sold in Fiscal 1999 were produced abroad and imported into the United States, principally from Hong Kong, China, India, Guatemala, Turkey, Bangladesh, the Dominican Republic, and the Philippines. The percentage of the Company's products which are manufactured in the United States is expected to decrease further during the Company's year ending December 31, 2000 ("Fiscal 2000"). The Company's purchases from its foreign suppliers are effected through individual purchase orders specifying the price and quantity of the items to be produced. Generally, the Company does not have any long-term, formal arrangements with any of the suppliers which manufacture its products. The Company continually seeks additional suppliers throughout the world for its sourcing needs. One foreign contractor accounted for 12% of the Company's products, but no other domestic or foreign contractor manufactured more than 10% of the Company's products in Fiscal 1999. 2 Virtually all of the Company's merchandise imported into the United States is subject to United States duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas that limit the amount of certain categories of merchandise that may be imported into the United States. Because the United States may, from time to time, impose new quotas, duties, tariffs or other import controls or restrictions, the Company monitors import and quota-related developments. Attendant with the Company's increased reliance on foreign manufacturing is a risk of excess inventory. The Company must commit to its foreign manufacturers and suppliers four to six months in advance of its selling season, usually before the Company has received its orders from its customers. Thus, there exists the risk that the purchase orders by the Company's customers will be less than the amount manufactured. The Company believes that this risk is outweighed by the cost savings to the Company by manufacturing such products abroad. Conversely, in the event there exists excess demand for the Company's products, the lengthy production time for imported goods makes it impossible for the Company to return to the market to purchase additional goods for the same selling season. The Company's relationships with foreign suppliers are also subject to the additional risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds and in certain parts of the world, political instability. The Company's operations have not been materially affected by any of such factors to date. However, due to the large portion of the Company's products which are produced abroad, any substantial disruption of its relationships with its foreign suppliers could have a material adverse effect on the Company's operations and financial condition. The portion of the Company's products which it currently imports from Asia is further subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The impact, if any, of these regional events on the Company's business, and in particular its sources of supply, cannot be determined at this time. Approximately 70% of the products sold by the Company in Fiscal 1999 were manufactured in Asia. CUSTOMERS In Fiscal 1999, the Company shipped orders to approximately 9,200 stores in the United States. This customer base represents approximately 1,300 accounts. Of the Company's net sales for Fiscal 1999, department stores accounted for approximately 62%, wholesale clubs for approximately 18%, mass merchants for approximately 6%, chain stores for approximately 5%, catalog customers for approximately 3%, specialty retailers for approximately 3%, and other customers for approximately 3%. The Company markets its products to major department stores, including J. C. Penney, Dillard's, May Company, Federated, Stage Stores, Saks, Inc., Sears, as well as wholesale clubs including Sam's and mass merchants including K-Mart. The Company also sells exclusive private label products to catalog specialty retailers and suppliers. In addition, the Company manufactures products exclusively for J.C. Penney private label. In Fiscal 1999, sales to Wal-Mart accounted for 16% and sales to J.C. Penney accounted for 11% of the Company's net sales. The loss of, or significantly decreased sales to, these customers could have a material adverse effect on the Company's consolidated financial condition and results of operations. The Company's Electronic Data Interchange computer system ("EDI") connects the Company to approximately 39 of its large customers and, in Fiscal 1999, was used to place 55% 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 10, 2000, the Company had a 12 person sales force, of whom 8 were Company employees and 4 were independent commissioned sales representatives. These sales representatives are located in 3 cities and provide nationwide coverage to retailers ranging from individual specialty shops to national chain stores and catalogs. The Company's principal showrooms are in New York City. RAW MATERIALS SUPPLIERS The Company's sources of fabric and trim supply are well established. As a result of the large, steady purchases each year by the Company of domestic fabrics and trim for its production of certain styles, the Company is a major customer of several of the larger synthetic textile producers. The Company typically experiences little difficulty in obtaining domestic raw materials and believes that the current and potential sources of fabric and trim supply are sufficient to meet its needs for the foreseeable future. 3 TRADEMARKS AND PROPRIETARY RIGHTS The Company owns and has registered in the United States, and in certain foreign jurisdictions, the following trademarks under which a variety of the Company's products are sold: Beldoch Popper (R), Casey & Max (R), Donnkenny (R), Victoria Jones (R). Upon compliance with the trademark statutes of the United States and the relevant foreign jurisdictions, these trademark registrations may be renewed. The Company holds licensing rights to manufacture, import and sell women's sportswear in the United States and the U.S. Virgin Islands with the Pierre Cardin(R) trademark, including sweaters, pants, skirts, knitwear, jeans, swimwear and activewear. Such license is automatically continued from year to year at the Company's option provided net sales equal specified minimums. The Company's sales during Fiscal 1999 surpassed the minimum requirements of this license, and the Company intends to renew this license for an additional one year period. BACKLOG At March 25, 2000, the Company had unfilled, confirmed customer orders of approximately $48.9 million, compared to approximately $50.7 million of such orders at March 27, 1999, with such orders generally scheduled for delivery within three to six months of confirmation, although some extend until the end of the fiscal year. The amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of the production and shipment of garments, which in some instances may be delayed or accelerated at the customer's request. Accordingly, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. There can be no assurance that cancellations, rejections and returns will not reduce the amount of sales realized from the backlog of orders. COMPETITION The women's apparel business is highly competitive and consists of many manufacturers and distributors, none of which accounts for a significant percentage of total sales in the overall market, but many of which are larger and have substantially greater resources than the Company. The Company competes with both domestic manufacturers and importers, primarily on an item-by-item basis, with respect to brand name recognition, price, quality and availability. EMPLOYEES As of March 10, 2000, the Company had 545 full-time employees, of whom 133 were salaried and 412 were paid on an hourly basis. The Company had 4 part-time employees, all of whom work on an hourly basis. The Company's hourly labor force is non-union. The Company believes relations with its employees are good. ENVIRONMENTAL MATTERS The Company believes that it is in material compliance with all applicable federal, state and local environmental laws. The Company does not currently anticipate the need to make material capital expenditures to remain in compliance with applicable federal, state and local environmental laws. ITEM 2. PROPERTIES ---------- The Company's production requirements continued to shift from domestically owned or leased facilities to foreign sourced suppliers. The following table indicates the facilities owned or leased at December 31, 1999. As of March 10, 2000, the Company operated five facilities in Virginia, one in Summerville, South Carolina, one in New York State and one in Hong Kong. 4
Approximate Square Owned or Location Footage Function Leased - ------------------------- --------------------- ------------------------------------------ ------------ Floyd, Virginia............................ 79,600 Fabric warehouse, sewing, cutting Owned Independence (Grayson), Virginia........... 70,350 Sewing, finishing Owned Independence (Kendon), Virginia............ 37,550 Company leasing to third party Owned Rural Retreat, Virginia.................... 61,230 Storage Owned Wytheville, Virginia....................... 161,800 Distribution, administration Owned Summerville, South Carolina(1)............. 200,000 Distribution center Leased New York, New York(2)...................... 47,050 Offices and principal showrooms Leased Hong Kong (Comet Building) (3)............. 2,200 Administration, sourcing, quality control Leased ------- TOTAL.................................. 659,780 =======
- --------------------- 1) This facility is leased, with annual rental payments totaling $463,500, and is subject to a 3% annual rental escalation, until March 19, 2006, at which time the lease expires. 2) Annual rental payments for the New York office/showroom space are approximately $2,000,000 in the aggregate. The Company sublet approximately 4,000 square feet in 1999 (sublease expired February 2000), offsetting the rental payments by approximately $145,000. The leases for the New York office/showrooms expire in 2006 and 2008. 3) Lease expires in 2002. Management believes that its current facilities are sufficient to meet its needs for the foreseeable future. On March 15, 2000 the Company announced that it would be closing its domestic manufacturing facilities located in Grayson and Floyd Virginia. The closings are scheduled to take place in May 2000. ITEM 3. LEGAL PROCEEDINGS Commencing November 1996, nine class action complaints were filed against the Company in the United States District Court for the Southern District of New York. Among other things, the complaints alleged violation of the federal securities laws. By order dated August 11, 1998, the court certified the litigation as class action on behalf of all persons and entities who purchased publicly traded securities or sold put options of the Company between February 14, 1995 and November 1996. On October 7, 1999, the Company entered into a stipulation of settlement (the "Settlement") with the class action plaintiffs. In consideration for the discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0 million, of which $5.0 million is the Company's share, and the balance is payable by the Company's insurers; issue 3 million shares of the Company's common stock, and to pursue litigation against two of the Company's insurers to recover under its excess insurers' policies. The Settlement is subject to class notification, the entry of a final judgement, and exhaustion of all appeals and reviews. A settlement hearing on the proposed settlement was held on March 31, 2000 and the court orally approved the settlement. A written order should be signed in due course. In 1999, the Company recorded a charge of $5.9 million, which represented the cost of the Settlement. The Company had funded its required cash contribution to the settlement as of December 31, 1999 except for a) the sum of $0.6 million, which the Company paid during the quarter ended March, 31, 2000; and b) the cost of the litigation with two of the Company's insurers which are not expected to be material. On April 27, 1998, an action was commenced against the Company in the United States District Court for the Western District of Virginia by Wanda King, a former employee of the Company. In her complaint, the Plaintiff claimed that she was constructively discharged by reason of the fact that she resigned from her position rather than follow alleged improper and illegal instructions from her supervisors and superiors. The Company has denied the allegations contained in the Complaint. On July 26, 1999, the District Court dismissed the Complaint on the grounds that it failed to plead a legally recognizable case against the Company. On August 30, 1999, the Plaintiff filed an amended Complaint alleging additional actions on part of the Company and former employees and seeking damages against the Company in excess of $8.0 million. On February 1, 2000, the District Court ruled that the allegations in the amended Complaint, if true, state claims against the Company. The Company has interposed an answer to the Complaint denying the material allegations. On October 7, 1999, NASDAQ notified the Company that it would delist the Company's Common Stock from the NASDAQ National Market. NASDAQ sought the delisting because the bid price for the Common Stock had been below $1.00. During the quarter ended December 31, 1999, the high and low bid prices ranged from approximately $1.25 per share to $0.53 per share. The 5 Company appealed this decision before a NASDAQ Listing Qualifications Panel. An oral hearing was held on February 10, 2000 before the NASDAQ Listing Qualifications Panel. At the hearing, the Company suggested that the Company would effect a reverse split of its outstanding shares of Common Stock to see if the bid price would rise above the $1.00 minimum bid price required for continued listing on the NASDAQ National Market. The Company's management believes, but cannot assure, that by reverse splitting the outstanding shares of Common Stock on a one-for-four basis, the bid price for the Common Stock will exceed $1.00 per share. By decision dated February 22, 2000, the NASDAQ Listing Qualifications Panel decided to allow the Company to continue to be listed on the NASDAQ National Market provided that on or before April 21, 2000, the Company evidences a closing price of at least $1.00 per share and immediately thereafter, the Company must evidence a closing bid price of at least $1.00 per share for a minimum of ten consecutive trading days. The NASDAQ Listing Qualifications Panel reserved the right to review its decision at any time upon the happening of a material change in the Company's financial or operational character. The Company is also 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 the financial condition, results of operations, liquidity or business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The Company's annual meeting of Shareholders was held on November 11, 1999. The results of the vote at the meeting for the election of directors were as follows: NAME OF NOMINEE VOTES FOR VOTES WITHHELD Harvey A. Appelle 13,425,130 236,972 James W. Crystal 13,433,880 228,222 Harvey Horowitz 13,433,780 228,322 Lynn Siemers-Cross 13,426,880 235,222 Herbert L. Ash 13,434,180 227,922 Sheridan C. Biggs 13,434,180 227,922 Daniel H. Levy 13,434,180 227,922 All Nominees were elected. Herbert L. Ash and James W. Crystal resigned their positions as directors for personal reasons in December 1999 and February 2000, respectively. At the Annual Meeting there was a proposal to ratify the appointment of Deloitte & Touche LLP as the independent auditors of the Company for the fiscal year ending on December 31, 1999. The result of the vote taken at the meeting for the ratification of the appointment of Deloitte & Touche LLP, which was approved, was as follows: FOR AGAINST ABSTAIN 13,547,762 75,550 38,790 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Registrant's Common Stock is traded on the NASDAQ National Market under the symbol "DNKY." The Common Stock began trading on the Nasdaq National Market on June 17, 1993. The following table sets forth the quarterly high and low closing prices of a share of Common Stock as reported by the Nasdaq National Market for the Company's two most recent fiscal years, plus the interim period through March 10, 2000. PERIOD HIGH LOW Fiscal 1998 First Quarter...................... $ 3 5/32 2 1/2 Second Quarter..................... 4 1/2 2 3/4 Third Quarter...................... 3 13/32 1 1/4 Fourth Quarter..................... 2 1/2 15/16 Fiscal 1999 First Quarter...................... $ 2 1/16 31/32 Second Quarter..................... 1 11/16 27/64 Third Quarter...................... 1 5/8 1/2 Fourth Quarter..................... 1 1/4 17/32 Fiscal 2000 Ten Weeks Ended March 10, 2000.... $ 1 1/16 21/32 On March 10, 2000, the closing price for a share of Common Stock, as reported by the NASDAQ National Market, was $0.97 per share. The number of holders of record for Registrant's Common Stock as of March 10, 2000 was 73. The Company currently anticipates that it will retain all its earnings for use in the operation and expansion of its business and, therefore, does not anticipate that it will pay any cash dividends in the foreseeable future. In addition, the Company's existing credit facilities and the proposed facility each prohibit the Company from declaring or paying dividends. 7 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data as of December 31, 1999 and 1998 and for each of the years in the three year period ended December 31, 1999 have been derived from the Company's consolidated financial statements included elsewhere in this Form 10-K which have been audited by Deloitte & Touche LLP, independent auditors, whose report thereon is also included herein. The selected consolidated financial data as of December 31, 1997, December 31, 1996 and December 2, 1995 and for the fiscal years December 31, 1996 and December 2, 1995 have been derived from the Company's consolidated financial statements, which are not included herein. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and its Subsidiaries and related notes thereto incorporated by reference herein.
Year Ended --------------------------------------------------------------------------- December 2, December 31, December 31, December 31, December 31, 1995 1996 1997 1998 1999 (In thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS Net sales.......................... $197,960 $255,179 $245,963 $197,861 $173,749 Cost of sales...................... 145,460 202,580 196,633 157,069 138,816 -------- -------- -------- -------- -------- Gross profit....................... 52,500 52,599 49,330 40,792 34,933 Selling, general and administrative expenses........... 34,508 57,370 45,361 38,221 33,002 Amortization of goodwill and other related acquisition costs... 985 1,449 1,204 1,321 1,390 Provision for settlement of litigation............ -- -- -- -- 5,875 Restructuring Charge.............. 2,815 -- 1,723 1,180 -- -------- -------- -------- -------- -------- Operating income (loss)........... 14,192 (6,220) 1,042 70 (5,334) Interest expense, net............. 4,303 5,387 5,461 4,778 4,007 -------- -------- -------- -------- -------- Income (loss) before income taxes...................... 9,889 (11,607) (4,419) (4,708) (9,341) Income taxes (benefit)............ 4,254 (3,319) (1,210) (644) 87 -------- -------- -------- -------- -------- Net income (loss)................. $ 5,635 $ (8,288) $ (3,209) $ (4,064) $ (9,428) ======== ======== ======== ======== ======== BASIC INCOME (LOSS) PER COMMON SHARE(1): Net income (loss).................. $ 0.41 $ (0.59) $ (0.23) $ (0.29) $ (0.66) ======== ======== ======== ======== ======== Shares used in the calculation of basic income (loss) per share 13,910 14,012 14,070 14,150 14,208 ======== ======== ======== ======== ======== DILUTED INCOME (LOSS) PER COMMON SHARE (1): Net Income (loss)................... $ 0.40 $ (0.59) $ (0.23) $ (0.29) $ (0.66) ======== ======== ======== ======== ======== Shares used in the calculation of diluted income (loss) per share 13,986 14,012 14,070 14,150 14,208 ======== ======== ======== ======== ======== CONSOLIDATED BALANCE SHEET DATA: Working capital.................... $ 80,270 $ 16,917 $ 38,354 $ 42,661 $ 48,302 Total assets....................... 157,486 139,433 102,460 100,215 101,837 Long-term debt, including Current portion................... 62,611 50,761 27,048 32,055 42,775 Stockholders' equity............... 65,147 55,278 53,086 49,258 41,881
- ---------------------------- (1) All per share amounts and the shares used in the calculation of basic income (loss) per share have been retroactively restated to reflect the two-for-one stock split paid on December 18, 1995 to stockholders of record on December 4, 1995 and the effects of SFAS 128. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth selected operating data of the Company as percentages of net sales, for the periods indicated below:
DECEMBER 31, ------------ YEAR ENDED 1997 1998 1999 - -------------------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 79.9 79.4 79.9 ----- ----- ----- Gross profit 20.1 20.6 20.1 Selling, general and administrative expenses 18.5 19.3 19.0 Amortization of goodwill and other related acquisition costs 0.5 0.7 0.8 Provision for settlement of litigation 0.0 0.0 3.3 Restructuring charges 0.7 0.6 0.0 ----- ----- ----- Operating income/(loss) 0.4 (0.0) (3.0) Interest expense, net 2.2 2.4 2.3 ----- ----- ----- Loss before income taxes (1.8) (2.4) (5.3) Income tax (benefit) (0.5) (0.3) 0.1 ----- ----- ----- Net (loss) (1.3%) (2.1%) (5.4%) ===== ===== =====
COMPARISON OF FISCAL 1999 WITH FISCAL 1998 NET SALES Net Sales decreased by $24.1 million or 12.2% from $197.9 million in Fiscal 1998 to $173.8 million in Fiscal 1999. The decline in net sales was due to decreases in the Donnkenny label of $8.7 million (primarily due to a reduction in orders from two major customers which resulted from the Company exiting the coordinate business), the Victoria Jones label of $5.5 million, and the Pierre Cardin label of $6.8 million (primarily from the decrease of $6.6 million in orders from one of it's customers which was caused by its change in buying pattern). The decreases were partially offset by increases in the Casey & Max label of $2.1 million. In addition, there was also a decline in net sales which resulted from the Company's exiting of outside contract work, closing the outlet divisions and exiting the Licensed Character business, which accounted for $5.2 million of the decline. GROSS PROFIT Gross profit for Fiscal 1999 was $34.9 million, or 20.1% of net sales, compared to $40.8 million, or 20.6% of net sales, for Fiscal 1998. Significant factors that contributed to the decline in gross profit included a competitive retail environment for non-major branded products, higher domestic manufacturing variances due to decreased sales volume in the Donnkenny label, and higher transportation costs. Subsequent to year end, the Company announced its plan to exit the domestic manufacturing business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased from $38.2 million in Fiscal 1998 to $33.0 million in Fiscal 1999. As a percentage of net sales, these costs decreased from 19.3% in Fiscal 1998 to 19.0% in Fiscal 1999. The $5.2 million decline in selling, general and administrative expense is due to reductions in all expense categories. Included in Fiscal 1998 were charges totaling $1.5 million related to the closing of the Company's outlet stores, consolidating office facilities, cancellation of lease agreements and professional fees associated with computer system installations. 9 PROVISION FOR SETTLEMENT OF LITIGATION Commencing November 1996, nine class action complaints were filed against the Company in the United States District Court for the Southern District of New York. Among other things, the complaints alleged violation of the federal securities law. By order dated August 11, 1998, the court certified the litigation as class action on behalf of all persons and entities who purchased publicly traded securities or sold put options of the Company between February 14, 1995 and November 1996. On October 7, 1999, the Company entered into a stipulation of settlement (the "Settlement") with the class action plaintiffs. In consideration for the discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0 million, of which $5.0 million is the Company's share, and the balance is payable by the Company's insurers; issue 3 million shares of the Company's common stock, and to pursue litigation against two of the Company's insurers to recover under its excess insurers' policies. The Settlement is subject to class notification, the entry of a final judgement, and exhaustion of all appeals and reviews. A settlement hearing on the proposed settlement was held on March 31, 2000 and the court orally approved the settlement. A written order should be signed in due course. In 1999, the Company recorded a charge of $5.9 million, which represented the cost of the Settlement. The Company had funded its required cash contribution to the settlement as of December 31, 1999 except for a) the sum of $0.6 million, which the Company paid during the quarter ended March, 31, 2000; and b) the cost of the litigation with two of the Company's insurers which are not expected to be material. INCOME FROM OPERATIONS In Fiscal 1999, the Company reported a loss from operations of $5.3 million inclusive of the $5.9 million provision for the settlement of the Consolidated Class Action, versus income from operations of $0.1 million in Fiscal 1998. PROVISION FOR INCOME TAXES The Fiscal 1999 provision for income taxes of $87 reflects state and local income taxes. The tax benefit in Fiscal 1998 of $644 or 13.7% of pre-tax losses is lower than the Company's historical rate due to the recording of a valuation allowance on a portion of deferred tax assets related to net operating loss carryforwards. NET LOSS In Fiscal 1999 the Company reported a net loss of $9.4 million, or ($.66) per share, versus a net loss of $4.1 million, or ($0.29) per share in Fiscal 1998. COMPARISON OF FISCAL 1998 WITH FISCAL 1997 NET SALES Net sales decreased by $48.1 million or 19.6% from $246.0 million in Fiscal 1997 to $197.9 million in Fiscal 1998. The decline in net sales was primarily the result of exiting the licensed character business, which accounted for $37.9 million of the decline and decreases in Victoria Jones of $18.8 million due to general softness in the sweater business resulting from warmer weather during the winter of 1998. The decreases were partially offset by increases in Casey & Max of $8.0 million and $5.6 million in Pierre Cardin. GROSS PROFIT Gross profit for Fiscal 1998 was $40.8 million, or 20.6% of net sales, compared to $49.3 million, or 20.1% of net sales, for Fiscal 1997. Significant factors that contributed to the decline in gross profit included the exiting of the licensed character business and general softness in the sweater business from the warm weather during the winter of 1998. Additionally, in the fourth quarter of Fiscal 1998, the Company recorded inventory write offs of $0.7 million related to the sale of the West Hempstead Facility. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased from $45.4 million in Fiscal 1997 to $38.2 million in Fiscal 1998. As a percentage of net sales, these costs increased from 18.5% in Fiscal 1997 to 19.3% in Fiscal 1998. Included in Fiscal 1998 were charges totaling $1.5 million related to the closing of the Company's outlet stores, consolidating office facilities, cancellation of lease agreements and professional fees associated with system installations. Included in Fiscal 1997 are charges in the amount of approximately $4.1 million, the largest component of which is $3.5 million in additional professional fees as the result of legal fees associated with the previously reported class action lawsuits, legal and accounting fees associated with the restatement of prior year quarterly and annual financial statements and consulting services related to the Company's amended credit facility. Excluding these charges, the balance of selling, general and administrative expenses for Fiscal 1998 was $37.6 million or 19.0% of net sales and for Fiscal 1997, $41.8 million, or 17.0% of net sales. The $4.2 million decline in selling, general and 10 administrative expense is due to reductions in all expense categories except design and sample expense and administrative expenses. RESTRUCTURING CHARGES During Fiscal 1998, the Company's production requirements continued to shift from domestically owned or leased facilities to out sourced suppliers. During 1998 and into 1999 several domestic facilities were closed and sold by the Company. In the fourth quarter of 1998, the Company recorded a pre-tax charge of $1.2 million in connection with the sale of its West Hempstead facility which occurred on February 2, 1999. The restructuring charge included write-offs of property, plant, equipment, employee severance payments and other incremental charges directly attributable to the sale of the manufacturing facility. In the fourth quarter of 1997, the Company decided to discontinue the manufacture and sale of the Mickey & Co. licensed character product line under a license agreement with Disney Enterprises, Inc. and recorded a pre-tax restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5 million for the write-down of merchandise inventories. The restructuring charge included payments due under agreements with the licensor; write-downs of property, plant and equipment; costs related to lease terminations; employee severance payments; and other incremental charges directly attributable to discontinuing the licensed character product lines. INCOME FROM OPERATIONS In Fiscal 1998, the Company reported income from operations of $0.1 million, versus income from operations of $1.0 million in Fiscal 1997. PROVISION FOR INCOME TAXES The Company's tax benefit in Fiscal 1998 amounts to 13.7% of pre-tax losses, as compared to a benefit of 27.4% for Fiscal 1997. The benefit in Fiscal 1998 is lower than the Company's historical tax rate due to the recording of a valuation allowance on a portion of deferred tax assets related to net operating loss carryforwards. NET LOSS In Fiscal 1998 the Company reported a net loss of $4.1 million, or ($0.29) per share, versus a net loss of $3.2 million, or ($0.23) per share in Fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise from the funding of working capital needs, primarily inventory and accounts receivable, and interest and principal payments related to certain indebtedness and capital expenditures. The Company's borrowing requirements for working capital fluctuate throughout the year. Capital expenditures were $0.5 million for Fiscal 1999, compared to $2.5 million in Fiscal 1998. In Fiscal 1999, the Company was permitted to spend up to $2.0 million on capital investments in accordance with the Revolving Credit Agreement described below. As part of the 1999 capital expense budget, the Company spent approximately $0.5 million for upgrading computer systems to become Year 2000 compliant. At the end of Fiscal 1999, direct borrowings under the revolving credit facility were $40.0 million and the term loan amounted to $2.5 million. Additionally, the Company had letters of credit outstanding of $17.6 million, with unused facility of $17.4 million. At the end of Fiscal 1998, direct borrowings and letters of credit outstanding under the prior credit facility were $31.6 and $24.3 million, respectively. On June 29, 1999, the Company and its operating subsidiaries signed a new three year credit agreement (the "Credit Agreement") with CIT Group/Commercial Services to replace the existing $75 million credit facility. The Credit Agreement provides the Company with a $75 million facility comprised of a $72 million revolver with sublimits up to $52 million for direct borrowings, $35 million for letters of credit, certain overadvances and a $3 million term loan. Borrowings under the Credit Agreement bear interest at the prime rate plus one half percent (9.0% at December 31, 1999). The Credit Agreement provides for advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the undrawn amount of all outstanding letters of credit plus (iv) allowable overadvances. The term loan requires quarterly payments of $250 plus all accrued and unpaid interest beginning September 30, 1999 through June 30, 2002. The Credit Agreement expires on June 30, 2002. 11 Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corporation. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of net worth and comply with a maximum cumulative net loss test and a minimum interest coverage ratio. Subsequent to June 1999, the Company amended the Credit Agreement. On February 29, 2000, the Company entered into a Third Amendment and Waiver Agreement. The Third Amendment and Waiver waived any existing defaults as of December 31, 1999 and for the End of Month Period for January 2000 with respect to the Company's noncompliance with covenants related to Minimum Interest Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the interest rate on borrowings was increased to 1% above the prime rate effective February 29, 2000 and the Overadvance Amounts for Fiscal 2000 were amended and restated. Certain covenants were also amended for the respective quarter ends in Fiscal 2000. A fee of $75,000 was paid on February 29, 2000. On April 13, 2000, the Company entered into a Fourth Amendment and Waiver Agreement to support the Company's 2000 business plan. The Fourth Amendment and Waiver waived any existing defaults as of the End of Month Period for March 2000 with respect to the Company's noncompliance with covenants related to Minimum Interest Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the interest rate on borrowings was increased to 1.5% above the prime rate effective April 13, 2000, and the Overadvance Amounts for Fiscal 2000 were amended. Certain covenants were also amended for the respective quarter ends in Fiscal 2000. A fee of $75,000 is payable for the Fourth Amendment and Waiver. The Company also has a factoring agreement with CIT. The factoring agreement provides for a factoring commission equal to .45% of gross amount of sales, plus certain customary charges. During Fiscal 1999, cash used in operating activities was $11.9 million, principally as the result of increases in accounts receivable and inventory (which relate primarily to inventory in transit and to first quarter fiscal 2000) and decreases to accounts payable and accrued expenses, partially offset by decreases in other non-current assets. During Fiscal 1998, cash used in operating activities was $1.4 million, principally as the result of the increase in accounts receivable and other non-current assets, partially offset by decreases in inventories and recoverable income taxes. Cash provided by investing activities in Fiscal 1999 included proceeds from the sale of fixed assets of $1.4 million offset by $0.5 for the purchase of fixed assets. Cash used in Fiscal 1998 for investing activities of $3.4 million included $2.5 million for the purchase of fixed assets and the $1.8 million earnout payment related to the acquisition of Beldoch, which was partially offset by proceeds from the sale of fixed assets of $0.8 million. Cash provided by financing activities in Fiscal 1999 was $10.7 million, which represented net borrowings of under the revolver of $8.4 million and net borrowings of the term loan of $2.3 million. Cash provided by financing activities in Fiscal 1998 was $5.0 million, which represented repayments of $5.6 million on the Term Loan, offset by net borrowings under the Revolving Credit Agreement of $10.1 million and the proceeds from an equipment loan of $0.5 million. The Company believes that cash flows from operations and amounts available under the revolving credit agreement will be sufficient for its needs for the foreseeable future. OTHER ITEMS AFFECTING THE COMPANY Competition The apparel industry in the United States is highly competitive and characterized by a number of multi-line manufacturers (such as the Company) and a larger number of specialty manufacturers. The Company faces substantial competition in its markets from manufacturers in both categories. Apparel Industry Cycles and other Economic Factors The apparel industry historically has been subject to substantial cyclical variation, with consumer spending on apparel tending to decline during recessionary periods. A decline in the general economy or uncertainties regarding future economic prospects may affect consumer spending habits, which, in turn, could have a material adverse effect on the Company's results of operations and its financial condition. Retail Environment Various retailers, including some of the Company's customers, have experienced declines in revenue and profits in recent periods and some have been forced to file for bankruptcy protection. To the extent that these financial difficulties continue, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. 12 Seasonality of Business and Fashion Risk The Company's principal products are organized into seasonal lines for resale at the retail level during the Spring, Summer, Transition, Fall and Holiday Seasons. Typically, the Company's products are designed as much as one year in advance and manufactured approximately one season in advance of the related retail selling season. Accordingly, the success of the Company's products is often dependent on the ability to successfully anticipate the needs of retail customers and the tastes of the ultimate consumer up to a year prior to the relevant selling season. Foreign Operations The Company's foreign sourcing operations are subject to various risks of doing business abroad, including indirect vulnerability to currency fluctuations, quotas and, in certain parts of the world, political instability. Any substantial disruption of its relationships with its foreign suppliers could adversely affect the Company's operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas, which limit the amount of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocation could adversely affect the Company's operations. Asian Operations The portion of the Company's products which it currently imports from Asia is further subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The impact, if any, of these regional events on the Company's business, and in particular its sources of supply, cannot be determined at this time. Approximately 70% of the products sold by the Company in Fiscal 1999 were manufactured in Asia. Facility Closures On March 15, 2000 the Company announced that it will be closing all of its domestic manufacturing plants. These facilities are located in Floyd and Independence, Virginia. The Company will incur a charge of approximately $0.3 million for employee severance payments and other incremental charges directly attributable to the closing of the manufacturing facilities. The plant closings are planned to be completed by May of Fiscal 2000. Factors that May Affect Future Results and Financial Condition The Company's future operating results and financial condition are dependent upon its ability to successfully design, manufacture, import and market apparel. Proposed Reverse Stock Split On February 15, 2000, the Company's Board of Directors adopted a resolution to recommend to the Company's shareholders a four for one reverse stock split as part of an effort to maintain continued listing of the Company's common stock on the NASDAQ National Market. The reverse stock split recommendation will be put before the Company's shareholders at a special meeting to be held on April 18, 2000. As a result of the proposed split, if the recommendation is approved by the Company's shareholders, each four shares of common stock applicable to shareholders on the effective date of the split will be converted into one share of stock. The Company's Board of Directors recommended this action to the Company's shareholders in an effort to maintain NASDAQ National Market listing. One of the requirements for continued listing on the NASDAQ National Market is the maintenance of a bid price for the Company's shares of $1.00 or higher. During the last quarter of 1999, and into 2000, the Company's bid price has fallen below $1.00. While it is anticipated that following the reverse stock split, the market value of the Company's shares will increase in inverse proportion to the ratio of the reverse split, there can be no assurance that this will occur or that the bid price of the Company's common stock will maintain a $1.00 or higher price. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes standards for the accounting and reporting for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has determined that this statement will not have a significant impact on its financial statements or disclosures, as it does not engage in derivative or hedging transactions. 13 Forward Looking Statements This Form 10-K (including by not limited to the sections hereof entitled "Business" and "Management's Discussion and Analysis") contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward looking statement includes a statement of the assumptions or bases underlying such forward looking statement, the Company cautions that assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, there can be no assurance that the statement of the expectation or belief will result, or be achieved or accomplished. The words "believe", "expect", "estimate", "project", "seek", "anticipate" and similar expressions may identify forward-looking statements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Financial Statements following item 14 of this Annual Report of Form 10-K 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT DANIEL H. LEVY, a director of the Company, has been a principal of and consultant to LBK Consulting Inc., a retail consulting business, since January 1997 and during the period of 1994 to April 1996. From April 1996 through January 1997, he served as Chairman of the Board and Chief Executive Officer of Best Products, Inc., a retail sales company which filed for bankruptcy in September 1996. From 1993 through 1994, Mr. Levy served as Chairman of the Board and Chief Executive Officer of Conran's, a retail home furnishings company. From 1991 to 1993, he was Vice Chairman and Chief Operating Officer of Montgomery Ward, a retail sales company. Mr. Levy is a director of Whitehall Jewelers, Inc. Mr. Levy is 56 years old. On January 1, 2000, Mr. Levy became Chairman of the Board and Chief Executive Officer of the Company. HARVEY A. APPELLE, a director of the Company, was Chairman of the Board and Chief Executive Officer of the Company from December 19, 1996 until December 31, 1999, when he resigned his office. Mr. Appelle had been the President of HarGil Capital Associates Ltd., a private investment firm, since 1994. From 1983 to 1993, he was a Managing Director of the Investment Banking Division of Merrill Lynch Pierce Fenner & Smith Inc. and a Senior Vice President of Merrill Lynch Interfunding Inc. Mr. Appelle is 54 years old. LYNN SIEMERS-CROSS, a director of the Company, became President and Chief Operating Officer of the Company on April 14, 1997. Prior thereto, for more than five years, she was President of the Oak Hill Division of the Company. Ms. Siemers-Cross is 41 years old. BEVERLY EICHEL, has been Executive Vice President and Chief Financial Officer of the Company since October 1998. Prior thereto, she was Executive Vice President and Chief Financial Officer of Danskin, Inc. from June 1992 to September 1998, and had been its Corporate Controller from October 1987 to June 1992. Ms. Eichel also serves as Secretary of the Company. Ms. Eichel is 42 years old. SHERIDAN C. BIGGS, a director of the Company, is Executive-in-Residence at the Graduate Management Institute at Union College. Prior to that, he was a senior partner of Price Waterhouse, the accounting and consulting firm; he was with that firm for thirty-one years until his retirement in 1994. During his career at Price Waterhouse, Mr. Biggs served as a Vice Chairman and member of the firm's management committee. Mr. Biggs is 65 years old. HARVEY HOROWITZ, a director of the Company, served as Vice President, and General Counsel of the Company from October 1, 1996 to February 28, 1998 when he resigned his office. 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 a director of The Gotham Bank of New York, a financial institution. Mr. Horowitz is 57 years old. JAMES W. CRYSTAL, a director of the Company, has been President, since 1978, and Chairman of the Board since 1989, of Frank Crystal & Co., international insurance brokers. Mr. Crystal is 62 years old. On February 28, 2000, Mr. Crystal resigned his position as a Director of the Company for personal reasons. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 1999, all Section 16(a) reporting requirements applicable to the Company's officers, directors and greater than ten percent shareholders were in compliance. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth compensation paid for the fiscal years ended December 31, 1999, December 31, 1998, and December 31, 1997 to those persons who were, at December 31, 1999 (i) the chief executive officer and (ii) the other most 15 highly compensated executive officers of the Company (collectively, the "Named Executive Officers"). The information in the following tables with respect to the number of shares of Common Stock underlying options, option exercise prices and the number of shares of Common Stock acquired upon the exercise of options has been retroactively restated to reflect the two-for-one stock split paid to all holders of Common Stock of record on December 4, 1995 (the "Stock Split").
SUMMARY COMPENSATION TABLE ----------------------------- LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS --------------------------------------------------------------------- RESTRICTED SECURITIES ALL OTHER FISCAL STOCK UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS/SARS (1) - ---------------------------------------------------------------------------------------------------------------------- Harvey A. Appelle (2)(4)(7) 1999 $473,806 $2,130 Chairman of the Board and 1998 402,652 100,000 2,880 Chief Executive Officer 1997 400,000 $174,000 440,625 200,000 2,880 Lynn Siemers-Cross (3)(5)(7) President and Chief 1999 $502,652 $ 810 Operating Officer 1998 502,550 100,000 1,020 1997 500,000 $212,500 440,625 200,000 660 Beverly Eichel (6) Executive Vice President and 1999 $275,000 $ 810 Chief Financial Officer 1998 63,462 $ 50,000 150,000 255
(1) Represents insurance premiums paid by, or on behalf of, the Company during the covered fiscal year with respect to term life insurance for the benefit of the Named Executive Officer. (2) This individual became an Executive Officer of the Company in 1996. This individual resigned his office as Chief Executive Officer effective 12/31/99. (3) This individual became an Executive Officer of the Company in 1997. (4) Bonus for 1997 was paid in 69,600 shares of common stock; Bonus for 1998 included the grant of options to purchase 100,000 shares of common stock (5) Bonus for 1997 was $150,000 cash payment and 25,000 shares of common stock; Bonus for 1998 included the grant of options to purchase 100,000 shares of common stock. (6) This individual became an Executive Officer of the Company in 1998. Annual compensation represents prorated compensation from date of hire in October 1998 and a signing bonus paid in connection with the execution of her employment agreement with the Company. (7) Includes restricted stock awards of 150,000 shares of which 30,000 shares were vested on March 31, 1999 and the remaining 120,000 shares will be vested on March 31, 2000. EMPLOYMENT AGREEMENTS Daniel H. Levy As of January 1, 2000, Mr. Levy entered into an employment agreement with the Company to serve as its Chairman of the Board and Chief Executive Officer. While the term of the employment agreement is for three years, the agreement gives the Company and Mr. Levy the right to terminate the agreement at the end of three, six and twelve months. In the event the Company exercises this termination right, the Company agrees to pay Mr. Levy severance of three, six and twelve months respectively. The agreement provides 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, as well as certain insurance benefits. The Company paid to Mr. Levy a relocation bonus of $25,000, with a gross up for the tax effect of this bonus. In connection with the execution of the employment agreement, the Compensation Committee granted to Mr. Levy 150,000 restricted shares of the Company's stock, which will vest December 31, 2002. The employment agreement further provides for the issuance of another 150,000 restricted shares of the Company's stock if Mr. Levy is 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 150,000 shares of the Company's common stock, at a purchase price of $0.6875 a share. 100,000 of these stock options vest on June 30, 2000 and the balance of 50,000 will vest on December 31, 2000, if Mr. Levy is employed by the Company on those dates. The employment agreement provides that the restricted shares and the options granted would have accelerated vesting in the event of a change in control of the Company. 16 The agreement provides that in the event Mr. Levy's employment is terminated (except in certain limited circumstances) following a change in control of the Company, Mr. Levy will have the right to receive severance benefits equal to three times the sum of his then annual salary inclusive of any performance bonus. Harvey Appelle On April 12, 1997, Mr. Appelle entered into a three-year employment agreement with the Company to serve as its Chairman of the Board and Chief Executive Officer. The agreement provides for a base annual salary of $400,000 for the first two years of the term and of $500,000 for the third year of the term, as well as a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee of the Board, as well as certain insurance benefits. In addition, in connection with the execution of the employment agreement, the Compensation Committee granted to Mr. Appelle 150,000 restricted shares and options to purchase an aggregate of 150,000 additional shares at a price equal to the closing price of the Common Stock on the date of grant. The agreement further provides for an incentive cash bonus equal to the appreciation over five years of 50,000 shares of stock. The restricted shares, options and right to receive the incentive cash bonus will vest over the term of the agreement, subject to acceleration in the event of a change in control of the Company. Mr. Appelle resigned his position as Chief Executive Officer effective December 31, 1999. Lynn Siemers-Cross On June 12, 1997, Ms. Siemers-Cross entered into a four-year employment agreement with the Company to serve as its President and Chief Operating Officer. The agreement provides for a base annual salary of $500,000, a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee, but not less than $150,000 for Fiscal 1997, as well as certain insurance and other benefits. In addition, in connection with the execution of the employment agreement, the Compensation Committee granted to Ms. Siemers-Cross 150,000 restricted shares and options to purchase an aggregate of 150,000 additional shares at a price equal to the closing price of the Common Stock on the date of grant. The agreement further provides for an incentive cash bonus equal to the appreciation over five years of 50,000 shares of stock. The restricted shares, options and right to receive the incentive cash bonus will vest over the term of the agreement, subject to acceleration in the event of a change in control of the Company. The agreement provides that in the event Ms. Siemers-Cross' employment is terminated (except in certain limited circumstances) following a change in control of the Company, Ms. Siemers-Cross will have the right to receive severance benefits equal to three times the sum of the last annual salary inclusive of performance bonus (but not incentive bonus). Beverly Eichel On September 28, 1998, Ms. Eichel entered into a two-year employment agreement the Company to serve as Executive Vice President and Chief Financial Officer, providing for a base salary of $275,000 per annum and a one time signing bonus of $50,000. The agreement provides for a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee of the Board, as well as certain insurance benefits. In addition, in connection with the commencement dates the agreement provides for the grant of options to purchase 150,000 shares of Common Stock at an exercise price equal to the fair market value on the date of grant, vesting over three years. The agreement provides that in the event Ms. Eichel's employment is terminated (except in certain limited circumstances) following a change in control of the Company, Ms. Eichel will have the right to receive severance benefits equal to one and one half times the sum of the last annual salary inclusive of performance bonus. Harvey Horowitz On February 28, 1998, Mr. Horowitz entered into a two-year consulting agreement with the Company, which agreement superseded Mr. Horowitz's employment agreement with the Company dated September 5, 1996. Under the new agreement, Mr. Horowitz agrees to provide certain consulting services to the Company and its officers with respect to legal matters arising out of the business affairs of the Company. The new agreement provides for monthly payments to be made by the Company to Mr. Horowitz equal to $35,000 for March 1998, $30,000 per month thereafter for the balance of calendar year 1998, and $25,000 per month throughout calendar year 1999. Mr. Horowitz will continue to receive certain insurance and other benefits. 17 1999 STOCK OPTIONS GRANTS The Company strives to distribute stock option awards broadly throughout the organization. Stock option awards are based on the individual's position and contribution to the Company. The Company's long term performance ultimately determines compensation from stock options because stock option value is entirely dependent on the long term growth of the Company's common stock price. The following table sets forth certain information concerning options granted to the Chief Executive Officer and the Named Executive Officers and Directors during Fiscal 1999, including information concerning the potential realizable value of such options. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS OPTION TERM (1) ----------------------------------------------------- ---------------------- NUMBER OF SECURITIES % OF TOTAL EXERCISE UNDERLYING # OF OPTIONS PRICE (3) EXPIRATION OPTION (#) GRANTED IN 1999 ($/Sh) DATE 5% ($) 10% ($) ---------- --------------- ------ ---- ------ ------- Harvey Appelle (4) 100,000 37.04% 1.1875 3/2/09 74,763 189,387 Lynn Siemers-Cross (4) 100,000 37.04% 1.1875 3/2/09 74,763 189,387 Sheridan C. Biggs (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730 James W. Crystal (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730 Harvey Horowitz (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730 Daniel H. Levy (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
(1) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the SEC and, therefore, are not intended to forecast possible future appreciation, if any, of the Company's stock price. (2) Represents options granted to Messrs. Biggs, Crystal, Horowitz and Levy as directors pursuant to the Company's 1994 Non-Employee Director Option Plan. (3) All options were granted at an exercise price equal to the market value of the Company's common stock on the date of grant. (4) Options were granted as part of Fiscal 1998 compensation. 18 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, 1999 DECEMBER 31, 1999 (2) ON EXERCISE VALUE ----------------- ------------------------- (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE --- -------- ----------- ------------- ----------- ------------- Harvey Appelle (3) 0 0 172,500 100,000 0 0 Lynn Siemers-Cross (4) 0 0 154,500 103,000 0 0 Herbert L. Ash 0 0 20,000 0 0 0 Sheridan C. Biggs 0 0 25,000 0 0 0 Robert H. Cohen 0 0 20,000 0 0 0 James W. Crystal 0 0 37,500 0 0 0 Harvey Horowitz 0 0 32,500 0 0 0 Daniel H. Levy 0 0 25,000 0 0 0 Robert H. Martinsen 0 0 20,000 0 0 0 Beverly Eichel (5) 0 0 60,000 90,000 0 0
(1) All options were granted at an exercise price equal to market value of the common stock on the date of grant. (2) Amount reflects the market value of the underlying shares of common stock at the closing sales price reported on the Nasdaq National Market on December 31, 1999 ($.59) per share. (3) Represents 22,500 options granted to him under the Company's 1994 non-employee director option plan, 150,000 options granted to him in connection with the execution of his employment agreement and 100,000 options granted as part of his Fiscal 1998 compensation. (4) Represents 7,500 options granted to her under the Company's 1992 Stock Option Plan, 150,000 options granted in connection with the execution of her employment agreement and 100,000 options granted as part of her Fiscal 1998 compensation. (5) Represents 150,000 options granted in connection with the execution of her employment agreement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of March 10, 2000, with respect to beneficial ownership of the Company's Common Stock by: (i) each of the Company's directors, (ii) each of the Company's Named Executive Officers, (iii) each person who is known by the Company beneficially to own more than 5% of the Company's Common Stock, and (iv) by all directors and executive officers who served as directors or executive officers of March 10, 2000 as a group. All information in the table below with respect to the Common Stock of the Company has been restated to reflect the two-for-one stock split paid to all holders of Common Stock of record on December 4, 1995. For purposes of 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 OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED ------------------- --------------------- --------------------- Amber Arbitrage LDC 2,322,450 (2) 16.3% C/o Custom House Fund Management Limited 31 Kildare Sheet Dublin 2, Ireland Putnam Investments, Inc. 1,199,250 (3) 8.4% 1 Post Office Square Boston, MA 02109 Harvey A. Appelle 547,100 (4) 3.7% Lynn Siemers-Cross 353,200 (5) 2.4% Sheridan C. Biggs 26,000 (6) * James W. Crystal 38,500 (7) * Beverly Eichel 60,000 (8) * Harvey Horowitz 35,000 (9) * Daniel H. Levy 30,000 (10) * All directors and officers as a group (7 7.3% persons)
19 - ------- * Less than 1%. (1) Percentage to be based on the number of shares of Common Stock outstanding as of March 10, 2000. (2) Based on information contained in Schedule 13G filed with the Company on May 13, 1998. (3) Based on information contained in Schedule 13G/A filed with the Company on February 4, 1999. Includes shares held by Putman Investment Management, Inc. and Putman Advisory Company, Inc. (4) Includes 22,500 shares underlying currently exercisable stock options which have been granted to Harvey A. Appelle pursuant to the Company's 1994 Non-Employee Director Option Plan, 150,000 shares underlying currently exercisable stock options which have been granted to Mr. Appelle pursuant to his employment agreement, 150,000 restricted shares granted to Mr. Appelle pursuant to his employment agreement and 69,600 shares of stock issued to him as part of Fiscal 1997 compensation. The above includes 20,000 options and excludes 80,000 options issued as part of Fiscal 1998 compensation and will become exercisable on various dates through the year 2004. Also includes 135,000 shares held by Mr. Appelle. (5) Includes 6,000 shares of underlying options which have been granted on April 19, 1996 to Lynn Siemers-Cross pursuant to the Company's 1992 Stock Option Plan (excludes 1,500 options, which do not vest until April 19, 2001) and includes 150,000 shares underlying options which have been granted pursuant to Ms. Siemers-Cross' employment agreement. Also includes 150,000 shares of restricted stock pursuant to Ms. Siemers-Cross' employment agreement and 25,000 shares of stock issued as part of Fiscal 1997 compensation. The above includes 20,000 options, and excludes 80,000 options issued as part of Fiscal 1998 compensation which will become exercisable on various dates through the year 2004. Also includes 2,200 shares held by Mrs. Siemers-Cross. (6) Includes 25,000 shares underlying options which have been granted to Sheridan C. Biggs pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. Also includes 1,000 shares held by Mr. Biggs. (7) Includes 37,500 shares underlying options which have been granted to James W. Crystal pursuant to the Company's 1994 Non Employee Director Option Plan. Such options are currently exercisable. Also includes 1,000 shares held by Mr. Crystal. (8) Includes 60,000 shares underlying options, which are vested, out of 150,000 underlying options, which have been granted to Beverly Eichel pursuant to her employment agreement. Does not include 90,000 options of which, 60,000 will vest in September 2000, and 30,000 will vest in September 2001. (9) Includes 32,500 shares underlying options which have been granted to Harvey Horowitz pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. Also includes 2,500 shares held by Mr. Horowitz. (10) Includes 25,000 shares underlying options which have been granted to Daniel A. Levy pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. Also includes 5,000 shares held by Mr. Levy. Does not include 150,000 shares underlying stock options granted as of January 3, 2000 pursuant to the Company's 1992 Stock Option Plan, 100,000 of which vest on June 30, 2000 and the balance of 50,000, which will vest on December 31, 2000. Also does not include 150,000 shares of the Company's Restricted Stock granted as of January 3, 2000 pursuant to the Company's 1996 Restricted Stock Plan. These restricted shares vest on December 31, 2002. The foregoing options issued under the Company's 1992 Stock Option Plan and the restricted stock were granted pursuant to Mr. Levy's employment agreement. 20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Crystal is Chairman and President of Frank Crystal & Co., Inc., which provides insurance brokerage services to the Company. Frank Crystal & Co., Inc. received approximately $130,000 in commissions during 1999 for services rendered to the Company. Mr. Horowitz is of counsel to the law firm of Mintz & Gold LLP, which provides legal services to the Company. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Independent Auditors' Report Consolidated Balance Sheets at December 31, 1999 and 1998 Consolidated Statements of Operations for the Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 2. Financial Statement Schedule Valuation and Qualifying Accounts 3. The Exhibits, which are listed on the Exhibit Index attached hereto (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of Fiscal 1999. 21 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, 2000 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. DATED: MARCH 30, 2000 BY: /s/ DANIEL H. LEVY --------------------------------------- DANIEL H. LEVY, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) /s/ LYNN SIEMERS-CROSS --------------------------------------- DATED: MARCH 30, 2000 LYNN SIEMERS-CROSS, PRESIDENT AND CHIEF OPERATING OFFICER /s/ BEVERLY EICHEL --------------------------------------- DATED: MARCH 30, 2000 BEVERLY EICHEL, CHIEF FINANCIAL OFFICER, EXECUTIVE VICE PRESIDENT-FINANCE AND SECRETARY (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ HARVEY APPELLE --------------------------------------- DATED: MARCH 30, 2000 HARVEY APPELLE, DIRECTOR /s/ SHERIDAN C. BIGGS --------------------------------------- DATED: MARCH 30, 2000 SHERIDAN C. BIGGS, DIRECTOR /s/ HARVEY HOROWITZ --------------------------------------- DATED: MARCH 30, 2000 HARVEY HOROWITZ, DIRECTOR 22 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-Cross 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 TThe 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) 23 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) 21 Subsidiaries of the Company.
- ------------------ (1) Incorporated herein by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-48243), as filed with the Commission on May 29, 1992 (the "Registration Statement"). (2) Incorporated herein by reference to Amendment No. 4 to the Registration Statement (Registration No. 33-48243), as filed with the Commission on May 24, 1993. (3) Incorporated herein by reference to Amendment No. 3 to the Registration Statement (Registration Statement No. 33-48243), as filed with the Commission on May 10, 1993. (4) Incorporated herein by reference to Amendment No. 5 to the Registration Statement (Registration No. 33-48243), as filed with the Commission on June 11, 1993. (5) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 3, 1994. (6) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on June 2, 1995. (7) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on August 8, 1995. (8) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 2, 1995. (9) Incorporated herein by reference to the Company's 1996 Proxy Statement, filed March 22, 1996. (10) Incorporated herein by reference to the Company's Report on Form 10-Q, filed with the Commission on August 6, 1997. (11) Incorporated herein by reference to the Company's Report on Form 10-Q filed with the Commission on November 15, 1998. (12) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (13) Incorporated herein by reference to the Company's Report on Form 10-Q filed with the Commission on August 15, 1999. (14) Incorporated herein by reference to the Company's Report on Form 10-Q filed with the Commission on November 15, 1999. (15) Filed herewith. 24 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Donnkenny, Inc. We have audited the accompanying consolidated balance sheets of Donnkenny, Inc. and subsidiaries as of December 31, 1999 and December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the fiscal years in the three year period ended December 31, 1999. Our audits also included the financial statements schedule listed in the Index at item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects the financial position of Donnkenny, Inc. at December 31, 1999 and December 31, 1998, and the results of their operations and cash flows for each of the fiscal years in the three year period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP New York, New York March 22, 2000 (March 31, 2000 as to Note 13 and April 13, 2000 as to Note 6) F-1 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31, 1999 1998 ----------------- -------------------- ASSETS CURRENT ASSETS: Cash ........................................................ $ 180 $ 503 Accounts receivable, net of allowances for bad debts of $382 and $620, respectively ........................... 30,022 29,363 Recoverable income taxes .................................... 304 655 Inventories ................................................. 29,323 21,972 Deferred tax assets ......................................... 2,865 3,080 Prepaid expenses and other current assets ................... 636 1,265 Assets held for sale ........................................ 456 1,799 --------- --------- Total current assets ........................................ 63,786 58,637 PROPERTY, PLANT AND EQUIPMENT, NET .............................. 5,981 6,337 OTHER ASSETS .................................................... 546 2,327 INTANGIBLE ASSETS ............................................... 31,524 32,914 --------- --------- TOTAL ........................................................... $ 101,837 $ 100,215 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ........................... $ 1,168 $ 154 Accounts payable ............................................ 10,351 8,391 Accrued expenses and other current liabilities .............. 3,965 7,431 --------- --------- Total current liabilities ............................... 15,484 15,976 --------- --------- LONG-TERM DEBT .................................................. 41,607 31,901 DEFERRED TAX LIABILITIES ........................................ 2,865 3,080 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock $.01 par value; authorized 500 shares, issued none...................................................... Common stock, $.01 par value; authorized 20,000 shares, issued and outstanding 14,230 and 14,170, shares in 1999 and 1998 respectively ............. 142 142 Additional paid-in capital .................................. 47,771 47,595 Issuable shares for litigation settlement ................... 1,875 Retained earnings (deficit) ................................. (7,907) 1,521 --------- --------- Total stockholders' equity .................................. 41,881 49,258 --------- --------- TOTAL ........................................................... $ 101,837 $ 100,215 ========= =========
See accompanying notes to consolidated financial statements. F-2 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------- ------------ ------------- NET SALES .............................................. $ 173,749 $ 197,861 $ 245,963 COST OF SALES .......................................... 138,816 157,069 196,633 ------------ ------------ ------------ Gross Profit ................................... 34,933 40,792 49,330 OPERATING EXPENSES: Selling, general and administrative expenses ...... 33,002 38,221 45,361 Amortization of goodwill and other related acquisition costs .............................. 1,390 1,321 1,204 Provision for settlement of litigation ............ 5,875 Restructuring charge .............................. -- 1,180 1,723 ------------ ------------ ------------ Operating income (loss) ........................ (5,334) 70 1,042 OTHER EXPENSE: Interest expense (net of interest income of $0, $10, and $500) .................................. 4,007 4,778 5,461 ------------ ------------ ------------ (Loss) before income taxes ..................... (9,341) (4,708) (4,419) INCOME TAX EXPENSE (BENEFIT) ........................... 87 (644) (1,210) ------------ ------------ ------------ NET (LOSS) ........................................ $ (9,428) $ (4,064) $ (3,209) ============ ============ ============ Basic and diluted (loss) per common share ......... $ (0.66) $ (0.29) $ (0.23) ============ ============ ============ Shares used in the calculation of basic and diluted (loss) per common share ........................ 14,208,000 14,150,000 14,070,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ISSUABLE ADDITIONAL SHARES FOR RETAINED TOTAL PREFERRED COMMON PAID-IN LITIGATION EARNINGS STOCKHOLDERS' STOCK STOCK CAPITAL SETTLEMENT (DEFICIT) EQUITY -------- -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1996 $ -- $ 140 $ 46,344 $ -- $ 8,794 $ 55,278 Issuance of Common Stock .................. -- 1 116 -- -- 117 Tax Benefit attributable to the exercise of stock options .............. -- -- 900 -- -- 900 Net Loss .................................. -- -- -- -- (3,209) (3,209) -------- -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1997 $ -- $ 141 $ 47,360 $ -- $ 5,585 $ 53,086 Issuance of Common Stock .................. -- 1 235 -- -- 236 Net Loss .................................. -- -- -- -- (4,064) (4,064) -------- -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1998 $ -- $ 142 $ 47,595 $ -- $ 1,521 $ 49,258 Issuance of Common Stock .................. -- -- 176 -- -- 176 Issuable shares for litigation settlement . -- -- -- 1,875 -- 1,875 Net Loss .................................. -- -- -- -- (9,428) (9,428) -------- -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1999 $ -- $ 142 $ 47,771 $ 1,875 $ (7,907) $ 41,881 -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-4 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) .............................................................. $ (9,428) $ (4,064) $ (3,209) Adjustments to reconcile net cash (used in) provided by operating activities: Provision for shares issuable on litigation settlement ............... 1,875 -- -- Deferred income taxes ................................................ (177) (1,247) Depreciation and amortization of fixed assets ........................ 814 1,687 1,770 Loss on disposal of fixed assets ..................................... 5 506 -- Amortization of intangibles and other assets ......................... 1,390 1,321 1,204 Write down of fixed assets ........................................... -- 907 260 Provision for losses on accounts receivable .......................... (72) (46) 282 Changes in assets and liabilities, net of the effects of acquisitions and disposals: (Increase) decrease in accounts receivable ........................... (587) (4,864) 4,986 Decrease in recoverable income taxes ................................. 351 526 7,444 (Increase) decrease in inventories ................................... (7,351) 5,276 19,545 Decrease (increase) in prepaid expenses and other current assets .................................................... 630 881 (513) Decrease (increase) in other non-current assets ...................... 1,780 (2,327) -- Decrease in accounts payable ......................................... 1,960 (929) (10,156) Decrease in accrued expenses and other current liabilities ......................................... (3,290) (53) (335) ------ -------- -------- Net cash (used in) provided by operating activities ............... (11,923) (1,356) 20,031 ------ -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ................................................ (501) (2,452) (516) Proceeds from sale of fixed assets ...................................... 1,381 836 640 Increase in intangibles ................................................. -- (1,789) (1,200) ------ -------- -------- Net cash provided by (used in) investing activities ............... 880 (3,405) (1,076) ------ -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increases (repayments) of long-term debt ............................ 2,346 (5,580) (12,253) Proceeds of long-term debt .............................................. -- 483 -- Net increases (repayments) under revolving credit line .................. 8,374 10,104 (11,460) Issuance of Common Stock ................................................ -- -- 117 Tax benefit attributable to exercise of stock options ................... -- -- 900 ------ -------- -------- Net cash provided by (used in) financing activities ............... 10,720 5,007 (22,696) ------ -------- -------- NET (DECREASE) INCREASE IN CASH .............................................. (323) 246 (3,741) CASH, AT BEGINNING OF PERIOD ................................................. 503 257 3,998 ------ -------- -------- CASH, AT END OF PERIOD ....................................................... $ 180 $ 503 $ 257 ========= ======== ======== Supplemental Disclosures Income Taxes paid ....................................................... $ 206 $ 72 $ -- ========= ======== ======== Interest paid ........................................................... $ 3,438 $ 4,072 $ 5,692 ========= ======== ======== Supplemental schedule of non-cash financing activities Issuance of common stock ................................................ $ 176 $ 236 $ 117 ========= ======== ========
F-5 DONNKENNY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, DECEMBER 31, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - The Company designs, manufactures, imports and markets a broad line of moderately priced women's sportswear and 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. Inventories - Inventories are stated at the lower of cost or market using the first-in, first-out method (FIFO) (see note 2). Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, where applicable, the term of the lease, if shorter (see note 3). Estimated useful lives are as follows: Buildings 9 to 38 years Machinery and equipment 3 to 10 years Furniture and fixtures 7 to 10 years Leasehold improvements 7 to 10 years (or lease term if shorter) Other Assets - Other assets at December 31, 1999 of $546 represent deferred financing costs which are amortized over the term of the related debt agreement. In connection with the Company's settlement of litigation, discussed in Note 13, the Company agreed to pay $5,000 to the Company's insurance carrier of which $4,375 was paid prior to December 31, 1999. At December 31, 1998, $2,083 had been deposited and was included in other assets. Intangible Assets - Goodwill, which represents the excess purchase price over fair value of net assets acquired relates to the acquisition of the Company in 1989 following a change in control, and the sportswear division of Oak Hill Sportswear Corporation ("Oak Hill") and Beldoch Industries Corporation ("Beldoch") in 1995. Goodwill is amortized on a straight-line basis over the expected periods to be benefited, ranging from 20 to 40 years. Also included in intangible assets are costs related to licenses acquired by the Company, which are being amortized using the straight-line method over 20 years (see Note 4). Assessment of Asset Impairment - The Company periodically assesses the recoverability of the carrying value of long-lived assets, including identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment of recoverability of the carrying amount of an asset is based on estimated undiscounted future cash flows from the use of the asset and eventual disposition. If the estimated undiscounted future cash flows are less than the carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the fair value of the asset. The Company assesses the recoverability of goodwill by determining whether the amortization of goodwill over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operations or assets. If the estimated cash flows are less than the carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the estimated discounted cash flows. F-6 Advertising Expense - Advertising costs incurred to produce media advertising for major new campaigns are expensed in the year in which the advertising first takes place. Other advertising costs are expensed when incurred. Net advertising expenses of $572, $606, and $668 were included in the selling, general and administrative expenses in the Company's Consolidated Statements of Operations for the years ended December 31, 1999, 1998, and 1997, respectively. Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which is an asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. SFAS No. 109 requires that deferred tax assets are to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized (see note 7). Fair Value of Financial Instruments - The carrying amount of significant financial instruments, which includes accounts receivable, accounts payable and accrued expenses, all approximated fair value as of December 31, 1999 and December 31, 1998 due to their short-term maturities. Long-term debt approximates fair value due to either its variable interest rate or short term maturities. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (such as accounts receivable, inventories, 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. Reclassifications - Certain reclassifications have been made in the 1998 and 1997 financial statements to conform to the 1999 presentation. 2. INVENTORIES Inventories consisted of the following at December 31, 1999 and December 31, 1998: 1999 1998 ---- ---- Raw materials...................... $ 1,548 $ 2,155 Work in process.................... 2,742 4,235 Finished goods..................... 25,033 15,582 ------- ------- $29,323 $21,972 ======= ======= 3. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment consisted of the following at December 31, 1999 and December 31, 1998: 1999 1998 ---- ---- Land and land improvements ...... $ 409 $ 410 Buildings and improvements ...... 5,263 6,241 Machinery and equipment ......... 4,645 6,295 Furniture and fixtures .......... 1,727 1,719 ------- ------- 12,044 14,665 Less accumulated depreciation and amortization ................. 6,063 8,328 ------- ------- $ 5,981 $ 6,337 ======= ======= F-7 4. INTANGIBLE ASSETS Intangible assets consisted of the following at December 31, 1999 and December 31, 1998: 1999 1998 ---- ---- Goodwill .................... 35,274 $35,274 Licenses .................... 6,325 6,325 ------- ------- 41,599 41,599 Less accumulated amortization 10,075 8,685 ------- ------- $31,524 $32,914 ======= ======= 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following at December 31, 1999 and December 31, 1998: 1999 1998 ---- ---- Accrued Salaries, Benefits and Bonus $1,809 $1,995 Accrued Litigation Settlement ...... 625 1,000 Due to Former Owners of Subsidiary -- 880 Accrued Restructuring Expenses -- 548 Other Accrued Expenses ............ 1,531 3,008 ------ ------ Total .............................. $3,965 $7,431 ====== ====== 6. LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1999 and December 31, 1998: 1999 1998 ---- ---- Revolving Credit Borrowings ............. 40,017 $31,644 Senior Term Loan ....................... 2,500 -- Other (a) ............................... 258 411 Total ................................... 42,775 32,055 ------- ------- Less current maturities ................. 1,168 154 ------- ------- $41,607 $31,901 ------- ------- Annual maturities of debt are as follows: 2000 $ 1,168 2001 1,090 2002 40,517 ---- ------ $42,775 ======= On June 29, 1999, the Company and its operating subsidiaries signed a new three year credit agreement (the "Credit Agreement") with CIT Group/Commercial Services to replace the existing $75 million credit facility. The Credit Agreement provides the Company with a $75 million facility comprised of a $72 million revolver with sublimits up to $52 million for direct borrowings, $35 million for letters of credit, certain overadvances and a $3 million term loan. Borrowings under the Credit Agreement bear interest at the prime rate plus one half percent (9.0% at December 31, 1999). The Credit Agreement provides for advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the undrawn amount of all outstanding letters of credit plus (iv) allowable overadvances. The term loan requires quarterly payments of $250 plus all accrued and unpaid interest beginning September 30, 1999 through June 30, 2002. The Credit Agreement expires on June 30, 2002. F-8 Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corporation. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of net worth and comply with a maximum cumulative net loss test and a minimum interest coverage ratio. Subsequent to June 1999, the Company amended the Credit Agreement. On February 29, 2000, the Company entered into a Third Amendment and Waiver Agreement. The Third Amendment and Waiver waived any existing defaults as of December 31, 1999 and for the End of Month Period for January 2000 with respect to the Company's noncompliance with covenants related to Minimum Interest Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the interest rate on borrowings was increased to 1% above the prime rate effective February 29, 2000 and the Overadvance Amounts for the Fiscal 2000 were amended and restated. Certain covenants were also amended for the respective quarter ends in Fiscal 2000. A fee of $75,000 was paid on February 29, 2000. On April 13, 2000, the Company entered into a Fourth Amendment and Waiver Agreement to support the Company's 2000 business plan. The Fourth Amendment and Waiver waived any existing defaults as of the End of Month Period for March 2000 with respect to the Company's noncompliance with covenants related to Minimum Interest Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the interest rate on borrowings was increased to 1.5% above the prime rate effective April 13, 2000 and the Overadvance Amounts for Fiscal 2000 were amended. Certain covenants were also amended for the respective quarter ends in Fiscal 2000. A fee of $75,000 is payable for the Fourth Amendment and Waiver. The Company also has a factoring agreement with CIT. The factoring agreement provides for a factoring commission equal to .45% of gross sales, plus certain customary charges. - -------- (a) Other debt consists of a secured term loan that was entered into on June 30, 1998 in the amount of $483. As of December 31, 1999 the principal balance of this loan amounted to $258. The interest rate is fixed at 8.75% and the loan requires monthly principal and interest payments of $15 through June 2001. Software, machinery and equipment secure this obligation. 7. INCOME TAXES Income tax expense (benefit) for the years ended December 31, 1999, 1998 and 1997 is comprised of the following: 1999 1998 1997 ---- ---- ---- Current: Federal ....... $ -- $ -- $(1,537) State and local 87 (310) 35 Deferred .......... -- (334) 292 ------- ------- ------- $ 87 $ (664) $(1,210) ======= ======= ======= A reconciliation of the statutory Federal tax rate and the effective rate is as follows: 1999 1998 1997 ---- ---- ---- Federal statutory tax rate ........................... (34)% (34)% (34)% State and local taxes, net of federal income tax benefit ............................... (3) (2) (3) Losses not providing state and local tax benefit ...................................... 0 (8) 4 Nondeductible items .................................. 4 7 5 Losses not providing federal tax benefit ............. 2 0 -- Increase of valuation allowance ...................... 32 23 -- Other -- -- 1 --- --- --- 1% (14)% (27)% === === === F-9 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below: DECEMBER 31, DECEMBER 31, 1999 1998 ---------------- ------------ Deferred tax assets: Accounts receivable allowances ......... $ 141 $ 232 Inventory valuation .................... 1,139 874 Accrued expenses ....................... 1,449 1,118 Restructuring charges .................. -- 720 State operating loss carryforwards ..... 1,177 848 Federal operating loss carryforwards ... 4,783 2,570 Other .................................. 136 136 ------- ------- Total gross deferred tax assets .... 8,825 6,498 ------- ------- Deferred tax liabilities: Property, plant and equipment .......... (1,159) (1,738) Intangibles ............................ (3,037) (3,182) ------- ------- Total gross deferred tax liabilities (4,196) (4,920) ------- ------- Net deferred tax asset ..................... 4,629 1,578 Less valuation allowance ................... (4,629) (1,578) ------- ------- Net deferred taxes ......................... $ -- $ -- ======= ======= As of December 31, 1999 and 1998, the Company recorded a valuation allowance against the net deferred tax assets due to uncertainty of the realization of certain net operating loss carryforwards. As of December 31, 1999, the following Federal and State net operating loss carryforwards were available: Net Operating Losses ---------------------------- Expiration Dates Federal State ------- ----- 2011 .... $ -- $6,071 2012 .... -- 5,409 2013 .... -- 4,388 2014 .... -- 7,447 2015-2017 -- 1,006 2018 .... 4,463 -- 2019 .... 8,599 -- 2020-2022 1,006 -- During the years ended December 31, 1999 and 1998, the Company recorded interest income of $0 and $10 related to prior year carry back claims. 8. COMMITMENTS AND CONTINGENCIES a. Rental expense for operating leases for the years ended December 31, 1999, 1998, and 1997 approximated $3,223, $4,557, and $4,505, respectively. Minimum future rental payments as of December 31, 1999 for operating leases with initial noncancelable lease terms in excess of one year, are as follows: Year Ending December 31, Amount ------------------------ ------ 2000............................................ $3,123 2001............................................ 2,683 2002............................................ 2,331 2003............................................ 2,191 2004............................................ 2,182 Thereafter...................................... 2,174 ----- $ 14,684 ======== F-10 b. At December 31, 1999, the Company was contingently liable for outstanding letters of credit issued amounting to $17,624. c. The Company is also 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 the financial condition, results of operations, liquidity or business of the Company. 9. EMPLOYEE BENEFIT PLAN The Company sponsors an Employees' Savings 401(k) Plan (the "Plan") covering substantially all of its employees. Contributions to the Plan are made by the Company at the discretion of the Board of Directors. The Company matched the employee contributions for fiscal 1999 in the amount of $55. The Company did not make contributions to the Plan in fiscal 1998 and 1997 except for the payment of administrative expenses. 10. EARNINGS PER SHARE Basic EPS excludes dilution and is computed by dividing net income or loss attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (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. In the years ended December 31, 1999, 1998 and 1997, the incremental shares under stock plans of 293,254, 431,250, and 305,000 were not considered for the diluted earnings per share calculation due to their antidilutive effect. As such, the amounts reported for basic and diluted earnings per share are the same. 11. STOCK BASED COMPENSATION a. Stock Options The Company has a stock award and incentive program that permits the issuance of up to 2,000,000 options on terms as determined by the Board of Directors. Under the terms of the plan, options granted may be either non-qualified or incentive stock options and the exercise price, determined by the Stock Option committee, may not be less than the fair market value of a share on the date of the grant. Information regarding the Company's stock option plan is summarized below:
1999 1998 1997 ---------------------------- --------------------------- -------------------------- WEIGHTED- WEIGHTED- AVERAGE WEIGHTED- AVERAGE EXERCISE AVERAGE EXERCISE OPTIONS PRICE OPTIONS EXERCISE PRICE OPTIONS PRICE ----------- -------------- ---------- --------------- ---------- -------------- Outstanding at beginning of the year ............. 1,740,150 $ 4.04 1,660,650 $ 5.42 658,800 $ 10.51 Granted ..................... 250,000 1.26 500,000 1.13 1,300,500 3.73 Exercised ................... -- -- -- -- -- -- Cancelled ................... (457,250) 4.52 (420,500) 6.04 (298,650) 9.26 ---------- ---------- ---------- ----------- ---------- ----------- Outstanding at end of year .. 1,532,900 3.14 1,740,150 4.04 1,660,650 5.42 ========== ========== =========== ========== =========== Exercisable at end of year .. 685,940 484,160 234,800 ========== ========== ========== Available for grant at year end .................... 467,100 259,850 339,350 ========== ========== ==========
F-11 The options outstanding at December 31, 1999 range in price as follows: # OF OPTIONS EXERCISE PRICE --------- -------------- 597,500 $ 0.0000 - 1.8063 424,000 $ 1.8064 - 3.6125 432,500 $ 3,6126 - 5.4188 17,000 $ 7.2251 - 9.0313 61,900 $16.2564 - 18.0625 ------ 1,532,900 ========= The Company applies Accounting Principles Board Opinion No. 25, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans because the exercise price for stock options granted equaled the market price of the underlying stock at the date of grant. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share for the years ended December 31, 1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated below: 1999 1998 1997 ---- ---- ------ Net (loss) As reported ........................... $(9,428) $(4,064) $(3,209) ======= ======= ======= Pro forma ............................. $(9,675) $(4,777) $(3,834) ======= ======= ======= Basic and diluted net (loss) per share: As reported ........................... $ (0.66) $ (0.29) $ (0.23) ======= ======= ======= Pro forma ............................. $ (0.68) $ (0.34) $ (0.27) ======= ======= ======= The weighted average Black-Scholes value of the options granted during 1999, 1998 and 1997 were $1.13, $0.83, and $2.37, respectively. The following weighted-average assumptions were used in the Black-Scholes option-pricing model for grants in 1999, 1998 and 1997 respectively: dividend yield of 0% for all periods, volatility of 119%, 71%, and 55%, risk-free interest rate of 5.35%, 4.82%, and 6.51%, and an expected life of 10, 7 and 7 years. b. Restricted Stock In 1996, the Company adopted a plan to issue up to 1,000,000 shares of restricted stock to employees of the Company. During 1997, 305,000 shares were granted to employees of the Company at no cost to the employees. Of the total number of restricted shares granted, 5,000 shares vested and were issued upon the date of grant at the fair market value of $2.94 per share. The remaining 300,000 restricted shares were granted at a per share price of $2.94 and vest as follows: 60,000 shares vested and were issued March 31, 1999; 240,000 shares vest on March 31, 2000. Compensation cost recorded in 1999, 1998 and 1997 were $261, $328 and $233, respectively, which represents the amortization of the value of the restricted stock award at the date of grant over the vesting period. c. Warrants On January 14, 1997, the Company issued warrants to purchase 75,000 shares of Common Stock at $5.00 per share to the principal of a company to rescind an acquisition transaction. The warrants are immediately exercisable and will expire July 23, 2004. d. Stock Bonus The Company issued 94,600 shares of common stock to certain key employees during 1998 as payment for 1997 bonuses, which were accrued and recorded as compensation expense of $236 in the year ended December 31, 1997. F-12 e. Stock Appreciation Rights In 1997, the Company awarded stock appreciation rights to two Executive Officers. These officers will be paid an amount equal to the appreciation over 5 years of 100,000 shares of stock. No compensation expense was recorded for these stock appreciation rights in 1999, 1998 or 1997. 12. RESTRUCTURING CHARGES In the fourth quarter of 1998, the Company recorded a restructuring charge related to the sale of its West Hempstead facility that occurred on February 2, 1999. The charge included $1.2 million related to losses on the sale of property, plant and equipment, employee severance payments and other incremental charges directly attributable to the sale of the manufacturing facility. An additional $0.7 million was charged to cost of goods sold for the write down of inventory. The $0.6 million accrued restructuring expense balance at December 31, 1998 was utilized in fiscal 1999. At December 31, 1998, assets held for sale included three facilities, two were sold in Fiscal 1999. At December 31, 1999 assets held for sale included one facility. In the fourth quarter of 1997, the Company decided to discontinue the manufacture and sale of the Mickey & Co. licensed character product line under a license agreement with Disney Enterprises, Inc. and recorded a pre-tax restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5 million for the write down of merchandise inventories. The $1.7 million restructuring charge included: payments due under agreements with the licensor; write-downs of property, plant and equipment; costs related to lease terminations; employee severance payments; and other incremental charges which were primarily attributable to discontinuing the licensed character product lines. 13. PROVISION FOR SETTLEMENT OF LITIGATION Commencing November 1996, nine class action complaints were filed against the Company in the United States District Court for the Southern District of New York. Among other things, the complaints alleged violation of the federal securities law. By order dated August 11, 1998, the court certified the litigation as class action on behalf of all persons and entities who purchased publicly traded securities or sold put options of the Company between February 14, 1995 and November 1996. On October 7, 1999, the Company entered into a stipulation of settlement (the "Settlement") with the class action plaintiffs. In consideration for the discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0 million, of which $5.0 million is the Company's share, and the balance is payable by the Company's insurers; issue 3 million shares of the Company's common stock, and to pursue litigation against two of the Company's insurers to recover under its excess insurers' policies. The Settlement is subject to class notification, the entry of a final judgement, and exhaustion of all appeals and reviews. A settlement hearing on the proposed settlement was held on March 31, 2000 and the court orally approved the settlement. A written order should be signed in due course. In 1999, the Company recorded a charge of $5.9 million, which represented the cost of the Settlement. The Company had funded its required cash contribution to the settlement as of December 31, 1999 except for a) the sum of $0.6 million, which the Company paid during the quarter ended March, 31, 2000; and b) the cost of the litigation with two of the Company's insurers which are not expected to be material. 14. 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 11%, 13%, and 16% of the Company's sales in 1999, 1998 and 1997, respectively and accounts receivable from this customer was $3,048 at December 31, 1999. Sales to one wholesale club were 17%, 15% and 8% in 1999, 1998 and 1997, respectively and accounts receivable from this customer was $9,914 at December 31, 1999. No other customers accounted for more than eight percent of the Company's sales in 1999, 1998 and 1997. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. 15. SHAREHOLDERS RIGHTS PLAN On April 2, 1998, the Company's board of directors authorized a stockholder rights plan. Under the terms of the plan, stockholders of record at the close of business on April 13, 1998, received a dividend distribution of one preferred stock purchase right for each outstanding share of the Company's common stock held. The rights will become exercisable only in the event, with certain exceptions, an acquiring party accumulates fifteen percent or more of the Company's voting stock, or if a party announces an offer to acquire fifteen percent or more. The rights will expire on April 1, 2008. F-13 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. 16. FACILITY CLOSURES On March 15, 2000 the Company announced that it will be closing all of its domestic manufacturing plants. These facilities are located in Floyd and Independence, Virginia. The Company will incur a charge of approximately $0.3 million for employee severance payments and other incremental charges directly attributable to the sale of the manufacturing facilities. The plant closings are planned to be completed by mid May of Fiscal 2000. F-14 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, 1999, 1998 and 1997
BALANCE OF CHARGED TO BEGINNING OF COSTS AND BALANCE AT PERIOD EXPENSES DEDUCTIONS END OF PERIOD - ---------------------------------------------------------------------------------- ----------------------------------------- Year ended December 31, 1999: Reserve for bad debts ............. $ 602,000 (173,000) (64,000) $ 365,000 Reserve for discounts ............. 18,000 1,583,000 (1,584,000) 17,000 ----------- ----------- Subtotal for accounts receivable $ 620,000 $ 382,000 =========== =========== Reserve for inventory markdowns ... 1,935,000 1,786,000 (1,800,000) $ 1,921,000 =========== =========== Year ended December 31, 1998: Reserve for bad debts ............. $ 511,000 45,000 (46,000) $ 602,000 Reserve for discounts ............. 209,000 1,190,000 1,381,000 18,000 ----------- ----------- Subtotal for accounts receivable $ 720,000 $ 620,000 =========== =========== Reserve for inventory markdowns ... 3,384,000 1,909,000 (3,358,000) $ 1,935,000 =========== =========== Year ended December 31, 1997: Reserve for bad debts ............. $ 968,000 (175,000) 282,000 $ 511,000 Reserve for discounts ............. 1,272,000 3,872,000 4,935,000 209,000 ----------- ----------- Subtotal for accounts receivable $ 2,240,000 $ 720,000 =========== =========== Reserve for inventory markdowns ... 11,715,000 6,093,000 (14,424,000) $ 3,384,000 =========== ===========
EX-10.52 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made as of January 1, 2000, by and among Daniel H. Levy (the "Executive"), Donnkenny Apparel, Inc., a Delaware corporation (the "Company"), and Donnkenny, Inc., a Delaware corporation which is the parent corporation of the Company ("Donnkenny"). W I T N E S S E T H: WHEREAS, the Board of Directors of the Company (the "Board") expects that the Executive will make substantial contributions to the growth and prospects of Donnkenny, the Company and its subsidiaries; and WHEREAS, the Board desires to obtain for the Company the services of the Executive, and the Executive desires to be employed by the Company, all on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the Company and the Executive agree as follows: 1. EMPLOYMENT. a. Position. On the terms and subject to the conditions set forth herein, the Company hereby employs the Executive as its Chairman of the Board and Chief Executive Officer throughout the Employment Term (as defined below). In addition, the Company shall immediately cause each of its subsidiaries to designate Executive to the offices of Chairman of the Board and Chief Executive Officer throughout the Employment Term. Donnkenny hereby designates Executive as its Chief Executive Officer throughout the Employment Term and agrees that during the Employment Term, it shall (i) nominate the Executive for election to its Board of Directors at each annual meeting of shareholders and use its best efforts to cause the Executive to be duly elected to the Board at each such meeting, and (ii) elect the Executive to the position of Chairman of the Board. b. Duties and Responsibilities. The Executive shall have such duties and responsibilities consistent with his position as the Board determines and shall perform such duties and carry out such responsibilities to the best of his ability for the purpose of advancing the business of the Company and its subsidiaries and Donnkenny. Subject to the provisions of Section 1.c. below, and excluding any periods of vacation and sick leave to which Executive is entitled, during the Employment Term the Executive shall devote his full business time, skill and attention to the business of the Company and its subsidiaries and Donnkenny, and, except as specifically approved by the Board, shall not engage in any other business activity or have any other business affiliation. During the Employment Term, Executive shall report directly to the Board and all other executive officers of Donnkenny, the Company or any of its subsidiaries shall report to the Executive. c. Other Activities. Notwithstanding anything else to the contrary set forth herein, Executive shall have the right to manage his personal investments and, as part of the Executive's business efforts and duties on behalf of Donnkenny, the Company or any of its subsidiaries, Executive may participate fully in social, charitable and civic activities and may serve on the boards of directors of other companies provided that such activities do not unreasonably and materially interfere with the performance of and do not involve a conflict of interest with his duties or responsibilities hereunder. Donnkenny and the Company each 2 acknowledge that Executive serves as of the date hereof as a director of Whitehall Jewellers, Inc. and Domain Home Fashions, Inc., which service is hereby approved. 2. EMPLOYMENT TERM. Subject to the termination provisions of Section 5 hereof, the "Employment Term" hereunder shall be a period of three (3) years, commencing on January 1, 2000, and expiring at the close of business on December 31, 2002. 3. COMPENSATION. During the Employment Term, the Company will pay and/or otherwise provide the Executive with compensation and related benefits as follows: a. Relocation Payment. In consideration of Executive's execution of this Agreement and Executive's temporary relocation to New York City to perform his services hereunder, the Company, on or before January 31, 2000, shall pay to the Executive (i) the sum of Twenty Five Thousand Dollars ($25,000) (the "Relocation Payment"); and (ii) the federal, state and local income taxes for which Executive is liable on account of the Relocation Payment, together with an amount sufficient to satisfy any additional federal, state or local income taxes for which Executive is liable on account of the amounts received pursuant to this Section 3.a.(ii). The parties hereto agree that the amounts provided for in this Section 3.a. have been earned by the Executive and that the Company shall not be entitled to any refund or repayment of any portion thereof notwithstanding any termination of the Executive's employment for any reason whatsoever. b. Base Salary. During the Employment Term, the Company agrees to pay the Executive, for services rendered hereunder, a base salary at the annual rate of Five Hundred Thousand Dollars ($500,000) or such higher rate as the Compensation Committee of the Board (the "Compensation Committee") may designate in its sole and absolute discretion (the 3 "Base Salary"). The Base Salary shall be payable in equal periodic installments, not less frequently than monthly, less any sums which may be required to be deducted or withheld under applicable provisions of law. The Base Salary for any partial year shall be prorated based upon the number of days elapsed in such year. c. Bonus. As soon as practicable after the date hereof, the Company shall adopt a bonus plan for its senior executives in which Executive shall participate on the terms generally set forth in such plan from time to time, or in any plan substituted therefor or in addition thereto, during the Employment Term. d. Restricted Stock and Stock Options. In addition to the payments provided above, on Monday, January 3, 2000, the Compensation Committee granted to the Executive, subject to the execution of this Agreement, (i) an award of 150,000 restricted shares of the Common Stock of Donnkenny pursuant to Donnkenny's Restricted Stock Plan (the "Restricted Stock Plan") at a purchase price equal to the aggregate par value of such shares (i.e., $.01 per share); and (ii) options to purchase 150,000 shares of Donnkenny Common Stock pursuant to Donnkenny's Incentive Stock Option Plan (the "Stock Option Plan"), with the purchase price upon exercise of such options equal to $11/16 (i.e. $0.6875) per share i.e. the closing price of the Common Stock on the date of such grant. The shares of restricted stock and options shall vest as follows: (A) 100,000 options are deemed fully vested, exercisable and nonforfeitable on June 30, 2000, and the remaining 50,000 options will become fully vested, exercisable and nonforfeitable on December 31, 2000, and (B) 150,000 shares of restricted stock shall vest on December 31, 2002 and, with respect to the options, such options shall remain exercisable during the remainder of their 4 respective terms notwithstanding any termination of the Executive's employment except as otherwise provided in the grant agreements referred to below; provided, however, that, anything herein or in the grant agreements to the contrary notwithstanding, the vesting of such shares of restricted stock and options shall be accelerated in the event of a Change in Control (as defined herein), a termination of Executive's employment by the Company without Cause (as defined below), a termination of Executive's employment for Good Reason (as defined below), or a termination of Executive's employment as a result of the death or disability of Executive and, in the case of certain of the options, in certain other circumstances set forth in the grant agreement referred to below. With respect to the options, such options shall be incentive stock options to fullest extent permitted by applicable law and the Stock Option Plan. The grant of the shares of restricted stock and options has been made by the Compensation Committee pursuant to the grant agreements attached hereto as Annexes A, B-1 (with respect to incentive stock options) and B-2 (with respect to non-qualified stock options), respectively. Anything herein to the contrary notwithstanding, in the event a Change of Control shall not be consummated on or before June 30, 2000 then, no later than July 5, 2000, (i) in addition to the aforesaid 150,000 shares of restricted stock granted to Executive pursuant to the Restricted Stock Plan Executive shall be awarded an additional 150,000 restricted shares of the Common Stock of Donnkenny pursuant to the Restricted Stock Plan (subject to the same vesting provisions as is described above with respect to the initial award of restricted shares); and (ii) Donnkenny and the Company shall take whatever steps are required to amend the Restricted Stock Plan, and shall take any other required corporate action, to permit 5 the award and issuance of the additional restricted shares hereunder and pursuant to the Restricted Stock Plan. All shares of common stock of Donnkenny issued to Executive as restricted shares or pursuant to stock options upon the vesting thereof from time to time shall be duly registered and fully and freely tradeable by Executive without restriction. In the event Executive shall require a resale prospectus in connection with any intended sale of shares, Donnkenny and the Company shall promptly furnish such resale prospectus to Executive at the Company's expense. e. Automobile Allowance. During the Employment Term the Company shall pay to Executive the sum of One Thousand Two Hundred Dollars ($1,200) per month for Executive's automobile expenses including, without limitation, gasoline, tolls, insurance, parking, maintenance, repairs and similar expenses. f. Reimbursement of Expenses and Administrative Support. The Company shall pay or reimburse the Executive, upon the presentation of appropriate documentation of such expenses, for all reasonable travel and other expenses incurred by the Executive in performing his obligations under this Agreement. The Company further agrees to furnish the Executive with office space and administrative support, and any other assistance and accommodations as shall be reasonably required by the Executive in the performance of his duties under this Agreement. g. Vacation. Executive shall be entitled to four (4) weeks paid vacation in each calendar year. Any vacation not taken in any calendar year shall accrue and shall increase the paid vacation to which Executive is entitled in subsequent calendar years until such excess 6 shall be taken or paid for by the Company, as the case may be. Any vacation to which Executive is entitled and which has not been fully taken by Executive at the time his employment with the Company shall terminate for any reason, shall be fully paid to Executive within thirty (30) days after the effective date of Executive's termination of employment. h. Deductions. All payments made under this Agreement shall be subject to such deductions at the source as from time to time may be required to be made pursuant to any law, rule, regulation or order. i. Change in Control. For purposes of this Agreement, a "Change in Control" of the Company or Donnkenny shall be deemed to have occurred upon any of the following events: (A) A person or entity or group of persons or entities, acting in concert, shall become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended), of securities of the Company or Donnkenny representing more than fifty percent (50%) of the combined voting power of the issued and outstanding common stock of Donnkenny or the Company; or (B) The majority of the Board, or the majority of the board of directors of Donnkenny, is no longer comprised of the incumbent directors who constitute such board on the date of this Agreement and any other individual(s) who becomes a director subsequent to the date of this Agreement whose initial election or nomination for election as a director, as the case may be, was approved by at least a 7 majority of the directors who comprised the incumbent directors as of the date of such election or nomination; or (C) The Board shall approve a sale of all or substantially all of the assets of the Company, or the board of directors of Donnkenny shall approve a sale of all or substantially all of the assets of Donnkenny; or (D) The Board, or the board of directors of Donnkenny, shall approve any merger, consolidation, or like business combination or reorganization of the Company, or of Donnkenny, the consummation of which would result in the occurrence of any event described in clause (A) or (B) above, and such transaction shall have been consummated. 4. Participation in Benefit Plans. The Executive shall be entitled to participate, during the term of this Agreement, in the Company's and Donnkenny's benefit programs, including but not limited to qualified or non-qualified pension plans, other qualified or nonqualified retirement plans, supplemental pension plans, group hospitalization, health, dental care, death benefit, post-retirement welfare plans, or other present or future group employee benefit plans or programs of the Company or Donnkenny for which key executives are or shall become eligible (collectively, the "Benefit Plans"), on the same terms as other key executives of the Company or Donnkenny, as the case may be. If participation in any of such Benefit Plans is subject to or based on length of service, the Executive, upon execution of this Agreement, shall be credited with whatever number of years or period of service shall be required in order for Executive to immediately commence participation therein. In addition to and without limiting the generality of the foregoing, (i) the Company (x) may obtain and maintain a "key man" life insurance policy under which the Company is the named 8 beneficiary in the amount of $2,500,000, and (y) in the event Executive shall be in the employ of the Company on December 31, 2000, shall promptly obtain and maintain a term life insurance policy in the amount of $2,500,000, which policy shall be owned by the Executive, in each case from a nationally-recognized insurance carrier reasonably acceptable to the Executive, and (ii) the Company shall provide, in addition to any such insurance regularly provided to the Company's executives and/or employees, long-term disability insurance which will pay at least sixty percent (60%) of Executive's Base Salary until the Executive reaches age 65. Upon termination of the employment of the Executive with the Company or on or after December 31, 2000 for any reason other than for Cause or the death of Executive, the Company shall continue to pay the premiums on any of such policies, when due, for a period of five (5) years after the effective date of termination and, at the expiration of such five (5) year term, the Executive shall be entitled to purchase from the Company any life insurance policy then owned by the Company on the life of the Executive and the aforementioned disability insurance policy (if permitted under the terms of such policy) for a purchase price equal to the cash surrender value of each policy, if any. 5. TERMINATION OF EMPLOYMENT. a. By the Company For Cause. The Company may terminate the Executive's employment under this Agreement at any time for Cause (as defined below) by delivery of written notice of termination to the Executive (which notice shall specify in reasonable detail the basis upon which such termination is made and the specific provision(s) of the Agreement upon which it relies, and further stating the date, time and place of the special meeting of the Board or the Board of Directors of Donnkenny at which the issue of Cause 9 shall be addressed) at least ten days prior to the termination date set forth in such notice. No such termination shall become effective until the Executive, after receipt of such notice, shall have been offered the opportunity to attend a meeting of the Board of Directors of the Company (or the Board of Directors of Donnkenny, whichever is applicable) at which a quorum is present (with the Executive's counsel present and participating, if desired by the Executive) regarding such termination notice and the allegations set forth therein and, based upon such meeting, such Board of Directors shall have elected to proceed with such termination. Except as provided for in Section 23 below, in the event the Executive's employment is terminated for Cause, all provisions of this Agreement and the Employment Term shall be terminated; provided, however, that such termination shall not divest the Executive of any previously vested benefit or right. In addition, the Executive shall be entitled only to payment of his earned and unpaid Base Salary to the date of termination, earned and unpaid bonus for the prior fiscal year, additional salary payments in lieu of the Executive's accrued and unused vacation, unreimbursed business and entertainment expenses in accordance with the Company's policy, and unreimbursed medical, dental and other employee benefit expenses incurred, and other vested and accrued benefits payable in accordance with the Company's or Donnkenny's employee benefit plans (hereinafter referred to as the "Standard Termination Payments"). For purposes of this Agreement, "Cause" means (x) the conviction of the Executive for the commission of (A) any felony, or (B) a misdemeanor involving moral turpitude, or (y) willful misconduct by the Executive that results in material and demonstrable damage to the business or reputation of the Company. No act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that 10 the Executive's action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board or the Board of Directors of Donnkenny, or the advice of counsel for the Company or Donnkenny, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. b. Upon Death or Disability. If the Executive dies, all provisions of this Agreement (other than rights or benefits arising as a result of such death) and the Employment Term shall be automatically terminated; provided, however, that the Standard Termination Payments and pro rata Bonus for the fiscal year during which such death occurs shall be paid to the Executive's surviving spouse or, if none, his estate, and the death benefits under the Company's and Donnkenny's employee benefit plans shall be paid to the Executive's beneficiary or beneficiaries as properly designated in writing by the Executive. If the Executive is unable to perform his responsibilities under this Agreement by reason of physical or mental disability or incapacity and such disability or incapacity shall have continued for six consecutive months or any period aggregating six months within any 12 consecutive months (a "Disability'), the Company may terminate this Agreement and the Employment Term at any time thereafter. In such event, the Executive shall be entitled to receive his normal compensation hereunder during said six (6) month period, and shall thereafter be entitled to receive the Standard Termination Payments and the pro rata Bonus for the fiscal year during which such disability occurs. Pro rata Bonus, in the event of the Executive's death or disability, shall be an amount equal to the Bonus at the amount payable upon fully achieving the figure targeted in the annual business plan or other documents relating to the Bonus approved by the Board, the Compensation Committee or any other duly 11 authorized designee of the Board for such year (the "Target Amount") (regardless of the company's actual performance) for the fiscal year during which such death or disability occurs, prorated by a fraction, the numerator of which is the number of days of employment elapsed during the fiscal year prior to termination of employment and the denominator of which is 365. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), unless the Executive returns to full-time performance of the Executive's duties before the Disability Effective Date. In the event Executive shall become disabled or shall die on or after December 31, 2000, then the Company shall continue to provide the Executive and the spouse and dependents of the Executive, at the expense of the Company, with the medical insurance then provided generally to dependents of employees of the Company, for a period of five (5) years following the termination of the employment of the Executive, which medical insurance coverage shall be included as part of any required COBRA Coverage; provided, however, that the COBRA Coverage shall terminate with respect to the Executive, the spouse and/or dependents of the Executive as of the date that any such individual receives equivalent coverage and benefits under any plans, programs and/or arrangements of a subsequent employer. The rights and benefits of the Executive under the benefit plans and programs of the Company shall be determined in accordance with the provisions of such plans and programs. The rights and benefits of the Executive with respect to the shares of restricted stock and options referred to in Section 3.c. above shall be determined in accordance with the 12 provisions of this Agreement and the plans and grant agreements governing such shares and options. Except as otherwise specified in this Agreement, neither the Executive nor the Company shall have any further rights or obligations under this Agreement. c. By the Company Without Cause. 13 i. The Company may terminate the Executive's employment under this Agreement without Cause, and other than by reason of his death or disability, at March 31, 2000 ("March Termination Date"), June 30, 2000 ("June 30, 2000 ("June Termination Date") or December 31, 2000 ("December Termination Date") by sending written notice of termination to the Executive, which notice shall specify a date within 30 days after the date of such notice as the effective date of such termination (the "Termination Date"). Subsequent to December 31, 2000 the Company may only terminate the employment of the Executive for Cause or upon the death or disability of the Executive. From the date of such notice through the Termination Date, the Executive shall continue to perform the normal duties of his employment hereunder, and shall be entitled to receive when due all compensation and benefits applicable to the Executive hereunder. Thereafter, and within thirty (30) days after the Termination Date, the Company shall pay the Executive, by wire transfer of immediately available funds, an amount equal to the Base Salary that he would have been entitled to receive (A) for a period of 3 months following such termination, in the event of a termination as of the March Termination Date, or (B) for a period of 6 months following such termination, in the event of a termination as of the June Termination Date; or (c) for a period of 12 months following such termination, in the event of a termination as of the December Termination Date. The Executive shall have no obligation whatsoever to mitigate any damages, costs or expenses suffered or incurred by the Company or Donnkenny with respect to the severance obligations set forth in this Section, 5.c.i., and no such severance payments 14 received or receivable by the Executive shall be subject to any reduction, offset, rebate or repayment as a result of any subsequent employment or other business activity by the Executive including, without limitation, self employment. ii. In the event of a termination of Executive's employment by the Company without Cause on or after December 31,2000, the Company shall continue to provide the Executive and the spouse and dependents of the Executive, at the expense of the Company, with the medical insurance then provided generally to dependents of employees of the Company, for a period of five (5) years following the termination of the employment of the Executive, which medical insurance coverage shall be included as part of any required COBRA Coverage; provided, however, that the COBRA Coverage shall terminate with respect to the Executive, the spouse and/or dependents of the Executive as of the date that any such individual receives equivalent coverage and benefits under any plans, programs and/or arrangements of a subsequent employer. The rights and benefits of the Executive under the benefit plans and programs of the Company or Donnkenny shall be determined in accordance with the provisions of such plans and programs. The rights and benefits of the Executive with respect to the shares of restricted stock and options referred to in Section 3.c. above shall be determined in accordance with the provisions of this Agreement and the plans and grant agreements governing such shares and options. Except as otherwise specified in this Agreement, neither the Executive nor the Company or Donnkenny shall have any further rights or obligations under this Agreement. The Company shall also be obligated to pay to the Executive the 15 Standard Termination Payments and pro rata Bonus for the fiscal year during which such termination of employment occurs. Pro rata Bonus, in the event the Executive's employment is terminated by the Company without Cause, shall be an amount equal to the Bonus at Target Amount (regardless of the Company's actual performance) for the fiscal year during which such termination of employment occurs, pro rated by a fraction, the numerator of which is the number of days of employment elapsed during the fiscal year prior to termination of employment and the denominator of which is 365. d. By the Executive. i. The Executive may terminate his employment, and any further obligations which Executive may have to perform services on behalf of Donnkenny or the Company and any of its subsidiaries hereunder at any time after the date hereof, (i) without Good Reason (as defined below) by sending written notice of such termination to the Company not less than sixty (60) days prior to the effective date of such termination (during such sixty (60) day period, the Executive shall continue to perform the normal duties of his employment hereunder and shall be entitled to receive when due all compensation and benefits applicable to the Executive hereunder); or (ii) for Good Reason pursuant to the procedure set forth in Section 5(d)iii below). ii. For purposes of this Agreement, "Good Reason" shall be defined as any of the following: 16 A. failure by the Company or Donnkenny to re-elect the Executive as a director, Chairman of the Board and Chief Executive Officer, or the assignment to the Executive of any duties or responsibilities inconsistent in any respect with those customarily associated with the positions to be held by the Executive pursuant to this Agreement, or any other action by the Company that results in a diminution in the Executive's position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from the Executive; B. any failure by the Company or Donnkenny to comply with any provision of Section 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure that is not taken in bad faith and is remedied by the Company or Donnkenny, as the case may be, promptly after receipt of notice thereof from the Executive; C. Any requirement by the Company that the Executive's services be rendered primarily at a location or locations other than that provided for in New York City; D. any purported termination of the Executive's employment by the Company or Donnkenny for a reason or in a manner not expressly permitted by this Agreement; 17 E. any failure by the Company or Donnkenny to comply with paragraph (c) of Section 14 of this Agreement; F. any Change in Control of the Company or Donnkenny; G. the institution of bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings by or against the Company or Donnkenny (which proceedings, if instituted against the Company or Donnkenny, have been consented to by the Company or Donnkenny, as the case may be, or have remained undismissed for a period of sixty (60) days after the filing date thereof); or H. any other material breach of this Agreement by the Company or Donnkenny that either is not taken in good faith or is not remedied by the Company or Donnkenny, as the case may be, within five (5) business days after receipt of notice thereof from the Executive. iii. A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company or other event(s) that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than thirty (30) days after the notice is given. 18 iv. The Executive shall elect to terminate his employment hereunder (other than as a result of his death or disability) without Good Reason, then the Executive shall remain vested in all vested benefits provided for hereunder or under any benefit plan of the Company in which Executive is a participant and shall be entitled to receive the Standard Termination payments, but the Company shall have no further obligation to make payments or provide benefits to the Executive. v. Subject to the provisions of Section 5.d.vi. below, if the Company terminates the Executive's employment, other than for Cause (except as permitted pursuant to Section 5.c. above), death or Disability, or the Executive terminates employment for Good Reason, the Company shall, at the option of the Company, (i) continue to pay to the Executive, until the expiration of the Employment Term then in effect, the Base Salary then in effect (but in no event less than one year of Base Salary) plus the pro rata Bonus (calculated in the manner described in Section 5.b. above) or (ii) pay the Executive a lump sum amount equal to the present value of the amount referred to in 5.d.v(i) above. In addition to the foregoing, the Company shall also be obligated to pay to the Executive the Standard Termination Payments as and when they shall become due. Furthermore, if such termination occurs on or after December 31, 2000, the Company shall continue to provide the Executive and the spouse and dependents of the Executive, at the expense of the Company, with the medical insurance then provided generally to dependents of employees of the Company, for a period of five (5) years following the termination of the employment of the Executive, which medical insurance coverage shall be included as part of any 19 required COBRA Coverage; provided, however, that the COBRA Coverage shall terminate with respect to the Executive, the spouse and/or dependents of the Executive as of the date that any such individual receives equivalent coverage and benefits under any plans, programs and/or arrangements of a subsequent employer. The rights and benefits of the Executive with respect to the shares of restricted stock and options referred to in Section 3.c. above shall be determined in accordance with the provisions of this Agreement and the plans and grant agreements governing such shares and options. Except as otherwise specified in this Agreement, neither the Executive nor the Company shall have any further rights or obligations under this Agreement. Except as is provided for in Section 5.d.vi. below, the payments and benefits provided pursuant to this Section 5.d.v. are intended as liquidated damages for a termination of the Executive's employment by the Company other than for Cause or Disability or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason and shall be the sole and exclusive remedy therefor. Executive shall have no obligation whatsoever to mitigate any damages, costs or expenses suffered or incurred by the Company with respect to any payments made pursuant to this Section 5.d..v., and no such payment shall be subject to any reduction, offset, rebate or repayment as a result of any subsequent employment or other business activity by the Executive including, without limitation, self employment. 20 vi. If, during the Employment Term and upon or after the occurrence of a Change in Control other than a Change in Control proposed, sponsored or supported by the Executive, the Executive's employment is terminated by the Company or the Executive for any or no reason other than by the Company for Cause, death or Disability, the Company shall pay to the Executive, by wire transfer of immediately available funds within ten (10) days after the Termination Date, an amount equal to three times the sum of (x) the Executive's Base Salary in effect on the Date of Termination, and (y) the Bonus, if any, paid to the Executive with respect to the calendar year immediately preceding the calendar year in which the Date of Termination occurs. In addition to the foregoing, the Company shall also be obligated to pay to the Executive the Standard Termination Payments as and when they shall become due. Furthermore, if no Bonus is included in the calculation of the amount referred to in the preceding sentence, then, in addition to the payment provided for therein, the Company shall pay to Executive, contemporaneously with the payment provided for in the prior sentence, and in the same manner, an amount equal to the Bonus at Target Amount (regardless of the Company's actual performance) for the entire year in which the Termination Date occurs (which shall not be reduced pro rata for less than a full year's service). The Company shall continue to provide the Executive and the spouse and dependents of the Executive, at the expense of the Company, with the medical insurance then provided generally to dependents of employees of the Company, for a period of five (5) years following the termination of the employment of the Executive, which medical insurance coverage 21 shall be included as part of any required COBRA Coverage; provided, however, that the COBRA Coverage shall terminate with respect to the Executive, the spouse and/or dependents of the Executive as of the date that any such individual receives equivalent coverage and benefits under any plans, programs and/or arrangements of a subsequent employer. The rights and benefits of the Executive under the benefit plans and programs of the Company shall be determined in accordance with the provisions of such plans and programs. The rights and benefits of the Executive with respect to the shares of restricted stock and options referred to in Section 3.c. above shall be determined in accordance with the provision of this Agreement and the plans and grant agreements governing such shares and options. Except as otherwise specified in this Agreement, neither the Executive nor the Company shall have any further rights or obligations under this Agreement. The payments and benefits provided pursuant to this Section 5.d.vi. are intended as liquidated damages for a termination of the Executive's employment by the Company other than for Cause or Disability or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, in each case on or after the occurrence of a Change in Control, and shall be the sole and exclusive remedy therefor. Executive shall have no obligation whatsoever to mitigate any damages, costs or expenses suffered or incurred by the Company with respect to any payments made pursuant to this Section 5.d.vi., and no such payment shall be subject to any reduction, offset, rebate or repayment as a result of any subsequent employment or 22 other business activity by the Executive including, without limitation, self employment. e. Upon the Expiration of the Employment Term. In the event the employment of Executive hereunder shall terminate as a result of the expiration of the Employment Term (or any extension period mutually agreed upon by Donnkenny, the Company and the Executive), then Executive shall be entitled to receive from the Company and Donnkenny the same amounts and benefits, upon the same terms and conditions, as are applicable to a termination by the Company without Cause as of the December Termination Date, as are more particularly set forth in Section 5.c. above, but calculated and determined as of Executive's actual Date of Termination (as defined below). f. No Waiver. The failure to set forth any fact or circumstance in a Notice of Termination for Cause or a Notice of Termination for Good Reason shall not constitute a waiver of the right to assert, and shall not preclude the party giving notice from asserting, such fact or circumstance in an attempt to enforce any right under or provision of this Agreement. g. Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or without Cause or by the Executive for Good Reason is effective, the date on which the Executive gives the Company notice of a termination of employment without Good Reason, or the date upon which the Employment Term (or any mutually agreed extension thereof shall expire) as the case may be. 23 6. TAX INDEMNIFICATION. If the compensation, benefits, payment accelerations, share option acceleration, appreciation rights or loan forgiveness received by Executive from Donnkenny or the Company hereunder, or otherwise, (the "Payments") will be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code and any successor provision, or any comparable provision of state or local tax law (collectively, "Section 4999"), or any interest, penalty or addition to tax will be incurred by Executive with respect to such excise tax (such excise tax, together with any such interest, penalty or addition to tax being referred to herein as the "Excise Tax"), then Executive shall receive an additional cash payment (a "Gross-Up Payment") in an amount such that after the payment by Executive of all taxes, interest, penalties, and additions to tax imposed with respect to the Gross-Up Payment (including, without limitation, any income tax, employment tax payable by Executive and Excise Tax imposed upon the Gross-Up Payment), Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon such Payments. In calculating the Gross-Up Payment, Executive will be deemed to pay Federal income taxes at the highest marginal rate of Federal income taxation as of the year in which the Gross-Up Payment is to be made and state and local taxes at the highest marginal rate of taxation in the state or locality of the Gross-Up Payment recipient's state of residence as of the date the tax obligation is incurred, net of the maximum reduction in Federal income taxes which could be obtained from deducting the state and local taxes if paid in the year in which the tax obligation is incurred. 7. Representations and Warranties of the Company and Donnkenny. Each of the Company and Donnkenny represents and warrants to the Executive as follows: i. the options have been duly granted to the Executive by the Company or Donnkenny, as the case may be, at the opening of business on Monday, January 3, 2000, 24 pursuant to the express provisions of the Stock Option Plan, and all necessary corporate action with respect thereto has been duly taken; ii. the shares of restricted stock of Donnkenny have been granted to the Executive by the Company or Donnkenny, as the case may be, pursuant to the express provisions of the Restricted Stock Plan, and all necessary corporate action with respect thereto has been duly taken; iii. the Option Plan and the Restricted Stock Plan are in full force and effect in accordance with their respective terms, and the options and shares of restricted stock granted to the Executive under each such Plan were available for grant thereunder; iv. the aforesaid grant of the options and shares of restricted stock to the Executive does not violate or breach any provision of the Articles of Incorporation or Bylaws of Donnkenny or the Company or any agreement to which Donnkenny or the Company is subject or by which it is bound, and no shareholder approval of such grant or the exercise of any options or shares of restricted stock thereunder is required; and v. the options, the shares of restricted stock and all agreements related thereto to be entered into by the Company or Donnkenny shall be duly executed and delivered by the Company or Donnkenny and shall constitute valid and binding obligations of the Company or Donnkenny, enforceable against the Company, as the case may be, in accordance with their terms (except as the enforceability thereof may be limited or otherwise affected by bankruptcy, insolvency, reorganization, 25 moratorium or other similar laws generally affecting the rights of creditors and subject to general equity principles, whether considered at law or in equity). 8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan,, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Vested benefits and other amounts that the Executive is otherwise entitled to receive under the Restricted Stock Plan, the Stock Option Plan, or any other plan, policy, practice or program of, or any contract of agreement with, the Company or any of its affiliated companies on or after the Date of Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be. 9. INVENTIONS. Any and all inventions, innovations or improvements ("inventions") made, developed or created by the Executive (whether at the request or suggestion of the Company (which, as used in this Section 9, shall be deemed to include the Company and each of its subsidiaries) or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the period of his employment with the Company which may be directly or indirectly useful in, or relate to, the business of the Company, shall be promptly and fully disclosed by the Executive to the Board and shall be the Company's exclusive property as against the Executive, and the Executive shall promptly deliver to an appropriate representative of the Company as designated by the Board all papers, drawings, models, data and other material relating to any inventions made, developed or created by him as aforesaid. The Executive shall, at the request of the 26 Company and without any payment therefor, execute any documents necessary or advisable in the opinion of the Company's counsel to direct issuance of patents or copyrights to the Company with respect to such inventions as are to be the Company's exclusive property as against the Executive or to vest in the Company title to such inventions as against the Executive. The expense of securing any such patent or copyright shall be borne by the Company. 10 CONFIDENTIAL INFORMATION. The Executive shall hold in strict confidence all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Executive obtains during the Executive's employment by the Company or any of its affiliated companies; provided, however, that Executive's obligations under this Section 10 with respect to any specific Confidential Information shall cease when that specific Confidential Information becomes public knowledge (other than as a result of the Executive's violation of this Section 10) ("Confidential Information") or when it is disclosed by any person, firm, corporation or business entity which is not bound by the terms of a confidentiality agreement with the Company which contains substantially identical provisions as the terms hereof. Except as is otherwise provided for herein, the Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or regulation or by legal process. If the Executive is requested pursuant to, or required by, applicable law or regulation or by legal process to disclose any Confidential Information, the Executive shall provide the Company, as promptly as the circumstances reasonably permit, with notice of such request or requirement and, unless a protective order or other appropriate relief is previously obtained, the Confidential Information, subject to such request, may be disclosed pursuant to and in 27 accordance with the terms of such request or requirement, provided that the Executive, at the Company's expense, shall use his best efforts to limit any such disclosure to the precise terms of such request or requirement. 11 NON-COMPETITION. The Executive acknowledges that the services to be rendered by him to the Company (which, as used in this Section 11 shall be deemed to include the Company and each of its subsidiaries) are of a special and unique character. In consideration of his employment hereunder, the Executive agrees, for the benefit of the Company, that he will not, during the term of this Agreement and (except in a case where the Executive's employment is terminated (x) by the Company other than for Cause, (y) by the Executive for Good Reason, or (z) by the Executive or the Company for any or no reason following the occurrence of a Change in Control) thereafter until the expiration of a period of twelve (12) months commencing on the date of termination of his employment with the Company (a) engage, directly or indirectly, whether as principal, agent, distributor, representative, consultant, employee, partner, stockholder, limited partner or other investor (other than an investment of not more than (i) five percent (5%) of the stock or equity of any corporation the capital stock of which is publicly traded or (ii) five percent (5%) of the ownership interest of any limited partnership or other entity) or otherwise, within the United States of America, in any apparel business which is competitive with the business now, or at any time during the term of this Agreement, conducted by the Company, (b) solicit or entice to endeavor to solicit or entice away from the Company any person who was an officer, employee or sales representative of the Company, either for his own account or for any individual, firm or corporation, whether or not such person would commit any breach of his contract of employment by reason of leaving the service of the Company, and the Executive agrees not to employ, directly or indirectly, any person who was an 28 officer, employee or sales representative of the Company or who by reason of such position at any time is or may be likely to be in possession of any confidential information or trade secrets relating to the businesses or products of the Company; provided, however, that nothing herein shall be deemed to restrict or prohibit the solicitation and hiring of any individual who responds to general solicitation or advertising of employment which is not specifically directed or targeted to employees of the Company or its subsidiaries, or (c) solicit or entice or endeavor to solicit or entice away from the Company any customer or prospective customer of the Company, either for his own account or for any individual, firm or corporation with respect to the business of the Company. In addition, the Executive shall not, at any time during the term of this Agreement or at any time thereafter, engage in the business which uses as its name, in whole or in part, Donnkenny, Kenny Classics or any other tradename or trademark or corporate name used by Donnkenny, the Company or any of their subsidiaries during the Employment Term. 12 INDEMNIFICATION. a The Company and Donnkenny shall indemnify the Executive to the fullest extent permitted by Delaware law in effect as of the date hereof against all costs, expenses, liabilities and losses (including, without limitation, attorneys' fees, judgments, fines, penalties, ERISA excise taxes, penalties and amounts paid in settlement) reasonably incurred by the Executive in connection with a Proceeding. For the purposes of this Section 12, a "Proceeding" shall mean any action, suit or proceeding, whether civil, criminal, administrative or investigative, in which the Executive is made, or is threatened to be made, a party to, or a witness in, such action, suit or proceeding by reason of the fact that he is or was an officer, director or employee of the Company or Donnkenny, or is or was serving as an 29 officer, director, member, employee, trustee or agent of any other entity at the request of the Company or Donnkenny, whether or not the basis of such Proceeding arises out of or in connection with the Executive's alleged action or omission in an official capacity. b The Company and Donnkenny shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company or Donnkenny, as the case may be, of a written request for such advance. Such request shall include an itemized list of the costs and expenses and an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. Upon a request under subsection (b), the Executive shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established by a court of competent jurisdiction. c The Executive shall not be entitled to indemnification under this Section 12 unless he meets the standard of conduct specified in the Delaware General Corporation Law. Any indemnification under subsection a. (unless ordered by a court) shall be made by the Company or Donnkenny only as authorized in the specific case upon a determination that indemnification of the Executive is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware Corporation Law. Such determination shall be made (1) by the Board or the Board of Directors of Donnkenny, as the case may be, by a majority vote of a quorum consisting of directors who were not parties to such Proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of 30 disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. d Neither the Company nor Donnkenny shall settle any Proceeding or claim in any manner which would impose on the Executive any penalty or limitation without his prior written consent. Neither the Company nor Donnkenny nor the Executive will unreasonably withhold its or his consent to any proposed settlement. e The indemnification in this Section 12 shall inure to the benefit of the Executive's heirs, executors and administrators. f The Company and Donnkenny agree to use their respective best efforts to obtain, continue and maintain an adequate directors and officers' liability insurance policy and shall cause such policy to cover the Executive to the extent the Company or Donnkenny provides such coverage for its other executive officers. Upon request by Executive, the Company and Donnkenny shall furnish Executive with written evidence that such coverage is in full force and effect. g Donnkenny and the Company agree to indemnify and hold Executive harmless from all losses, costs, fees and expenses including, without limitation, reasonable legal fees and litigation expenses, which Executive shall suffer, sustain or incur as a result of, in connection with or arising from any breach of this Agreement by Donnkenny or the Company. 13 ATTORNEYS' FEES. The Company agrees to pay, as incurred, all legal fees and expenses incurred by the Company and the Executive in connection with the preparation of this Agreement. The Company further agrees to pay, as incurred, to the fullest extent permitted by law, all legal fees 31 and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome) by Donnkenny, the Company, the Executive or others of the validity or enforceability of or liability under, or otherwise involving, any provision of this Agreement, together with interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. 14 SUCCESSORS; BENEFICIARIES. a This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall insure to the benefit of and be enforceable by the Executive's legal representatives. b This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. c The Company or Donnkenny, as the case may be, shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or Donnkenny expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Donnkenny or the Company would have been required to perform it if no such succession had taken place; provided, however, that no such assignment or transfer shall have the effect of releasing or relieving Donnkenny or the Company of any liability or obligation to the Executive hereunder or in any other agreement, plan or document contemplated herein. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise and "Donnkenny" shall mean both Donnkenny as defined above and any such 32 successor that assumes and agrees to perform this Agreement by operation of law or otherwise. d The Executive shall be entitled, to the extent permitted under any applicable law, to select and change the beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death by giving the Company written notice thereof. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 15 NOTICES. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mr. Daniel H. Levy 3332 Sabal Cove Lane Longboat Key, Florida 34228 With a copy to: Piper Marbury Rudnick & Wolfe Suite 1800 203 North LaSalle Street Chicago, Illinois 60601-1293 Attn: Stephen A. Landsman, Esq. If to Donnkenny or the Company: Donnkenny Apparel, Inc. 1411 Broadway New York, New York 10018 Attention: President 33 or to such other address as either party furnishes to the other in writing in accordance with this Section 15. Notices and communications shall be effective when actually received by the addressee. 16 MODIFICATION OR WAIVER. No amendment, modification, waiver, termination or cancellation of this Agreement shall be binding or effective for any purpose unless it is made in a writing signed by the party against whom enforcement of such amendment, modification, waiver, termination or cancellation is sought. No course of dealing between or among the parties to this Agreement shall be deemed to affect or to modify, amend or discharge any provision or term of this Agreement. No delay on the part of Donnkenny, the Company or the Executive in the exercise of any of their respective rights or remedies shall operate as a waiver thereof, and no single or partial exercise by Donnkenny, the Company or the Executive of any such right or remedy shall preclude other or further exercises thereof. A waiver of a right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy on any other occasion. 17 GOVERNING LAW; JURISDICTION. This Agreement and all rights, remedies and obligations hereunder, including, but not limited to, matters of construction, validity and performance shall be governed by the laws of the State of Delaware without regard to its conflict of laws principles or rules. 18 SEVERABILITY. Whenever possible each provision and term of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision or term of this Agreement shall be held to be prohibited by or invalid under such applicable law, then such provision or term shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provisions or term or the remaining provisions or terms of this Agreement. 34 19 COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same Agreement. 20 HEADINGS. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part hereof and shall not affect the construction or interpretation of this Agreement. 21 ENTIRE AGREEMENT. This Agreement (together with all documents and instruments referred to herein) constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof. 22 ARBITRATION. If any controversy or dispute shall arise between the parties hereto in connection with, arising from, or in respect to this Agreement, any provision hereof, or any provision of any instrument, document, agreement or other writing delivered pursuant hereto, or with respect to the validity of this Agreement or any such document, agreement or other writing, and if such controversy or dispute shall not be resolved within thirty (30) days after the same shall arise, then such dispute or controversy shall be submitted for arbitration to the New York, New York office of the American Arbitration Association in accordance with its commercial arbitration rules then in effect. Any such dispute or controversy shall be determined by one (1) arbitrator. Such arbitrator may award any relief which such arbitrator shall deem proper in the circumstances, without regard to the relief which would otherwise be available to either party hereto in a court of law or equity, including, without limitation, an award of money damages (including interest on unpaid amounts, calculated from the due date of any such amount, at a rate per annum determined by said arbitrator), specific performance and injunctive relief. The award and findings of such arbitrator shall be conclusive and 35 binding upon the parties thereto, and judgment upon such award may be entered in any court of competent jurisdiction. Any party against whom an arbitrator's award shall be issued shall not, in any manner, oppose or defend against any suit to confirm such award, or any enforcement proceedings brought against such party, whether within or outside of the United States of America, with respect to any judgment entered upon the award, and such party hereby consents to the entry of a judgment against such party, in the full amount thereof, or other relief granted therein, in any jurisdiction in which such enforcement is sought. 23 SURVIVAL. The respective obligations of Donnkenny and the Company and the Executive under Sections 5 (with respect to amounts owing as a result of any termination), 6, 8 (with respect to amounts owing), 9, 10, 11, 12, 13, 14.c., 22 or this Section 23 shall survive any termination of Executive's employment; provided, however, that the Executive's obligations under Section 11 (Non-Competition) shall terminate and shall not survive in the event (i) the Executive's employment is terminated by the Company other than for Cause or by the Executive for Good Reason, or (ii) the Executive's employment is terminated for any or no reason following a Change in Control. 36 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. DONNKENNY, INC., a Delaware corporation By: -------------------------------- Name: Title: DONNKENNY APPAREL, INC., a Delaware corporation By: -------------------------------- Name: Title: EXECUTIVE -------------------------------- DANIEL H. LEVY EX-10.53 3 THIRD AMENDMENT TO CREDIT AGREEMENT WAIVER & CONSENT THIRD AMENDMENT TO CREDIT AGREEMENT, WAIVER AND CONSENT THIRD AMENDMENT TO CREDIT AGREEMENT, WAIVER AND CONSENT, dated as of February __, 2000 (this "Amendment"), to the Credit Agreement dated as of June 29, 1999 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among DONNKENNY APPAREL, INC. a Delaware corporation ("DKA"), BELDOCH INDUSTRIES CORPORATION, a Delaware corporation ("BIC"; together with DKA, and severally, the "Borrowers"), the Guarantors party thereto, the lenders party thereto (collectively, the "Lenders") and THE CIT GROUP/COMMERCIAL SERVICES, INC. as agent for the Lenders (in such capacity, the "Agent"). The Borrowers, the Guarantors, the Lenders and the Agent are parties to the Credit Agreement. The Borrowers have requested that (a) the Lenders waive certain existing Events of Default under the Credit Agreement, (b) (i) Lenders consent to certain action taken by Parent which is prohibited by the Credit Agreement and (ii) Required Lenders consent to the closing by Borrowers of certain manufacturing facilities, and (c) amend certain provisions of the Credit Agreement. The Lenders are willing to waive such existing Events of Default, give such consent and make such amendments to the Credit Agreement upon the terms and subject to the conditions set forth in this Amendment. Accordingly, in consideration of the mutual agreements set forth herein, and for good and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Initially capitalized terms used and not otherwise defined herein shall have their respective meanings as defined in the Credit Agreement. 2. Waiver of Events of Default. Borrowers have exceeded the Overadvance Amount permitted under the terms of the Credit Agreement during the End of Month Period for January 2000 and have defaulted under Sections 7.10 (Minimum Interest Coverage Ratio), 7.11 (EBITDA) and 7.12(A) (Tangible Net Worth) of the Credit Agreement (collectively, the "Subject Covenants"), as a result of their breach of such financial covenants for the quarterly period ending December 31, 1999. As a result of the foregoing, Events of Default (collectively, the "Covenant Defaults") have occurred under Article VIII(d) of the Credit Agreement. In response to the Borrowers' request for a waiver of the Covenant Defaults, Lenders hereby waive the Covenant Defaults, provided, however, that nothing contained in this Amendment shall be construed to limit, impair or otherwise affect any rights of Lenders in respect of future noncompliance with respect to any Overadvance Amount, the Subject Covenants or any other covenant, term or provision of the Credit Agreement or of any of the other Loan Documents. 3. Consents. (a) Subsection (n) of Article VIII of the Credit Agreement provides that an Event of Default shall have occurred if Harvey Appelle ceases to be the Chairman of the Parent (i.e. Donnkenny, Inc.), unless a replacement reasonably satisfactory to the Required Lenders is found within 180 days. The Borrowers have advised the Lenders that as of January 1, 2000, Daniel Levy was appointed Chairman of Donnkenny, Inc., succeeding Harvey Appelle. The Lenders hereby confirm that Daniel Levy is satisfactory as Chairman of Donnkenny, Inc. and, therefore, no Event of Default occurred as a result of such retirement by Harvey Appelle and such successor appointment. (b) Borrowers have advised Lenders that Borrowers propose to close the following three manufacturing facilities ("Subject Facilities") and to transfer the manufacturing operations presently conducted at the Subject Facilities to manufacturing facilities located outside of the United States that are owned by Borrowers and/or other Persons (the "Subject Facilities Closing"): (1) Fabric Cutters 326 West Oxford Street Floyd, Virginia 24091 (2) Skyline 326 West Oxford Street Floyd, Virginia 24091 and (3) Grayson 116 Grayson Avenue Independence, Virginia 24348 In response to Borrowers' request, Required Lenders hereby waive the application of Sections 6.02 and 7.13 of the Credit Agreement and hereby consent to the Subject Facilities Closing, provided that, (i) nothing contained herein shall be deemed or constitute Required Lenders' consent to the sale, lease or other disposition of the Subject Facilities and (ii) Borrowers shall comply with all laws applicable to the Subject Facilities Closing, including, without limitation, the Worker Adjustment and Retraining Notification Act, 29 U.S.C. ss. 2101 et. seq. 4. Amendment of Section 1.01. Section 1.01 of the Credit Agreement is amended as follows: (a) Interest Rate. The initial portion of the definition of "Interest Rate" that precedes the parenthetical based on the Eurodollar Rate...)" is hereby amended in its entirety to read as follows: " 'Interest Rate' shall mean as to Prime Rate Loans, a rate of one (1.00%) percent in excess of the Prime Rate and, as to Eurodollar Rate Loans, a rate of three (3.00%) percent per annum in excess of the Adjusted Eurodollar Rate..." 2 (b) Overadvance Amount. The definition of "Overadvance Amount" is amended and restated in its entirety to read as follows: " 'Overadvance Amount' shall mean, during any Intramonth Period and End of Month Period, the amounts set forth below as correspond to the Intramonth Period and the End of Month Period during the months set forth below: OVERADVANCE AMOUNT OVERADVANCE AMOUNT DURING THE DURING THE MONTH INTRAMONTH PERIOD OF MONTH PERIOD -------------------- ----------------------------- --------------- January 2000 $ 8,200,000 $4,200,000 February 2000 $ 8,000,000 $4,000,000 March 2000 $ 7,800,000 $2,800,000 April 2000 $10,300,000 $5,300,000 May 2000 $13,700,000 $8,700,000 June 2000 $14,200,000 $9,200,000 July 2000 $13,300,000 $8,300,000 August 2000 $10,200,000 $5,200,000 September 2000 $ 8,000,000 $3,000,000 October 2000 $ 7,000,000 $2,000,000 November 2000 $ 7,000,000 $2,000,000 December 2000 $ 7,000,000 $2,000,000 ; provided, however, that, if following receipt of a mutually acceptable monthly operating plan by November 30, 2000 the Borrowers and the Lenders have not agreed on Overadvance Amounts for January, 2001 and thereafter, the Overadvance Amount during the End of Month Period and during the Intramonth Period End for January, 2001 and thereafter shall be zero dollars ($0); provided, further, that each of the foregoing amounts shall be reduced by the aggregate amount of cash proceeds received by the Parent and/or any of its Subsidiaries (i) as tax refunds 3 and (ii) as proceeds (net of taxes due and any reasonable expenses of sale) from the sale or other disposition of any assets of the Parent and/or any of its Subsidiaries (excluding sales of inventory in the ordinary course of business consistent with past practices). The foregoing shall not be deemed to be a consent by the Agent or any Lender to any sale of assets. For purposes of this paragraph, (i) the term 'End of Month Period' shall mean the period commencing on the last Business Day of a month and ending on the fifth day of the immediately following month and (ii) the term `Intramonth Period' shall mean the period commencing on the sixth day of a month and ending on the day immediately preceding the last Business Day of the same month." 5. Amendment of Section 2.01(b). Section 2.01(b) of the Credit Agreement is hereby amended by inserting into the first paragraph thereof a new sentence, which shall be the second to last sentence thereof and shall immediately follow the sentence ending with "$75,000,000", as follows: "In addition to and not in limitation of the foregoing limitations with respect to Revolving Credit Loans outstanding at any time to Borrowers, and notwithstanding anything to the contrary contained in this Section 2.01(b), the aggregate principal amount of Revolving Credit Loans outstanding at any time to Borrowers solely with respect to Eligible Receivables and Eligible Inventory shall not exceed an amount equal to the total amount of Revolving Credit Loans then available based upon the immediately preceding clauses (B)(i) and (B)(ii)(I)." 6. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is amended in its entirety to read as follows: "Section 7.10 Minimum Interest Coverage Ratio. Permit the Interest Coverage Ratio of the Parent and its Subsidiaries on a Consolidated basis for each four consecutive fiscal quarter period ending on the last day of each of the fiscal quarters set forth below to be less than the ratio set forth below opposite such fiscal quarter: 4 Quarterly Period Ending Minimum Interest Coverage Ratio ----------------------- ------------------------------- March 31, 2000 .30 to 1.00 June 30, 2000 0 to 1.00 September 30, 2000 .40 to 1.00 December 31, 2000 1.50 to 1.00" 7. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.11 EBITDA. Permit EBITDA of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis for each four consecutive fiscal quarter period ending on the last day of each of the fiscal quarters set forth below to be less than the amount set forth below opposite each such fiscal quarter: Quarterly Period Ending EBITDA ---------------- ------------- March 31, 2000 $1,109,000 June 30, 2000 $ 83,700 September 30, 2000 $1,445,000 December 31, 2000 $5,130,000" 8. Amendment of Section 7.12A. Section 7.12A of the the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.12A Tangible Net Worth. Permit the Tangible Net Worth of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis as of the end of each of the fiscal quarters set forth below to be less than the amount set forth below opposite each such fiscal quarter: Quarterly Period Ending Tangible Net Worth ----------------------- ------------------ March 31, 2000 $10,000,000 June 30, 2000 $ 7,500,000 September 30, 2000 $ 9,450,000 December 31, 2000 $11,500,000" 5 9. Overadvance Amount Clean-Up. Section 6.16 of the Credit Agreement is hereby amended in its entirety to read as follows: "SECTION 6.16 Payment of Revolving Credit Loans with respect to Overadvance Amount. Notwithstanding anything to the contrary otherwise contained in this Agreement, including, without limitation, Section 2.01(b), during the quarterly period ending December 31, 2000, Borrowers shall pay and satisfy in full, on any one (1) day as may be selected by Borrowers during such quarterly period (such day, the "Overadvance Clean-up Date"), Revolving Credit Loans in an aggregate amount equal to (x) that amount of Revolving Credit Loans which would otherwise be permitted to be outstanding under Section 2.01(b) on the Overadvance Clean-up Date, less (y) the Overadvance Amount as of the Overadvance Clean-up Date. Subject to the terms and conditions of this Agreement, Borrowers may at any time after the Overadvance Clean-up Date re-borrow such Revolving Credit Loans repaid to Lenders on the Overadvance Clean-up Date." 1. Amendment Fee. In consideration of the waiver of the Covenant Defaults and the amendments to the Credit Agreement as set forth herein, Borrowers shall pay to Agent, for the benefit of Lenders, or Agent, at its option, may charge the account(s) of Borrowers maintained by Agent an amendment fee in the amount of $75,000, which fee is fully earned and payable as of the date hereof and shall constitute part of the Obligations. 10. Representations and Warranties. Borrowers hereby represent and warrant to Lenders that the representations and warranties set forth in Article IV of the Credit Agreement are true on and as of the date hereof, as if made on and as of the date hereof, after giving effect to this Amendment, except to the extent that any such representation or warranty expressly relates to a prior date, and breach of any of the representations and warranties made in this paragraph 11 shall constitute and Event of Default under Article VIII(a) of the Credit Agreement. Borrowers further represent and warrant that, after giving effect to this Amendment, no Event of Default or event which, with the lapse of time or the giving of notice or both, would become an Event of Default has occurred and is continuing. 11. Effectiveness. This Amendment shall become effective on the date Agent shall have received counterparts of this Amendment duly executed and delivered by each of the parties hereto. 12. Continuing Effect of Credit Agreement. This Amendment shall not constitute a waiver or amendment of any provision of the Credit Agreement not expressly referred to herein and shall not be construed as a consent to any further or future action on the part of either of the 6 Borrowers that would require consent of Lenders. Except as expressly amended by this Amendment, the provisions of the Credit Agreement are and shall remain in full force and effect. 13. Applicable Law. This Amendment shall be construed in accordance with and governed by the laws of the State of New York (other than the conflicts of law principles thereof). 14. Counterparts; Facsimile Signature. This Amendment may be executed in counterparts, each of which shall constitute and original and all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of the signature page of this Amendment by facsimile shall be effective as delivery of a manually executed signature page hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC., as a Borrower and a Guarantor By: /s/ Beverly Eichel -------------------------------------------------------- Name: Beverly Eichel ------------------------------------------------------ Title: Executive Vice President, Chief Financial Officer ----------------------------------------------------- BELDOCH INDUSTRIES CORPORATION, as a Borrower and a Guarantor By: /s/ Beverly Eichel -------------------------------------------------------- Name: Beverly Eichel ------------------------------------------------------ Title: Executive Vice President, Chief Financial Officer ----------------------------------------------------- [SIGNATURES CONTINUED ON NEXT PAGE] [SIGNATURES CONTINUED FROM PREVIOUS PAGE] CHRISTIANSBURG GARMENT COMPANY, INCORPORATED as a Guarantor By: /s/ Beverly Eichel -------------------------------------------------------- Name: Beverly Eichel ------------------------------------------------------ Title: Executive Vice President, Chief Financial Officer ----------------------------------------------------- 7 H SQUARED DISPOSITIONS, INC., as a Guarantor By: /s/ Beverly Eichel -------------------------------------------------------- Name: Beverly Eichel ------------------------------------------------------ Title: Executive Vice President, Chief Financial Officer ----------------------------------------------------- THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent By: /s/ Lisa Murakami -------------------------------------------------------- Name: Lisa Murakami ------------------------------------------------------ Title: Vice President ----------------------------------------------------- THE CIT GROUP/COMMERCIAL SERVICES, INC., as a Lender By: /s/ Lisa Murakami -------------------------------------------------------- Name: Lisa Murakami ------------------------------------------------------ Title: Vice President ----------------------------------------------------- 8 EX-10.54 4 FOURTH AMENDMENT TO CREDIT AGREEMENT FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER, dated as of April 13, 2000 (this "Amendment"), to the Credit Agreement dated as of June 29, 1999 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among DONNKENNY APPAREL, INC. a Delaware corporation ("DKA"), BELDOCH INDUSTRIES CORPORATION, a Delaware corporation ("BIC"; together with DKA, and severally, the "Borrowers"), the Guarantors party thereto, the Lenders party thereto and THE CIT GROUP/COMMERCIAL SERVICES, INC. as agent for the Lenders (in such capacity, the "Agent"). The Borrowers, the Guarantors, the Lenders and the Agent are parties to the Credit Agreement. The Borrowers have requested that the Lenders waive existing Events of Default under the Credit Agreement and amend certain provisions of the Credit Agreement. The Lenders are willing to waive such existing Events of Default and make such amendments to the Credit Agreement upon the terms and subject to the conditions set forth in this Amendment. Accordingly, in consideration of the mutual agreements set forth herein, and for good and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Initially capitalized terms used and not otherwise defined herein shall have their respective meanings as defined in the Credit Agreement. 2. Waiver of Events of Default. The Borrowers have failed to: (a) prepay, as required by Section 2.09(c) of the Credit Agreement, the amount by which the Revolving Credit Loans exceeded Availability during the End of Month Period for March 2000, and (b) perform the negative covenant set forth in Sections 7.10 (Minimum Interest Coverage Ratio), 7.11 (EBITDA) and 712A (Tangible Net Worth) of the Credit Agreement for the quarterly period ending March 31, 2000; as a result of which Events of Default (collectively, the "Subject Defaults") have occurred and are continuing under Articles VIII(b) and VIII(d)of the Credit Agreement. In response to the Borrowers' request for a waiver of the Subject Defaults, Lenders hereby waive the Subject Defaults, provided, however, that nothing contained in this Amendment shall be construed to limit, impair or otherwise affect any rights of Lenders in respect of future noncompliance with any covenant, term or provision of the Credit Agreement or of any of the other Loan Documents. 3. Amendment of Section 1.01. Section 1.01 of the Credit Agreement is amended as follows: (a) Availability Reserves. The following is added as a defined term: "'Availability Reserves'" shall mean, as of any date of determination, such amounts as Agent may from time to time establish and revise in good faith reducing the amount of Revolving Credit Loans and Letters of Credit which would otherwise be available to Borrowers under the Borrowing Base provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Agent in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets, business or prospects of either Borrower or any other Loan Party or (iii) the security interests and other rights of Lenders in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Agent's good faith belief that any collateral report or financial information furnished by or on behalf of Borrowers is or may have been incomplete, inaccurate or misleading in any material respect or (c) in respect of any state of facts which Agent determines in good faith constitutes a Default or an Event of Default." (b) Interest Rate. The definition of "Interest Rate" is amended as follows: (i) the initial portion of the definition of "Interest Rate" that precedes "and, as to Eurodollar Rate Loans..." is hereby amended in its entirety to read as follows: ""Interest Rate" shall mean as to Prime Rate Loans, a rate of one and one-half (1.5%) percent in excess of the Prime Rate...", and (ii) the initial portion of the proviso contained in such definition is hereby amended by adding thereto, immediately after "provided that", the following: "(x) if no Overadvance exists during the period commencing November 1, 2000 through and including December 31, 2000, then, from and after January 1, 2000, the Interest Rate shall mean as to Prime Rate Loans a rate of one (1.00%) percent in excess of the Prime Rate, and (y)[the Interest Rate shall be increased by two (2.00%) percent...]" (c) Overadvance. "Overadvance" shall have the meaning assigned to such term in Section 2.01(c) hereof. (d) Overadvance Amount. The definition of "Overadvance Amount" is deleted in its entirety. 4. Elimination of Eurodollar Rate Loan Option. Notwithstanding anything to the contrary contained in the Credit Agreement or in any of the other Loan Documents, from and after the date this Amendment becomes effective pursuant to Section 14 below, Borrowers shall have no right to request or receive, and Agent and Lenders shall not make, any Eurodollar Rate Loans. 2 5. Amendment of Schedules 2.01(a) and 2.01(b). Schedule 2.01(a) Term Loan Commitment and Schedule 2.01(b) Revolving Credit Commitments are hereby amended and restated in their entirety effective October 6, 1999 as set forth in the form of Schedule 2.01(a) and Schedule 2.01(b) attached hereto. 6. Amendment of Section 2.01(b). Section 2.01(b) of the Credit Agreement is hereby amended as follows: (a) The phrase "plus (iii) the Overadvance Amount as of the date of determination" is deleted from the second sentences of the first paragraph thereof. (b) The phrase "except as otherwise set forth in Section 2.01(c)", is inserted in the fourth line of the second paragraph thereof after "that" and before "no". (c) As a result of the amendments to Section 2.01(b) made by clauses (a) and (b) immediately above, Section 2.01(b) is amended and restated in its entirety to read as follows: "(b) Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender, severally and not jointly, agrees to make Revolving Credit Loans to, and through the Agent open Letters of Credit for the benefit of, the Borrowers, at any time and from time to time from the date hereof to the Revolving Credit Termination Date, in an aggregate principal amount at any time outstanding not to exceed the amount of such Lender's Revolving Credit Commitment set forth opposite its name in Schedule 2.01(b) annexed hereto. Notwithstanding the foregoing, the aggregate principal amount of Revolving Credit Loans outstanding at any time to the Borrowers shall not exceed (1) the lesser of (A) the Total Revolving Credit Commitment and (B) an amount equal to the total of (i) up to ninety percent (90%) of the Net Amount of Eligible Receivables plus (ii) the sum of (I) up to sixty percent (60%) of the Net Amount of Eligible Inventory plus (II) up to sixty percent (60%) of the undrawn amount of all outstanding Letters of Credit for the importation of finished goods inventory consigned to the Agent as of the date of determination (not to exceed $37,000,000 at any time) minus (iii) any Availability Reserves (the amount determined pursuant to this clause (B) referred to herein as the "Borrowing Base"), minus (2) the Letter of Credit Usage at such time (not to exceed $35,000,000 at any time). In no event, however, shall the sum of (i) the principal amount of the Term Loan outstanding at any time plus (ii) the aggregate principal amount of Revolving Credit Loans outstanding at any time exceed $75,000,000. In addition to and not in limitation of the foregoing limitations with respect to Revolving Credit Loans outstanding at any time to Borrowers, and notwithstanding anything to the contrary contained in this Section 2.01(b), the aggregate principal amount of Revolving 3 Credit Loans outstanding at any time to Borrowers solely with respect to Eligible Receivables and Eligible Inventory shall not exceed an amount equal to the total amount of Revolving Credit Loans then available based upon the immediately preceding clauses (B)(i) and (B)(ii)(I). The Borrowing Base will be computed daily and a compliance certificate from a Responsible Officer of the Borrowers presenting its computation will be delivered to the Agent in accordance with Section 6.05 hereof. Subject to the foregoing and within the foregoing limits, the Borrowers may borrow, repay (or, subject to the provisions of Section 2.09 hereof, prepay) and reborrow Revolving Credit Loans, on and after the date hereof and prior to the Revolving Credit Termination Date, subject to the terms, provisions and limitations set forth herein, including without limitation, the requirement that, except as set forth in Section 2.01(c), no Revolving Credit Loan shall be made hereunder if the amount thereof exceeds the Availability outstanding at such time." The Agent has reviewed the business plan of Borrowers, dated April 6, 2000, as delivered by Borrowers to Agent in contemplation of the making of this Amendment, including the amounts of the Overadvances detailed therein which are necessary to achieve such business plan, and the Agent has been advised by Borrowers that, in order to achieve the business plan, Borrowers will require Overadvances pursuant to Section 2.01(c), as detailed in such business plan. 7. Addition of Section 2.01(c). The Credit Agreement is hereby amended by adding Section 2.01(c) thereto immediately following Section 2.01(b), as follows: "(c) Notwithstanding anything to the contrary contained in this Agreement or any of the other Loan Documents (including, without limitation, the last paragraph of Section 6(c) of the Fourth Amendment and Waiver, dated as of April 3. 2000, executed among Borrowers, Guarantors, Agent and Lenders), at the request of the Borrowers, the Agent may, in its sole discretion, subject to the Total Revolving Credit Commitment, make Revolving Credit Loans and issue Letter of Credit Guarantees to the Borrowers on behalf of the Lenders in excess of the Availability ("Overadvance"), which Overadvance shall be repayable on demand, provided, that, the aggregate amount of any such Overadvance which the Agent may make without the consent of all of the Lenders shall not exceed $9,700,000. Each Lender shall be obligated to pay the Agent the amount of its ratable share of any such additional Revolving Credit Loans or Letter of Credit Guaranties. Any Overadvance not repaid on demand shall, without waiving any Event of Default which has 4 occurred thereby, bear interest at the applicable Interest Rate. The making of an Overadvance by the Agent shall in no way limit, waive or otherwise affect the Agent's right with respect to the making of any additional Overadvance." 8. Amendment of Schedule 2.02. Schedule 2.02 Domestic Lending Offices is hereby amended and restated in its entirety as set forth in the form of Schedule 2.02 attached hereto. 9. Amendment of Section 2.09(c). The first sentence of Section 2.09(c) is amended and restated in its entirety to read as follows: "(c) In addition to and not in limitation of the provisions contained in Section 2.01(c), upon demand by the Agent, the Borrowers shall make prepayments of the Revolving Credit Loans such that the Availability equals or exceeds zero." 10. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is amended in its entirety to read as follows: "Section 7.10 Minimum Interest Coverage Ratio. Permit the Interest Coverage Ratio of the Parent and its Subsidiaries on a Consolidated basis for each four consecutive fiscal quarter period ending on the last day of each of the fiscal quarters set forth below to be less than the ratio set forth below opposite such fiscal quarter: Quarterly Period Ending Minimum Interest Coverage Ratio ----------------------- ------------------------------- June 30, 2000 N/A September 30, 2000 0 to 1.00 December 31, 2000 1.35 to 1.00" 11. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.11 EBITDA. Permit EBITDA of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis for each four consecutive fiscal quarter period ending on the last day of each of the fiscal quarters set forth below to be less than the amount set forth below opposite each such fiscal quarter: Quarterly Period Ending EBITDA ----------------------- ------ June 30, 2000 ($1,650,000) September 30, 2000 $130,000 December 31, 2000 $4,330,000 5 12. Amendment of Section 7.12A. Section 7.12A of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.12A Tangible Net Worth. Permit the Tangible Net Worth of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis as of the end of each of the fiscal quarters set forth below to be less than the amount set forth below opposite each such fiscal quarter: Quarterly Period Ending Tangible Net Worth ----------------------- ------------------ June 30, 2000 $6,000,000 September 30, 2000 $8,000,000 December 31, 2000 $10,200,000 13. Amendment Fee. In consideration of the waiver of the Subject Defaults and the amendments to the Credit Agreement as set forth herein, Borrowers shall pay to Agent, for the benefit of Lenders, or Agent, at its option, may charge the account(s) of Borrowers maintained by Agent an amendment fee in the amount of $75,000, which fee is fully earned and payable as of the date hereof and shall constitute part of the Obligations. 14. Representations and Warranties. Borrowers hereby represent and warrant to Lenders that the representations and warranties set forth in Article IV of the Credit Agreement are true on and as of the date hereof, as if made on and as of the date hereof, after giving effect to this Amendment, except to the extent that any such representation or warranty expressly relates to a prior date, and breach of any of the representations and warranties made in this paragraph 13 shall constitute and Event of Default under Article VIII(a) of the Credit Agreement. Borrowers further represent and warrant that, after giving effect to this Amendment, no Event of Default or event which, with the lapse of time or the giving of notice or both, would become an Event of Default has occurred and is continuing. 15. Effectiveness. This Amendment shall become effective on the date Agent shall have received counterparts of this Amendment duly executed and delivered by each of the parties hereto. 16. Continuing Effect of Credit Agreement. This Amendment shall not constitute a waiver or amendment of any provision of the Credit Agreement not expressly referred to herein and shall not be construed as a consent to any further or future action on the part of either of the Borrowers that would require consent of Lenders. Except as expressly amended by this Amendment, the provisions of the Credit Agreement are and shall remain in full force and effect. 17. Applicable Law. This Amendment shall be construed in accordance with and governed by the laws of the State of New York (other than the conflicts of law principles thereof). 6 18. Counterparts; Facsimile Signature. This Amendment may be executed in counterparts, each of which shall constitute and original and all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of the signature page of this Amendment by facsimile shall be effective as delivery of a manually executed signature page hereto. [SIGNATURE PAGES FOLLOW.] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC., as a Borrower and a Guarantor By: /s/ Beverly Eichel ------------------------------------------------------ Name: Beverly Eichel ------------------------------------------------------ Title: EVP, CFO ------------------------------------------------------ BELDOCH INDUSTRIES CORPORATION, as a Borrower and a Guarantor By: /s/ Beverly Eichel ------------------------------------------------------ Name: Beverly Eichel ------------------------------------------------------ Title: EVP, CFO ------------------------------------------------------ CHRISTIANSBURG GARMENT COMPANY, INCORPORATED a Guarantor By: /s/ Beverly Eichel ------------------------------------------------------ Name: Beverly Eichel ------------------------------------------------------ Title: EVP, CFO ------------------------------------------------------ H SQUARED DISPOSITIONS, INC., as a Guarantor By: /s/ Beverly Eichel ------------------------------------------------------ Name: Beverly Eichel ------------------------------------------------------ Title: EVP, CFO ------------------------------------------------------ [SIGNATURES CONTINUE ON NEXT PAGE] 8 [SIGNATURES CONTINUE FROM PREVIOUS PAGE] THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent By: /s/ Kevin J. Winsch ------------------------------------------------------ Name: Kevin J. Winsch ------------------------------------------------------ Title: Vice President ------------------------------------------------------ THE CIT GROUP/COMMERCIAL SERVICES, INC., as a Lender By: /s/ Kevin J. Winsch ------------------------------------------------------ Name: Kevin J. Winsch ------------------------------------------------------ Title: Vice President ------------------------------------------------------ CENTURY BUSINESS CREDIT CORPORATION, as a Lender By: /s/ Steven A. Stone ------------------------------------------------------ Name: Steven A. Stone ------------------------------------------------------ Title: Senior Vice President ------------------------------------------------------ 9 SCHEDULE 2.01(a) Term Loan Commitments Term Loan Percentage of Total Term Lender Commitment(1) Loan Commitment ------ ---------- -------------------- The CIT Group/Commercial $2,200,000 73.33% Services, Inc. 1211 Avenue of the Americas New York, New York 10036 Attn: Lisa Murakami Century Business Credit Corporation $800,000 26.66% 119 West 40th Street New York, New York 10018 Attn: Steven Stone - -------- 1 Based on outstanding principal balance of the Term Loan as of the Closing Date. 10 SCHEDULE 2.01(b) Revolving Credit Commitments Percentage of Total Revolving Credit Revolving Loan Lender Commitment Commitment ------ ---------- ---------- The CIT Group/Commercial $55,000,000 73.33% Services, Inc. 1211 Avenue of the Americas New York, New York 10036 Attn: Lisa Murakami Century Business Credit Corporation $20,000,000 26.66% 119 West 40th Street New York, New York 10018 Attn: Steven Stone 11 SCHEDULE 2.02 Domestic Lending Offices Lender Domestic Lending Office ------ ----------------------- The CIT Group/Commercial Service, Inc. The CIT Group/Commercial Service, Inc. 1211 Avenue of the Americas New York, New York 10036 Attn: Lisa Murakami Century Business Credit Corporation Century Business Credit Corporation 119 West 40th Street New York, New York 10018 Attn: Steven Stone 12 EX-21 5 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Subsidiary Jurisdiction of Incorporation - -------------- ----------------------------- Christiansburg Garment Company Delaware Donnkenny Apparel, Inc. Delaware Beldoch Industries Corporation Delaware H Squared Dispositions, Inc. New York EX-27.1 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 DEC-31-1999 180,075 0 36,707,311 6,685,490 29,323,131 63,785,587 12,044,517 6,063,482 101,836,561 15,484,044 0 0 0 142,409 41,738,331 101,836,561 173,748,509 173,748,509 138,815,837 138,815,837 40,266,872 0 4,006,634 (9,340,834) 87,165 (9,427,999) 0 0 0 (9,427,999) 0.66 0.66
-----END PRIVACY-ENHANCED MESSAGE-----