-----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, P0oTTyh15ylJE2CbCA1sHBCpd1Mx70/Dj3LxF/bi2EBKv6QqAeLE79YDa5ZUmthy WIUbz9tvs5j1sGyccc3Yhg== 0000950136-98-000617.txt : 19980401 0000950136-98-000617.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950136-98-000617 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 98584024 BUSINESS ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 5402286181 MAIL ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 10-K 1 FORM 10-K PRIVILEGED AND CONFIDENTIAL HH DRAFT 3/27/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-21940 DONNKENNY, INC. --------------- (Exact name of registrant as specified in its charter) Delaware 51-0228891 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1411 Broadway New York, New York 10018 (Address of principal executive offices) (Zip Code) (212) 730-7770 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.|X| The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant, based on a closing sale price of the Common Stock on the Nasdaq National Market on March 19, 1998 of $2.75 per share, was approximately $38,706,085. As of March 19, 1998, 14,074,940 shares of Common Stock of Registrant were outstanding. 1.For purposes of this Report, the number of shares held by non-affiliates was determined by aggregating the number of shares held by Officers and Directors of Registrant, and by others who, to Registrant's knowledge, own more than 10% of Registrant's Common Stock, and subtracting those shares from the total number of shares outstanding. PART I ITEM 1. BUSINESS Donnkenny, Inc. (together with its subsidiaries, the "Registrant" or the "Company") was incorporated in Delaware in 1978 and is a holding company with four subsidiaries, three of which are operating subsidiaries, Donnkenny Apparel, Inc. ("Donnkenny Apparel"), Beldoch Industries Corporation ("Beldoch") and MegaKnits, Inc. ("MegaKnits"). The Company designs, manufactures, imports and markets a broad line of moderately priced women's sportswear. REGULATORY INVESTIGATION By letter dated August 15, 1996, the Company was notified by the Securities and Exchange Commission (the "SEC") that it was the subject of an informal investigation concerning alleged inaccuracies in the reporting of revenues and expenses by the Company for certain reporting periods. On or about November 10, 1996, the Company learned that the SEC had entered a formal order of investigation in the matter. The Company is cooperating fully with the SEC's ongoing investigation. PRODUCTS The Company designs, manufactures, imports and markets a broad line of moderately priced women's sportswear. The Company's major labels include Victoria Jones (R), Casey & Max(R), Pierre Cardin(R) and Donnkenny (R). The Victoria Jones Company At the beginning of 1998, the Company combined its separate moderate knit and sweater companies, Beldoch Popper and Victoria Jones into one division under the name The Victoria Jones Company. The Victoria Jones label represents moderately-priced womens' knit and sweater products which are sold to department stores, specialty stores and chains, including Belk, Mercantile, May Company, Lane Bryant, Kohl's, Dillard's, Federated, Proffitt's , Stage Stores, Catherine's, J.C. Penney and Sears. The division's products are marketed for missy, large sizes and petites. Approximately 76% of these products are imported, predominantly from Hong Kong, China and India. The balance is manufactured domestically, principally in the Company's West Hempstead, New York facility. Casey & Max Division The Casey & Max division manufactures and imports novelty woven tops and sportswear under the brand name Casey & Max. The Casey & Max line consists of moderately-priced products sold to department stores, specialty stores and chains, including Belk, Mercantile, Kohl's, Dillard's, Federated, May Company, Proffitt's, Stage Stores, Catherine's, J.C. Penney and -2- Sears. The division's products are marketed for missy, large sizes and petites. Approximately 93% of these products are imported, predominantly from Hong Kong, China and India. Donnkenny Division The Donnkenny division manufactures and imports moderately-priced women's career and casual coordinated merchandise as well as fashion products marketed for missy, large sizes and petites. Its major accounts include Stage Stores, Proffitt's, Catherine's, Frederick Atkins, J.C. Penney and Sears. Donnkenny has been an established brand name for over 60 years. Approximately 80% of Donnkenny products are manufactured domestically. Pierre Cardin Division The Pierre Cardin division produces women's knitwear pursuant to a license. The Pierre Cardin product is sold to the better knitwear departments of department stores and specialty stores. Its major accounts include Federated Stores, Belk, Mercantile, Proffitt's and Frederick Atkins stores and the Chadwick's Catalog. Approximately 53% of these products are imported, predominantly from Hong Kong, China, and India. Custom and Private Label Products The Company's Knitmaker's division is a private label division selling exclusive private label products to such customers as QVC, J.C. Penney and Levi Strauss. A vast majority of Knitmaker's products are manufactured in the Company's facility located in West Hempstead, New York. The Company also manufactures products on a contract basis utilizing the Company's Southern manufacturing facilities to customers which include, among others, Cross Creek, Basset Walker and Tultex. Licensed Character Products Through 1997, pursuant to non-exclusive licenses from Disney Enterprises, Inc., the Company manufactured, imported and sold a Mickey & Co.(R) line of sportswear collections and other clothing for women, men and children. The Company also sold sleepwear and women's intimate apparel products using various non-Disney licensed cartoon images. The Company has substantially exited these businesses in 1997. MANUFACTURING AND IMPORTING Approximately 34% of the Company's products sold in its fiscal year ended December 31, 1997 ("Fiscal 1997") were manufactured in the United States, as compared with 46% in its fiscal year ended December 31, 1996 ("Fiscal 1996"). The Company's domestically produced products are manufactured at the Company's production facilities in Virginia and West Hempstead, New York and by several outside contractors. The remaining 66% of the Company's products sold in Fiscal 1997 were produced abroad and imported into the United States, principally from Hong Kong, China, India, Guatemala, Turkey, Bangladesh, Dominican Republic, and the Philippines. The percentage of the Company's products -3- which are manufactured in the United States is expected to decrease further during the Company's fiscal year ending December 31, 1998 ("Fiscal 1998"). The Company's purchases from its foreign suppliers are effected through individual purchase orders specifying the price and quantity of the items to be produced. Generally, the Company does not have any long-term, formal arrangements with any of the suppliers which manufacture its products. The Company continually seeks additional suppliers throughout the world for its sourcing needs. One foreign contractor accounted for 14.2% of the Company's products, but no other domestic or foreign contractor manufactured more than 10% of the Company's products in Fiscal 1997. Virtually all of the Company's merchandise imported into the United States is subject to United States duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas that limit the amount of certain categories of merchandise that may be imported into the United States. Because the United States may, from time to time, impose new quotas, duties, tariffs or other import controls or restrictions, the Company monitors import and quota-related developments. Attendant with the Company's increased reliance on foreign manufacturing is a risk of excess inventory. The Company must commit to its foreign manufacturers and suppliers four to six months in advance of its selling season, usually before the Company has received its orders from its customers. Thus, there exists the risk that the purchase orders by the Company's customers will be less than the amount manufactured. The Company believes that this risk is outweighed by the cost savings to the Company by manufacturing such products abroad. Conversely, in the event there exists excess demand for the Company's products, the lengthy production time for imported goods makes it impossible for the Company to return to the market to purchase additional goods for the same selling season. The Company's relationships with foreign suppliers are also subject to the additional risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds and in certain parts of the world, political instability. The Company's operations have not been materially affected by any of such factors to date. However, due to the large portion of the Company's products which are produced abroad, any substantial disruption of its relationships with its foreign suppliers could have a material adverse effect on the Company's operations and financial condition. The portion of the Company's products which it currently imports from Asia is further subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The Company's risks associated with the Company's Asian operations may be higher in 1998 than has historically been the case, due to the fact that financial markets in East and Southeast Asia have recently experienced and continue to experience difficult conditions, including a currency crisis. As a result of recent economic volatility, the currencies of many countries in this region have lost value relative to the U.S. dollar. Because the Company does not enter into foreign currency transactions, the Company has experienced no foreign currency transaction losses since the beginning of this crisis. However, its operations in the region are subject to an increased level of economic instability. In the countries which have experienced the highest degree of instability, (Korea, Taiwan and Indonesia), the Company's purchasing activities have been minimal. The impact of these regional events on the Company's business, and in particular its sources of supply, cannot be determined at this time. Approximately 50% of the products sold by the Company in Fiscal 1997 were manufactured in Asia. -4- CUSTOMERS In Fiscal 1997, the Company shipped orders to approximately 19,800 stores in the United States. This customer base represents approximately 5,300 accounts. Of the Company's net sales for Fiscal 1997, chain stores accounted for approximately 4.0%, specialty retailers for approximately 2.8%, department stores for approximately 62.1%, mass merchants for approximately 18.1%, catalogue customers for approximately 4.8%, and other customers for approximately 8.2%. The Company markets its products to major department stores including J.C. Penney, Dillard's, May Company, Federated, Stage, Proffitt's and Sears, as well as specialty retailers. Knitmaker's, a part of the Company's private label operation, sells exclusive products to catalog specialty retailers and suppliers. In addition, the Company manufactures products exclusively for J. C. Penney under its D.K. Gold label. In Fiscal 1997, consolidated net sales to J.C. Penney accounted for 15.4% of the Company's net sales. The loss of, or significantly decreased sales to, this customer could have a material adverse effect on the Company's consolidated financial condition. The Company's Electronic Data Interchange computer system ("EDI") connects the Company to approximately 37 of its large customers and, in Fiscal 1997, was used to place 36% of the Company's order dollars. The Company is also linked by EDI to several of its major suppliers, which allows the Company to review purchase orders for fabric on a weekly basis. SALES AND MARKETING At March 19, 1998, the Company had a 23 person sales force, of whom 13 were Company employees and 10 were independent commissioned sales representatives. Sales representatives are located in 9 cities and provide nationwide coverage to retailers ranging from individual specialty shops to national chain stores and catalogues. The Company's principal showrooms are in New York City. RAW MATERIALS SUPPLIERS The Company's sources of fabric and trim supply are well established. As a result of the large, steady purchases each year by the Company of fabrics and trim for its production of certain styles, the Company is a major customer of several of the larger synthetic textile producers. The Company typically experiences little difficulty in obtaining raw materials and believes that the current and potential sources of fabric and trim supply are sufficient to meet its needs for the foreseeable future. TRADEMARKS AND PROPRIETARY RIGHTS The Company owns and has registered in the United States, and in certain foreign jurisdictions, the following trademarks under which a variety of the Company's products are sold: Donnkenny(R), Victoria Jones(R), Victoria Sport(R), Casey & Max(R), Beldoch Popper(R), Knitmaker's(R) -5- and Private Stock(R). Upon compliance with the trademark statutes of the United States and the relevant foreign jurisdictions, these trademark registrations may be renewed. The Company holds licensing rights to manufacture, import and sell women's sportswear in the United States and the U.S. Virgin Islands with the Pierre Cardin trademark, including sweaters, pants, skirts, knitwear, jeans, swimwear and activewear. Such license is automatically continued from year to year at the Company's option provided net sales meet certain specified minimums. The Company's sales during Fiscal 1997 surpassed the minimum requirements of this license, and the Company intends to renew this license for an additional one year period. BACKLOG At March 19, 1998, the Company had unfilled, confirmed customer orders of approximately $62 million, compared to approximately $64 million of such orders at March 15, 1997, with such orders generally scheduled for delivery within three to six months of confirmation, although some extend until the end of the fiscal year. The amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of the production and shipment of garments, which in some instances may be delayed or accelerated at the customer's request. Accordingly, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. There can be no assurance that cancellations, rejections and returns will not reduce the amount of sales realized from the backlog of orders. -6- COMPETITION The women's apparel business is highly competitive and consists of many manufacturers and distributors, none of which accounts for a significant percentage of total sales in the overall market, but many of which are larger and have substantially greater resources than the Company. The Company competes with both domestic manufacturers and importers, primarily on an item-by-item basis, with respect to brand name recognition, price, quality and availability. EMPLOYEES As of March 19, 1998, the Company had 1,211 full-time employees, of whom 189 were salaried and 1,022 were paid on an hourly basis. The Company had 15 part-time employees, all of whom work on an hourly basis. The Company's hourly labor force is non-union. The Company believes relations with its employees are good. ENVIRONMENTAL MATTERS The Company believes that it is in material compliance with all applicable federal, state and local environmental laws. The Company does not currently anticipate the need to make material capital expenditures to remain in compliance with applicable federal, state and local environmental laws. -7- ITEM 2. PROPERTIES The Company currently operates seven facilities in Virginia, one in South Carolina, two in New York State and one in Hong Kong.
APPROXIMATE SQUARE OWNED OR LOCATION FOOTAGE FUNCTION LEASED - -------- ------- -------- ------ Christiansburg, Virginia............ 109,000 Finishing Owned Dryden, Virginia.................... 28,850 Sewing Owned Floyd, Virginia..................... 79,600 Fabric Warehouse, Owned sewing, cutting Independence, Virginia (Grayson).... 70,350 Sewing Owned Independence, Virginia (Kendon)..... 37,550 Storage Owned Rural Retreat, Virginia............. 61,230 Sewing Owned Wytheville, Virginia................ 161,800 Distribution, Owned administration Charleston, South Carolina(1) 200,000 Distribution center Leased West Hempstead, New York 150,000 Knitting, sewing Leased New York, New York(2)............... 62,500 Offices and principal Leased showrooms Hong Kong (Comet Building).......... Administration, Leased 2,200 sourcing, quality ------- control TOTAL........................... 963,080 =======
- ------------------------- (1) This facility is leased, with annual rental payments totaling $450,000, and is subject to a 3% annual rental escalation, until March 19, 2006, at which time the lease expires. (2) Annual rental payments for the New York office/showroom space are approximately $2,200,000 in the aggregate. The leases for the New York office/showrooms expire in 2000, 2006 and 2008. Management believes that its current facilities are sufficient to meet its needs for the foreseeable future. -8- ITEM 3. LEGAL PROCEEDINGS IN RE DONNKENNY, INC. SECURITIES LITIGATION, 96 Civ. 8452 (MGC): Beginning in November 1996, ten punative class action complaints were filed in the United States District Court for the Southern District of New York. Plaintiffs have filed a Consolidated Complaint which names as defendants the Company, as well as Edward T. Creevy, Ronald Hollandsworth, Richard Rubin, all of whom are former officers and/or directors of the Company, and KPMG Peat Marwick LLP ("KPMG", the Company's former Auditor). The Consolidated Complaint alleges that defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, by, among other things, preparing false financial statements which allegedly overstated sales and revenues. The Consolidated Complaint seeks compensatory damages, prejudgement interest, attorneys fees and costs. On April 2, 1997, the Court appointed Emanon Partners, L.P. ("Emanon") as the lead plaintiff in the action and ruled that Emanon may select the law firms of Wolf Popper, LLP and Milberg Weiss Bershad Hynes & Lerach, LLP as co-lead counsel. On December 5, 1997, the Court granted KPMG's motion to dismiss the Consolidated Complaint as to KPMG. Discovery is proceeding in the consolidated action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of Fiscal 1997. -9- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Registrant's Common Stock is traded on the Nasdaq National Market under the symbol "DNKY." The Common Stock began trading on the Nasdaq National Market on June 17, 1993. The following table sets forth the quarterly high and low closing prices of a share of Common Stock as reported by the Nasdaq National Market for the Company's two most recent fiscal years, plus the interim eleven-week period ended March 19, 1998.
PERIOD HIGH LOW - ------ ---- --- Fiscal 1996 First Quarter............................................ $18 $10 1/8 Second Quarter........................................... 20 5/8 13 3/4 Third Quarter............................................ 21 3/8 16 Fourth Quarter........................................... 17 1/8 3 5/8 Fiscal 1997 First Quarter............................................ $5 3/8 $2 1/8 Second Quarter........................................... 4 3/4 2 3/8 Third Quarter............................................ 4 9/16 3 1/8 Fourth Quarter........................................... 5 3/16 2 1/2 Fiscal 1998 Eleven weeks ended 3/19/98............................... $3 $2 1/2
On March 19, 1998, the closing price for a share of Common Stock, as reported by the Nasdaq National Market, was $2.75 per share. The number of holders of record for Registrant's Common Stock as of March 19, 1998 was 96. The Company currently anticipates that it will retain all its earnings for use in the operation and expansion of its business and, therefore, does not anticipate that it will pay any cash dividends in the foreseeable future. In addition, the Company's existing credit facilities prohibit the Company from declaring or paying dividends. -10- ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data as of December 31, 1997 and December 31, 1996 and for each of the fiscal years in the three year period ended December 31, 1997 have been derived from the Company's consolidated financial statements included elsewhere in this Form 10-K which have been audited by Deloitte & Touche LLP, independent auditors, whose report thereon is also included herein. The selected consolidated financial data as of December 3, 1994 and December 4, 1993 and for the fiscal years then ended have been derived from the Company's consolidated financial statements, which are not included herein. The December 4, 1993 financial statements were audited by other auditors. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and its Subsidiaries and related notes thereto incorporated by reference herein. -11-
YEAR ENDED --------------------------------------------------------------------------------- DECEMBER 4, DECEMBER 3, DECEMBER 2, DECEMBER 31, DECEMBER 31, 1993 1994 1995 1996 1997 ---------- --------- ---------- ---------- ----------- (In thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales......................... $144,080 $151,147 $193,306 $255,179 $245,963 Cost of sales..................... 100,321 106,389 142,128 202,580 196,633 ------- ------- ------- ------- ------- Gross profit...................... 43,759 44,758 51,178 52,599 49,330 Selling, general and administrative expenses......... 25,298 26,772 34,000 57,603 45,867 Amortization of goodwill and other related acquisition costs............... 1,317 1,145 985 1,449 1,204 Restructuring charge................ 2,815 1,723 ------- ------- ------- ------- ------- Gain on sale of license........... (1,116) Operating profit (loss)........... 17,144 17,957 13,378 (6,453) 536 Interest expense, net............. 5,312 2,870 4,135 5,154 4,955 ------- ----- ----- ----- ----- Income (loss) before income taxes and extraordinary charge............ 11,832 15,087 9,243 (11,607) (4,419) Income taxes (benefit)............ 4,615 6,034 3,996 (3,319) (1,210) ------- ------- ------- ------- ------- Income (loss) before extraordinary charge............ 7,217 9,053 5,247 (8,288) (3,209) Extraordinary charge related to early extinguishment of debt, 453 295 net of taxes.................... ------- ------- -------- --------- --------- Net income (loss)................. $ 6,764 $ 8,758 $ 5,247 $ (8,288) $ (3,209) ======== ======== ======== ========= ========= BASIC INCOME (LOSS) PER COMMON SHARE(1): Income (loss) before extraordinary item.............. $ .74 $ .68 $ .38 $ (.59) $ (.23) Extraordinary item................ $ (.05) (.02) -------- ------ ------- ------- -------- Net income (loss)................. $ .69 $ .66 $ .38 $ (.59) $ (.23) ======= ====== ====== ======= ========= Shares used in the calculation of basic income (loss) per share....... 9,816 13,330 13,910 14,012 14,070 ======= ====== ====== ====== ========= CONSOLIDATED BALANCE SHEET DATA: Working capital................... $ 28,814 $ 54,292 $ 80,357 $ 16,917 $ 38,354 Total assets...................... 93,112 109,179 157,664 139,433 102,460 Long-term debt, including Current portion................. 32,110 28,315 62,611 50,761 27,048 Stockholders' equity.............. 39,782 57,826 65,234 55,278 53,086
(1) All per share amounts and the shares used in the calculation of basic income (loss) per share have been retroactively restated to reflect the two-for-one stock split paid on December 18, 1995 to stockholders of record on December 4, 1995,and the effects of SFAS 128. -12- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth selected operating data of the Company as a percentage of net sales, for the periods indicated below:
FISCAL YEAR ENDED ---------------------------------------------------- DECEMBER 2, DECEMBER 31, DECEMBER 31, ----------- ------------ ------------ 1995 1996 1997 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold 73.5 79.4 79.9 ---- ---- ---- Gross profit 26.5 20.6 20.1 Selling, general and administrative expenses 17.6 22.6 18.7 Amortization of goodwill and other related 0.5 0.6 0.5 acquisition costs Restructuring charge 1.5 0.7 ---- ---- ---- Operating income (loss) 6.9 (2.5) 0.2 Interest expense, net 2.1 2.0 2.0 --- --- --- Income (loss) before income taxes 4.8 (4.5) (1.8) Income tax provision (benefit) 2.1 (1.3) (0.5) --- ----- ----- Net income (loss) 2.7% (3.2%) (1.3%) ------ ------ ------
COMPARISON OF FISCAL 1997 WITH FISCAL 1996 Net Sales Net sales decreased by $9.2 million, or 3.6%, from $255.2 million in Fiscal 1996 to $246.0 million in Fiscal 1997. The decline in net sales was primarily the result of decreases in the Licensed Character business which was down $35.6 million or 46.9%. The decline was due to the discontinuation of the Lewis Frimel division and the decrease in sales of other licensed character lines. The decrease was partially offset by increases in the Company's core divisions - Donnkenny, Beldoch and Oak Hill which had increases of $8.1 million, $9.8 million and $8.8 million, respectively. The Company continues to stress its strategy of diversifying its product mix while selling to a broad range of retail stores. Sportswear accounted for approximately 84% of 1997 net sales while the licensed character business accounted for the remaining 16%. Gross Profit Gross profit for Fiscal 1997 was $49.3 million, or 20.1% of net sales, compared to $52.6 million, or 20.6% of net sales, for Fiscal 1996. Significant factors that contributed to the decline in gross profit included the sell off of inventory resulting from the closing of the Lewis Frimel Division; softness in other licensed character lines and excess supply of these products in the market place; softness in the sweater business due to warmer weather during the winter of 1997; and approximately $0.3 million applicable to sales -13- returns and allowances recorded in the fourth quarter of 1997 in the normal course of business. Additionally, in the fourth quarter of Fiscal 1997, the Company decided to discontinue certain licensed character lines, and as a result recorded additional markdowns of $0.5 million. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased from $57.6 million in Fiscal 1996 to $45.9 million in Fiscal 1997. As a percentage of net sales, these costs decreased from 22.6% in Fiscal 1996 to 18.7% in Fiscal 1997. Included in Fiscal 1997 are one-time charges in the amount of approximately $4.1 million, the largest component of which is $3.5 million in additional professional fees as the result of legal fees associated with the previously reported class action lawsuits, legal and accounting fees associated with the restatement of prior year quarterly and annual financial statements and consulting services related to the Company's amended credit facility. Included in Fiscal 1996 were one-time charges totaling $4.2 million, or 1.7% of net sales related to the following: the rescission of the Fashion Avenue acquisition of $0.5 million; severance relating to departing employees of $0.9 million and professional fees of $2.8 million associated with the class action lawsuits, legal and accounting fees related to the special investigation and restatements of prior year financial results. Excluding these charges, the balance of selling, general and administrative expenses for Fiscal 1997 was $41.8 million, or 17.0% of net sales and for Fiscal 1996, $53.4 million, or 20.9% of net sales. The $11.6 million decline in selling, general and administrative expense is due to reductions in all expense categories except distribution and factoring fees. Distribution expenses increased as a result of higher temporary employee expenses in the South Carolina distribution facility which were mostly offset by savings from the closing of the Mississippi distribution facility and lower costs at the West Hempstead distribution facility. As a result of the amended credit facility discussed below, the Company incurred $1.0 million in factoring fees which were not incurred in Fiscal 1996. The reductions in other selling, general and administrative categories included: Design and Sample expense decreases which were primarily the result of synergies resulting from consolidating company activities and reduced sample expense related to the discontinuation of the licensed character division; decrease in Sales expenses was the result of headcount and advertising reductions and lower sales commissions related to the reduced road force; decreases in Administrative expenses resulting from headcount reductions; Occupancy expense reductions which were primarily the result of closing the Plainview and Mississippi distribution facilities in Fiscal 1996. Restructuring Charge In the fourth quarter of 1997, the Company decided to discontinue the manufacture and sale of Mickey & Co. licensed character product line under a license agreement with Disney Enterprises, Inc. and recorded a pre-tax restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5 million for the write-down of merchandise inventories. The restructuring charge included payments due under agreements with the licensor; write-downs -14- of property, plant and equipment; costs related to lease terminations; employee severance payments; and other incremental charges directly attributable to discontinuing the licensed character product lines. Income From Operations In Fiscal 1997, the Company reported income from operations of $0.5 million, versus a loss from operations of $6.5 million in Fiscal 1996. Provision For Income Taxes The Company's tax benefit in Fiscal 1997 amounts to 27.0% of pre-tax losses, as compared to a benefit of 28.6% for Fiscal 1996. The benefit in Fiscal 1997 is lower than the Company's historical tax rate due to the recording of a valuation allowance on a portion of deferred tax assets related to state net operating loss carryforwards. Net Loss In Fiscal 1997 the Company reported a net loss of $3.2 million, or ($0.23) per share, versus a net loss of $8.3 million, or ($0.59) per share in Fiscal 1996. COMPARISON OF FISCAL 1996 WITH FISCAL 1995 Net Sales Net sales increased by $61.9 million, or 32.0%, from $193.3 million in Fiscal 1995 to $255.2 million in Fiscal 1996. Fiscal 1996 includes net sales for Beldoch and Oak Hill for a full year as compared to net sales for six months and five months, respectively, in Fiscal 1995. The inclusion of first half sales from these two divisions accounted for $52.2 million of the increase. The balance of the net sales increase was achieved in each of the Company's other divisions, other than the Lewis Frimel Division where net sales declined by $3.8 million. The Company continues to stress its strategy of diversifying its product mix while selling to a broad range of retail stores. Sportswear accounted for approximately 70% of 1996 net sales while the licensed character business accounted for the remaining 30%. Gross Profit Gross profit for Fiscal 1996 was $52.6 million, or 20.6% of net sales, compared to $51.2 million, or 26.5% of net sales, for Fiscal 1995. In the fourth quarter of Fiscal 1996, management undertook a program to reduce excess inventories and balance quantities on hand with the Company's near term needs. As a result, the Company recorded markdowns of $11.4 million. The Company also recorded, in the fourth quarter, approximately $5.1 million applicable to sales returns and allowances. The decline in the gross profit margin was primarily the result of these markdowns, and to a lesser extent, sales returns and allowances. -15- Selling, General and Administrative Expenses Selling, general and administrative expenses increased from $34.0 million in Fiscal 1995 to $57.6 million in Fiscal 1996. As a percentage of net sales, these costs increased from 17.6% in Fiscal 1995 to 22.6% in Fiscal 1996. Included in Fiscal 1996 are charges totaling $4.2 million, or 1.7% of net sales related to the following: the rescission of the Fashion Avenue acquisition of $0.5 million; severance relating to departing employees of $0.9 million; litigation expenses of $1.2 million; and professional fees and special investigation expenses of $1.6 million. Excluding these charges, the balance of SG&A for Fiscal 1996 is $53.4 million or 20.9% of net sales. Of the $19.4 million year to year change, as adjusted, $12.9 million (excluding distribution expenses) or 5.1% of net sales, relates to Beldoch and Oak Hill which were only included for six months and five months, respectively, in Fiscal 1995. Additionally, distribution expense increased by $3.8 million to $7.8 million in Fiscal 1996 or 3.1% of net sales, a 1.0 percentage point increase over 1995. The increase is related to the opening of a new distribution facility in Summerville, South Carolina and the closing of two distribution centers in Mississippi and New York. Loss From Operations In Fiscal 1996 the Company reported a loss from operations of $6.5 million versus Fiscal 1995 operating income of $13.4 million principally related to the inventory adjustments and sales allowances and the $4.2 million of costs discussed in the preceding paragraph. Interest Expense Interest expense increased by $1.1 million from $4.1 million in Fiscal 1995 to $5.2 million in Fiscal 1996. The increase in interest expense was primarily due to the increased working capital needs of the Company resulting from the acquisitions in 1995, which were funded by the revolving credit agreement. These increases in borrowing and interest more than offset the decline in interest expense as a result of reduced borrowing under the Company's Senior Term Loan. As a percentage of net sales, interest expense declined from 2.1% during Fiscal 1995 to 2.0% in Fiscal 1996. Provision For Income Taxes The Company's tax benefit in Fiscal 1996 amounts to 28.6% of pre-tax losses as compared to a provision of 43.2% for Fiscal 1995. The benefit in Fiscal 1996 is lower than the Company's historical tax rate due to the recording of a valuation allowance on a portion of deferred tax assets related to state net operating loss carryforwards. Net Income In Fiscal 1996 the Company reported a net loss of $8.3 million, or ($0.59) per share, as a result of the factors described above, versus Fiscal year 1995 net income of $5.2 million, or $0.38 per share. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise from the funding of working capital needs, primarily inventory and accounts receivable, and interest and principal payments related to certain indebtedness. The Company's borrowing requirements for working capital fluctuate throughout the year. -16- Capital expenditures were $0.5 million for Fiscal 1997, compared to $1.0 million in Fiscal 1996. In Fiscal 1998 the Company may spend up to $3.5 million on capital investments in accordance with the Revolving Credit Agreement described below. As part of the 1998 capital expense budget, the Company has committed to spend approximately $2.1 million for upgrading computer systems to increase efficiencies and become Year 2000 compliant. At the end of Fiscal 1997, direct borrowings were $27.0 million, which included a senior term loan of $5.5 million and revolving credit borrowings of $21.5 million. Additionally, the Company had letters of credit outstanding of $20.9 million, with unused availability of $14.1 million. At the end of Fiscal 1996, direct borrowings and letters of credit outstanding under the prior credit facility were $50.8 million and $19.9 million, respectively. On April 30, 1997, the Company entered into an amended credit facility (the "Credit Facility") to, among other things, include the Company's operating subsidiaries Donnkenny Apparel, Inc., MegaKnits, Inc. and Beldoch Industries Corp., as borrowers. The Credit Facility consists of a Term Loan, a Revolving Credit Agreement, and a Factoring Agreement. The purpose of the Credit Facility is to provide for working capital needs of the Company including, the issuance of letters of credit. The Credit Facility expires on March 31, 1999. Under the Credit Facility, The Chase Manhattan Bank serves as agent (and holds a 35% interest), the CIT Group/Commercial Services Inc. ("CIT") serves as collateral agent (and holds a 15% interest), and each of Fleet Bank, N.A. and the Bank of New York are co-lenders (each holding a 25% interest). As of March 20, 1998, the balance of the Term Loan was $5.5 million. The interest rate is equal to the prime rate plus 1 1/2% per annum. The amortization schedule calls for quarterly payments of approximately $1.3 million, with a balloon payment of $0.5 million due on March 31, 1999. An excess cash flow recapture is payable annually within 15 days after receipt of the Company's audited fiscal year-end financial statements. In addition, any tax refunds received in Fiscal 1998 will be applied to reduce the balloon payment. The default interest rate, if applicable, would be equal to 2% above the otherwise applicable rate. The Term Loan does not carry any prepayment penalty. The total amount available under the Revolving Credit Agreement is $85 million subject to an asset based borrowing formula, with sublimits of $70 million for direct borrowings and $35 million for letters of credit. The interest rate is equal to the prime rate plus 1 1/2% per annum. Borrowings in excess of an allowable overadvance will bear interest at the prime rate plus 3 1/2%. The Revolving Credit Agreement also requires the Company to pay certain letter of credit fees and unused commitment fees. Advances and letters of credit are limited to (i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance. In April, 1997 the Company also entered into a Factoring Agreement with CIT. The Factoring Agreement provides for a factoring commission equal to 0.45% of the gross amount of sales, plus certain customary surcharges. An additional fee of 0.20% was paid upon the conversion to a factored receivable arrangement. -17- Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel Inc., Beldoch Industries Corp., and Megaknits, Inc. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with a maximum cumulative net loss test. At December 31, 1997, the Company was not in compliance with the covenant related to the maximum cumulative net loss test. On March 31, 1998, Chase Manhattan Bank, as agent, issued a waiver for the violation of this covenant. Additionally, on March 31, 1998, in support of the Company's 1998 business plan, the previously discussed Credit Facility was amended to provide for a sublimit for direct borrowings of $60 million; a letter of credit line of $35 million; and required seasonal overadvances. Any tax refunds applicable to 1997 and prior years and proceeds from the sale of fixed assets are to be applied to reduce the balloon payment on the Term Loan. During Fiscal 1997, the Company's operating activities generated $20.0 million more cash than they used, principally as the result of decreases in accounts receivable, inventories and recoverable income taxes, partially offset by decreases in accounts payable. During Fiscal 1996, the Company's operating activities generated $5.8 million more cash than they used, principally as the result of decreases in accounts receivable and inventories, increases in accounts payable partially, offset by the net loss. Cash used in Fiscal 1997 for investing activities included $0.5 million for the purchase of fixed assets and the $1.2 million contingent earnout payment related to the acquisition of Beldoch, which was partially offset by proceeds from the sale of fixed assets. Cash used in Fiscal 1996 for the purchase of fixed assets was $1.0 million and included purchases of machinery and equipment, building improvements and leasehold improvements to the Company's South Carolina distribution facility. Cash used in financing activities in Fiscal 1997 was $22.7 million, which represented repayments of $12.3 million on the Term Loan, net repayments under the Revolving Credit Agreement of $11.5 million and the repayment of the Virginia state loan of $0.2 million. Cash used in financing activities in Fiscal 1996 was $6.2 million, which represented repayments of $5.0 million for a senior term loan with The Chase Manhattan Bank, and $2.0 million for the note relating to the acquisition of Beldoch. This was offset by net borrowings under the revolving credit line. The Company believes that cash flows from operations and amounts available under the revolving credit agreement will be sufficient for its needs for the foreseeable future. OTHER ITEMS AFFECTING THE COMPANY: Competition The apparel industry in the United States is highly competitive and characterized by a number of multi-line manufacturers (such as the Company) and a larger number of specialty manufacturers. The Company faces substantial competition in its markets from manufacturers in both categories. Apparel Industry Cycles and other Economic Factors The apparel industry historically has been subject to substantial cyclical variation, with consumer spending on apparel tending to decline during recessionary periods. A decline in the general economy or uncertainties regarding future economic prospects may affect -18- consumer spending habits, which, in turn, could have a material adverse effect on the Company's results of operations and its financial condition. Retail Environment Various retailers, including some of the Company's customers, have experienced declines in revenue and profits in recent periods and some have been forced to file for bankruptcy protection. To the extent that these financial difficulties continue, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. Seasonality of Business and Fashion Risk The Company's principal products are organized into seasonal lines for resale at the retail level during the Spring, Summer, Transition, Fall and Holiday Seasons. Typically, the Company's products are designed as much as one year in advance and manufactured approximately one season in advance of the related retail selling season. Accordingly, the success of the Company's products is often dependent on the ability to successfully anticipate the needs of retail customers and the tastes of the ultimate consumer up to a year prior to the relevant selling season. Foreign Operations The Company's foreign sourcing operations are subject to various risks of doing business abroad, including indirect vulnerability to currency fluctuations, quotas and, in certain parts of the world, political instability. Any substantial disruption of its relationship with its foreign suppliers could adversely affect the Company's operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas, which limit the amount of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocation could adversely affect the Company's operations. Asian Operations The Company's operations in Asia are subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The Company's risks associated with the Company's -19- Asian operations may be higher in 1998 than has historically been the case, due to the fact that financial markets in East and Southeast Asia have recently experienced and continue to experience difficult conditions, including a currency crisis. As a result of recent economic volatility, the currencies of many countries in this region have lost value relative to the U.S. dollar. Although the Company has experienced no material foreign currency transaction losses since the beginning of this crisis, its operations in the region are subject to an increased level of economic instability. Approximately 50% of the products sold by the Company in Fiscal 1997 were manufactured in Asia. The impact of these events on the Company's business, and in particular its sources of supply, cannot be determined at this time. Factors that May Affect Future Results and Financial Condition The Company's future operating results and financial condition are dependent upon the Company's ability to successfully design, manufacture, import, and market apparel. Year 2000 Issue The Company recognizes the need for, and has begun implementation of, a comprehensive program intended to upgrade the operating systems, hardware and software, which should eliminate any issues involving Year 2000 compliance. The Company's current software systems, without modification, will be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of improving the Company's information systems to provide enhanced support to all operating areas, the Company will upgrade to new financial and operating systems. Such upgrade will provide for or eliminate any issues involving year 2000 compliance because all software implemented is designed to be year 2000 compliant. The Company anticipates that its cost for such upgrade will be approximately $2.1 million. The Company anticipates that it will complete its systems conversion in time to accommodate year 2000 issues. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information" which is effective for periods beginning after December 15, 1997. SFAS No. 131 requires that public companies report certain information about operating segments in their annual financial statements and in condensed financial statements of interim periods issued to shareholders. This statement also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is currently reviewing the impact of this statement on its current level of disclosure. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which is effective for fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This statement standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. The Company is currently reviewing the impact of this statement on its current level of disclosure. Forward-Looking Statements This Form 10-K (including but not limited to the sections hereof entitled "Business" and "Management's Discussion and Analysis") contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, there can be no assurance that the statement of the expectation or belief will result, or be achieved or accomplished. The words "believe", "expect", "estimate", "project", "seek", "anticipate" and similar expressions may identify forward-looking statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Financial Statements following Item 14 of this Annual Report on Form 10-K ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As previously reported on the Company's Form 8-K filed November 12, 1996, on November 4, 1996 the Company's then auditors, KPMG Peat Marwick LLP, informed the Company that they were resigning. They informed the Company that they would no longer be able to rely on representations of financial management and that they did not have access to sufficient, credible information from others within the Company to enable them to continue as auditors. On December 17, 1996, Deloitte & Touche LLP accepted appointment to serve as the Company's new auditors. -20- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Harvey A. Appelle, a director of the Company, was appointed Chairman of the Board and Chief Executive Officer of the Company on December 19, 1996. Mr. Appelle has been the President of HarGil Capital Associates Ltd., a private investment firm, since 1994. From 1983 to 1993, he was a Managing Director of the Investment Banking Division of Merrill Lynch Pierce Fenner & Smith Inc. and a Senior Vice President of Merrill Lynch Interfunding Inc. Mr. Appelle is 53 years old. Herbert L. Ash, a director of the Company, has been a partner at the law firm of Hahn & Hessen, Attorneys, since 1972. Mr. Ash has been a director of Hampton Industries, Inc., a manufacturer of apparel, since 1994. He is also a Trustee of the National Jewish Medical and Research Center, Denver, Colorado. Mr. Ash is 56 years old. Sheridan C. Biggs, a director of the Company, is Executive-in-Residence at the Graduate Management Institute at Union College. Prior to that, he was a senior partner of Price Waterhouse, the accounting and consulting firm; he was with that firm for thirty-one years until his retirement in 1994. During his career at Price Waterhouse, Mr. Biggs served as a Vice Chairman and member of the firm's management committee. Mr. Biggs is 63 years old. Robert H. Cohen, a director of the Company, is the founder, President and Chief Executive Officer of Recharge Corporation of America, a recycling company formed on July 1, 1995. He has also been Chief Executive Officer of R.J.C. Development Corporation, a real estate company, since 1987. For several years prior to founding Recharge Corporation of America, Mr. Cohen invested for his own account, having retired in 1996 as President and Chief Executive Officer of Craftex Creations, Inc., a manufacturer of intimate apparel, and in 1993 of Shamrock Outlet Stores, Inc. From 1987 to 1992, Mr. Cohen served on the board of the Intimate Apparel Council of the American Apparel Manufacturers' Association. Mr. Cohen is 59 years old. James W. Crystal, a director of the Company, has been President, since 1978, and Chairman of the Board since 1989, of Frank Crystal & Co., Inc., international insurance brokers. Mr. Crystal is 60 years old. Harvey Horowitz, a director of the Company, served as Vice President, and General Counsel of the Company from October 1, 1996 to February 28, 1998 when he resigned his office as Vice President. For more than five years, prior to October 1, 1996, he was a partner of the law firm Squadron, Ellenoff, Plesent & Sheinfeld, LLP. Mr. Horowitz is a director of Biofield Corp., a medical device company. Mr. Horowitz is 55 years old. Daniel H. Levy, a director of the Company, has been a principal of and consultant to LBK Consulting Inc., a retail consulting business, since January 1997 and during the period from 1994 to April 1996. From April 1996 through January 1997, he served as Chairman of the Board and Chief Executive Officer of Best Products, Inc., a retail sales company which filed for bankruptcy in September 1996. From 1993 through 1994, Mr. Levy served as Chairman of the Board and Chief Executive Officer of Conran's, a retail home furnishings company. From 1991 to 1993, he was Vice Chairman and Chief Operating Officer of Montgomery Ward, a retail sales company. Mr. Levy is a director of Marks Bros. Inc. Jewelers and Phar-Mor, Inc. Mr. Levy is 55 years old. -21- Stuart S. Levy has been Vice President-Finance and the Chief Financial Officer of the Company since November 4, 1996. From January 1993 to July 1996, Mr. Levy was Vice President of Finance and Chief Financial Officer of Xpedite Systems, Inc., a publicly-held provider of enhanced fax services. From August 1996 through October 1996, Mr. Levy provided services to Xpedite Systems, Inc., in connection with the completion and integration of information acquisitions. Prior thereto, he was a financial consultant to an investment group since 1988. Mr. Levy also serves as Assistant Secretary of the Company. Mr. Levy is 56 years old. Robert H. Martinsen, a director of the Company, worked at Citicorp/Citibank for thirty-eight years until his retirement in 1995. At that point, he was Chairman of Credit Policy. Prior to that, he was in charge of corporate business in Asia. Prior to that, he was Chairman and President of Citibank's asset based finance subsidiary, Citicorp Industrial Credit. Mr. Martinsen is 63 years old. Lynn Siemers-Cross, a director of the Company, became President and Chief Operating Officer of the Company on April 14, 1997. Prior thereto, she was President of the Oak Hill Division of the Company, and had been President of the Oak Hill Division for more than five years. Ms. Siemers-Cross is 39 years old. -22- ITEM 11. EXECUTIVE COMPENSATION The following table sets forth compensation paid for the fiscal years ended December 31, 1997, December 31, 1996, and December 2, 1995 to those persons who were, at December 31, 1997 (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company(collectively, the "Named Executive Officers"). The information in the following tables with respect to the number of shares of Common Stock underlying options, option exercise prices and the number of shares of Common Stock acquired upon the exercise of options has been retroactively restated to reflect the two-for-one stock split paid to all holders of Common Stock of record on December 4, 1995 (the "Stock Split").
SUMMARY COMPENSATION TABLE LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS ---------------------------------------------------------------------------------------- SECURITIES ALL OTHER NAME AND PRINCIPAL FISCAL RESTRICTED UNDERLYING COMPENSATION POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS/SARS (1) - ------------------------------------------------------------------------------------------------------------------------ Harvey A. Appelle(2)(6) 1997 $ 400,000 174,000 440,625 50,000 2,880 Chairman of the Board 1996 0 and Chief Executive Officer 2,880 Harvey Horowitz(2)(5) 1997 $ 405,000 Vice President and 1996 124,444 General Counsel Stuart S. Levy(2)(3) 1997 $ 361,667 25,000 14,650 11,000 Vice President - 1996 31,667 Finance And Chief Financial Officer Lynn Siemers-Cross(4)(7) 1997 $ 500,000 212,500 440,625 50,000 660 President and Chief Operating Officer
- ----------------------- (1) Represents insurance premiums paid by, or on behalf of, the Company during the covered fiscal year with respect to term life insurance for the benefit of the Named Executive Officer. (2) This individual became an executive officer of the Company in 1996. (3) On November 4, 1997, this individual's salary increased to $350,000 per annum. (4) This individual became an executive officer of the Company in 1997. (5) This individual resigned his office as vice president on February 28, 1998 and entered into a two-year consulting agreement with the Company (6) Bonus paid in 69,600 shares of common stock. (7) Bonus paid as follows: $150,000 cash payment and 25,000 shares of common stock. -23- EMPLOYMENT AGREEMENTS Harvey Appelle On June 12, 1997, Mr. Appelle entered into a three-year employment agreement with the Company to serve as its Chairman of the Board and Chief Executive Officer. The agreement provides for a base annual salary of $400,000 for the first two years of the term and of $500,000 for the third year of the term, as well as a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee of the Board, as well as certain insurance and other benefits. In addition, in connection with the execution of the employment agreement, the Compensation Committee granted to Mr. Appelle 150,000 restricted shares and options to purchase an aggregate of 150,000 additional shares at a price equal to the closing price of the Common Stock on the date of grant. The agreement further provides for an incentive cash bonus equal to the appreciation over five years of 50,000 shares of stock. The restricted shares, options and right to receive the incentive cash bonus will vest over the term of the agreement, subject to acceleration in the event of a change in control of the Company. The agreement provides that in the event Mr. Appelle's employment is terminated (except in certain limited circumstances) following a change in control of the Company, Mr. Appelle will have the right to receive severance benefits equal to three times the sum of the last annual salary inclusive of performance bonus (but not incentive bonus). Lynn Siemers-Cross On June 12, 1997, Ms. Siemers-Cross entered into a four-year employment agreement with the Company to serve as its President and Chief Operating Officer. The agreement provides for a base annual salary of $500,000, a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee, but not less than $150,000 for Fiscal 1997, as well as certain insurance and other benefits. In addition, in connection with the execution of the employment agreement, the Compensation Committee granted to Ms. Siemers-Cross 150,000 restricted shares and options to purchase an aggregate of 150,000 additional shares at a price equal to the closing price of the Common Stock on the date of grant. The agreement further provides for an incentive cash bonus equal to the appreciation over five years of 50,000 shares of stock. The restricted shares, options and right to receive the incentive cash bonus will vest over the term of the agreement, subject to acceleration in the event of a change in control of the Company. The agreement provides that in the event Ms. Siemers-Cross' employment is terminated (except in certain limited circumstances) following a change in control of the Company, Ms. Siemers-Cross will have the right to receive severance benefits equal to three times the sum of the last annual salary inclusive of performance bonus (but not incentive bonus). -24- Harvey Horowitz On February 28, 1998, Mr. Horowitz entered into a two-year consulting agreement with the Company, which agreement superseded Mr. Horowitz's employment agreement with the Company dated September 5, 1996. Under the new agreement, Mr. Horowitz agrees to provide certain consulting services to the Company and its officers with respect to legal matters arising out of the business affairs of the Company. The new agreement provides for monthly payments to be made by the Company to Mr. Horowitz equal to $35,000 for March 1998, $30,000 per month thereafter for the balance of calendar year 1998, and $25,000 per month throughout calendar year 1999. Mr. Horowitz will continue to receive certain insurance and other benefits and the Company agrees to use its best efforts to cause Mr. Horowitz to be nominated for election as a member of its Board of Directors at the annual meeting of its shareholders to take place during calendar year 1998. Stuart S. Levy On January 28, 1997, Mr. Levy entered into a two-year employment agreement with the Company to serve as Chief Financial Officer, Vice President-Finance and Assistant Secretary. The agreement provides for an annual salary of $350,000, an annual bonus based on the performance of Mr. Levy and the Company, as well as certain insurance and other benefits. The Agreement provides for a grant of 5,000 restricted shares of Common Stock, and options to purchase 100,000 shares of Common Stock at a price of $4.43 per share, vesting over three years. The Agreement provides for severance payments to be based on the current year's salary and the preceding year's bonus and to continue for the longer of the remaining term under the Agreement or six months after termination. 1997 STOCK OPTIONS GRANTS The Company strives to distribute stock option awards broadly throughout the organization. Stock option awards are based on the individual's position and contribution to the Company. The Company's long term performance ultimately determines compensation from stock options because stock option value is entirely dependent on the long term growth of the Company's common stock price. The following table sets forth certain information concerning options granted to the Chief Executive Officer and the Named Executive Officers during Fiscal 1997, including information concerning the potential realizable value of such options. -25-
OPTION GRANTS IN LAST FISCAL YEAR Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term (1) ---------------------------------------------------- ----------------------- Number of % of Total # Securities of Options Underlying Granted to Option Employees Exercise Price (3) Expiration Name (#) Year ($/Sh) Date 5%($) 10%($) - ---- ------- -------- --------- ---------- ------- ------ Harvey A. Appelle 150,000 11.4% 2.9375 4/14/2007 277,107 702,243 Herbert L. Ash (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130 Sheridan C. Biggs (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130 Robert H. Cohen (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130 James W. Crystal (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130 Harvey Horowitz 25,000 1.9% 3.9375 6/10/2007 61,907 156,884 Daniel H. Levy (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130 Stuart S. Levy 100,000 7.6% 4.4375 1/28/2007 279,072 707,223 Robert H. Martinsen (2) 15,000 1.1% 3.9375 6/10/2007 37,144 94,130 Lynn Siemers-Cross 150,000 11.4% 2.9375 4/14/2007 277,107 702,243
(1) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the SEC and, therefore, are not intended to forecast possible future appreciation, if any, of the Company's stock price. (2) Represents options granted to Messrs. Ash, Biggs, Cohen, Crystal, Levy, and Martinsen as directors pursuant to the Company's 1994 Non-Employee Director Option Plan. (3) All options were granted at an exercise price equal to the market value of the Company's common stock on the date of grant. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES(1)
Number of Securities Value of Unexercised Underlying Unexercised In-The-Money Shares Options at Options at Acquired December 31, 1997 December 31, 1997 on Exercise Value ---------------------------------- ------------------------- Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable - ---- --------- -------- ----------- ------------- ----------- ------------- Harvey Appelle 0 0 22,500 150,000 0 0 Herbert L. Ash 0 0 15,000 0 0 0 Sheridan C. Biggs 0 0 15,000 0 0 0 Robert H. Cohen 0 0 15,000 0 0 0 James W. Crystal 0 0 27,500 0 0 0 Harvey Horowitz 0 0 22,500 25,000 0 0 Daniel H. Levy 0 0 15,000 0 0 0 Stuart S. Levy 0 0 33,333 66,667 0 0 Robert H. Martinsen 0 0 15,000 0 0 0 Lynn Siemers-Cross 0 0 0 157,500 0 0
- -------------------- (1) All options were granted at an exercise price equal to market value of the common stock on the date of grant. -26- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of March 15, 1998, with respect to beneficial ownership of the Company's Common Stock by: (i) each of the Company's directors, (ii) each of the Company's Named Executive Officers, (iii) each person who is known by the Company beneficially to own more than 5% of the Company's Common Stock, and (iv) all directors and executive officers of the Company as a group. All information in the table below with respect to the Common Stock of the Company has been restated to reflect the two-for-one stock split paid to all holders of Common Stock of record on December 4, 1995.
NAME AND ADDRESS COMMON STOCK OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED -------------------- --------------------- ---------------- Schaenen Fox Capital 859,350(2) 5.7% Management LLC 200 Park Avenue Suite 3900 New York, NY 10166 Putnam Investments, Inc. 1,388,150(2) 9.2% 1 Post Office Square Boston, MA 02109 Pioneering Management Corporation 890,000(2) 5.9% 60 State Street Boston, MA 02109 Harvey A. Appelle 427,100(3) 2.8% Herbert L. Ash 15,500(4) * Sheridan C. Biggs 18,000(5) * Robert H. Cohen 20,000(6) * James W. Crystal 28,500(7) * Harvey Horowitz 50,000(8) * Daniel H. Levy 20,000(9) * Stuart S. Levy 105,000(10) * Robert H. Martinsen 32,000(11) * Lynn Siemers-Cross 327,200(12) 2.2% All directors and officers as a group 974,700 7.1% (11 persons) * Less than 1%.
-27- (1) Except as otherwise indicated, the information as to securities owned by directors, nominees and executive officers was furnished to the Company by such directors, nominees and executive officers. (2) Based on information contained in Schedule 13G filed with the Company. (3) Includes 22,500 shares underlying stock options which have been granted to Harvey A. Appelle pursuant to the Company's 1994 Non-Employee Director Option Plan, which are currently exercisable. Also includes 150,000 shares issued pursuant to Mr. Appelle's employment agreement, which is summarized in this Form 10-K under the caption "Executive Compensation-Employment Agreements". Such options are currently not exercisable. Also includes 69,600 shares of stock issued as part of Fiscal 1997 compensation as described in this Form 10-K under the caption "Executive Compensation" Footnote (6). (4) Includes 15,000 shares underlying options which have been granted to Herbert L. Ash pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (5) Includes 15,000 shares underlying options which have been granted to Sheridan C. Biggs pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (6) Includes 15,000 shares underlying options which have been granted to Robert H. Cohen pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (7) Includes 27,500 shares underlying stock options which have been granted to James W. Crystal pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (8) Includes 22,500 shares underlying stock options which have been granted to Harvey Horowitz pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (9) Includes 15,000 shares underlying options which have been granted to Daniel H. Levy pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (10) Shares issued pursuant to Mr. Levy's employment agreement of January 28, 1997, which is summarized in this Form 10-K under the caption "Executive Compensation-Employment Agreements". Currently one-third of such options are exercisable. (11) Includes 15,000 shares underlying options which have been granted to Robert H. Martinsen pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (12) Includes 7,500 shares granted on April 19, 1996 to Lynn Siemers-Cross pursuant to the Company's 1992 Stock Option Plan and 150,000 shares issued pursuant to Ms. Siemers-Cross' employment agreement which is summarized in this Form 10-K under the caption "Executive Compensation- Employment Agreements". Such options are currently not exercisable. Also includes 25,000 shares of stock issued as part of Fiscal 1997 compensation as described in this Form 10-K under the caption "Executive Compensation" footnote (7). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Crystal is Chairman and President of Frank Crystal & Co., Inc., which provides insurance brokerage services to the Company. Frank Crystal & Co., Inc. received approximately $186,000 in commissions during 1997 for services rendered to the Company. Herbert L. Ash, Esq., partner Hahn & Hessen, LLP provided certain legal services to the Company. Hahn & Hessen, LLP received approximately $13,000 in 1997 for legal services rendered to the Company. -28- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. The following financial statements: Independent Auditors' Report Consolidated Balance Sheets at December 31, 1997 and December 31, 1996 Consolidated Statements of Income for the Fiscal Years ended December 31, 1997, December 31, 1996 and December 2, 1995 Consolidated Statements of Stockholders' Equity for the Fiscal Years ended December 31, 1997, December 31, 1996, and December 2, 1995 Consolidated Statements of Cash Flows for the Fiscal Years ended December 31, 1997, December 31, 1996 and December 2, 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedule Valuation and Qualifying Accounts 3. The Exhibits, which are listed on the Exhibit Index attached hereto. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of Fiscal 1997. -29- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 31, 1998 DONNKENNY, INC. By: /s/ Harvey A. Appelle -------------------------------------- Harvey A. Appelle, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated. Dated: March 31, 1998 /s/ Harvey A. Appelle _________________________________________ Harvey A. Appelle, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) Dated: March 31, 1998 /s/ Herbert L. Ash _________________________________________ Herbert L. Ash, Director Dated: March 31, 1998 /s/ Sheridan C. Biggs _________________________________________ Sheridan C. Biggs, Director Dated: March 31, 1998 /s/ Robert H. Cohen _________________________________________ Robert H. Cohen, Director Dated: March 31, 1998 /s/ James W. Crystal _________________________________________ James W. Crystal, Director Dated: March 31, 1998 /s/ Harvey Horowitz _________________________________________ Harvey Horowitz, Director Dated: March 31, 1998 /s/ Daniel H. Levy _________________________________________ Daniel H. Levy, Director Dated: March 31, 1998 /s/ Stuart S. Levy _________________________________________ Stuart S. Levy, Chief Financial Officer, Vice President-Finance and Assistant Secretary (Principal Financial and Accounting Officer) -30- Dated: March 31, 1998 /s/ Robert H. Martinsen _________________________________________ Robert H. Martinsen, Director Dated: March 31, 1998 /s/ Lynn Siemers-Cross _________________________________________ Lynn Siemers-Cross, President and Chief Operating Officer -31- EXHIBIT INDEX
Exhibit Description Sequentially No. of Exhibit Numbered Page - ------ ----------- ------------- 3.1 Amended and Restated Certificate of Incorporation of Donnkenny, Inc., dated May 15, 1992.1 3.3 Certificate of Ownership and Merger of DHC Holding Corporation into Donnkenny, Inc.1 3.4 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Donnkenny, Inc., dated May 18, 1993.2 3.5 By-laws of Donnkenny, Inc., dated May 18, 1993.2 4.1 Specimen form of Common Stock Certificate.4 10.12 Amended and Restated Donnkenny, Inc. 1992 Stock Option Plan.9 10.13 Form of Indemnification Agreement with Directors and Executive Officers.2 10.14 Donnkenny, Inc. Employees Savings 401(k) Plan.1 10.22 Employment Agreement between Richard Rubin and the Company, dated September 23, 1992.3 10.23 Lease Purchase Agreement among The Industrial Development Authority of Dickenson County, Virginia, Donnkenny, Inc. and the County of Dickenson, Virginia, dated July 31, 1989.3 10.24 Loan Agreement between The Industrial Development Authority of Dickenson County, Virginia and Donnkenny Apparel, Inc., dated as of June 8, 1992.3 10.25 Credit Agreement among Donnkenny Apparel, Inc. the Lenders Named therein and Chemical Bank, as Agent, dated February 2, 1995.5 10.26 Satisfaction and Termination Agreement among Donnkenny, Inc., Donnkenny Apparel, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, and Prudential Reinsurance Company, dated February 2, 1995.5 10.27 Release of Security Interest-Marks among Donnkenny, Inc., Donnkenny Apparel, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company and Prudential Reinsurance Company, dated February 2, 1995.5 10.28 Asset Purchase Agreement between Oak Hill Sportswear Corporation and Donnkenny Apparel, Inc., dated as of May 23, 1995,5 together with Amendment No. 1 thereto, dated as of June 26, 1995.8 10.29 Stock Purchase Agreement among Donnkenny Apparel, Inc. -32- and all of the Shareholders of Beldoch Industries Corporation, dated June 5, 1995.6 10.30 Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries Corporation, the Guarantors Named therein, the Lenders Named therein and Chemical Bank, as Agent, dated June 5, 1995.7 10.31 Employment Agreement between Richard Rubin and the Company, dated November 30, 1995.9 10.32 Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors.9 10.33 Donnkenny, Inc. 1996 Restricted Stock Plan.12 10.34 Stock Purchase Agreement between Donnkenny Apparel, Inc. and Mel Weiss, dated as of September 3, 1996.10 10.35 Employment Agreement between Harvey Horowitz and the Company, dated September 5, 1996.13 10.36 Settlement Agreement between Richard Rubin and the Company, dated December 18, 1996.11 10.37 Rescission Agreement between Donnkenny Apparel, Inc. and the Company, dated December 18, 1996.13 10.38 Employment Agreement between Stuart S. Levy and the Company, dated January 28, 1997.13 10.39 Seventh Amendment, Waiver and Release Agreement, dated as of January 31, 1997, to the Credit Agreement, dated as of June 5, 1995 among the Company, the Lenders Named Therein, the Guarantors Named Therein and the Chase Manhattan Bank.15 10.40 Eighth Amendment Agreement, dated as of April 28, 1997, to the Credit Agreement, dated as of June 5, 1995 among the Company, the Lenders Named Therein, the Guarantors Named Therein and the Chase Manhattan Bank.16 10.41 Employment Agreement between Harvey A. Appelle and the Company, dated April 14, 1997.14 10.42 Employment Agreement between Lynn Siemers-Cross and the Company, dated April 14, 1997.14 10.43 Consultant Agreement between Harvey Horowitz and the Company, dated February 28, 1998. 10.44 Eighth Amendment Waiver dated as of June 5, 1995 to the Credit Agreement, dated as of April 28, 1997 among the Company, the Lenders Named Therein and the Chase Manhattan Bank. 10.45 Tenth Amendment Agreement, dated as of March 31, 1998 to the Credit Agreement, dated as of June 5, 1995 among the Company, the Lenders Named Therein, The Guarantors Named Therein and the Chase Manhattan Bank. 21 Subsidiaries of the Company
1 Incorporated herein by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-48243), as filed with the Commission on May 29, 1992 (the "Registration Statement"). -33- 2 Incorporated herein by reference to Amendment No. 4 to the Registration Statement (Registration No. 33-48243), as filed with the Commission on May 24, 1993. 3 Incorporated herein by reference to Amendment No. 3 to the Registration Statement (Registration Statement No. 33-48243), as filed with the Commission on May 10, 1993. 4 Incorporated herein by reference to Amendment No. 5 to the Registration Statement (Registration No. 33-48243), as filed with the Commission on June 11, 1993. 5 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 3, 1994. 6 Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on June 2, 1995. 7 Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on June 17, 1995. 8 Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on August 8, 1995. 9 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 2, 1995. 10 Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on September 21, 1996. 11 Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on December 19, 1996. 12 Incorporated herein by reference to the Company's 1996 Proxy Statement, filed March 22, 1996. -34- 13 Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 14 Incorporated herein by reference to the Company's Report on Form 10-Q, filed with the Commission on August 6, 1997. 15 Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on February 20, 1997. 16 Incorporated herein by reference to the Company's Report on Form 10-Q, filed with the Commission on May 16, 1997. -35- EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Subsidiary Jurisdiction of Incorporation - ---------- ----------------------------- Christiansburg Garment Company Delaware Donnkenny Apparel, Inc. Delaware Beldoch Industries Corporation Delaware MegaKnits, Inc. New York -36- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Donnkenny, Inc. We have audited the accompanying consolidated balance sheets of Donnkenny, Inc. and subsidiaries as of December 31, 1997 and December 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the fiscal years in the three year period ended December 31, 1997. Our audits also included the financial statements schedule listed in the Index at item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects the financial position of Donnkenny, Inc. at December 31, 1997 and December 31, 1996, and the results of their operations and cash flows for each of the fiscal years in the three year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statements schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP New York, New York March 20, 1998 (March 31, 1998 as to Note 8) F-1 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS CURRENT ASSETS: Cash ........................................................ $ 257 $ 3,998 Accounts Receivable, net of allowances of $720 and $2,240 24,453 29,721 Recoverable income taxes .................................... 1,181 8,625 Inventories ................................................. 27,248 46,793 Deferred tax assets ......................................... 5,109 4,439 Prepaid expenses and other current assets ................... 2,146 1,633 -------- -------- Total current assets ..................................... 60,394 95,209 PROPERTY, PLANT AND EQUIPMENT, NET ............................. 9,620 11,774 INTANGIBLE ASSETS .............................................. 32,446 32,450 -------- -------- TOTAL .......................................................... $102,460 $139,433 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ........................... $ 5,000 $ 50,761 Accounts payable ............................................ 9,320 19,476 Accrued expenses and other current liabilities .............. 7,720 8,055 -------- -------- Total current liabilities ............................... 22,040 78,292 -------- -------- LONG-TERM DEBT ................................................. 22,048 DEFERRED TAX LIABILITIES ....................................... 5,286 5,863 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock $.01 par value; authorized 500 shares, issued none Common stock, $.01 par value; authorized 20,000 shares, issued and outstanding 14,075 and 14,045 shares .. 141 140 Additional paid-in capital .................................. 47,360 46,344 Retained earnings ........................................... 5,585 8,794 -------- -------- Total stockholders' equity ............................... 53,086 55,278 -------- -------- TOTAL .......................................................... $102,460 $139,433 ======== ========
See accompanying notes to consolidated financial statements. F-2 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 2, 1997 1996 1995 ------------ ------------ ------------ NET SALES ............................................................... $ 245,963 $ 255,179 $ 193,306 COST OF SALES ........................................................... 196,633 202,580 142,128 ------------ ------------ ------------ Gross Profit ..................................................... 49,330 52,599 51,178 OPERATING EXPENSES: Selling, general and administrative expenses ........................ 45,867 57,603 34,000 Amortization of goodwill and other related acquisition costs ................................................ 1,204 1,449 985 Restructuring charge ................................................ 1,723 2,815 ------------ ------------ ------------ Operating income (loss) .......................................... 536 (6,453) 13,378 OTHER EXPENSE: Interest expense (net of interest income of $500 in 1997) ........... 4,955 5,154 4,135 ------------ ------------ ------------ (Loss) income before income taxes ................................ (4,419) (11,607) 9,243 INCOME TAX (BENEFIT) PROVISION .......................................... (1,210) (3,319) 3,996 ------------ ------------ ------------ NET (LOSS) INCOME ....................................................... $ (3,209) $ (8,288) $ 5,247 ============ ============ ============ Basic (loss) income per common share ................................ $ (0.23) $ (0.59) $ 0.38 ============ ============ ============ Shares used in the calculation of basic (loss) income per common share ................................ 14,070,000 14,012,000 13,910,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 DONKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ADDITIONAL TOTAL PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS EQUITY --------- ------ ---------- -------- ------------- BALANCE, DECEMBER 3, 1994 ........................ $ $ 137 $ 43,585 $ 14,104 $ 57,826 Exercise of stock options .................... 2 2,159 2,161 Net income ................................... 5,247 5,247 -------- -------- -------- -------- -------- BALANCE, DECEMBER 2, 1995 ........................ 139 45,744 19,351 65,234 Net loss - December 3, 1995 to December 31, 1995 (Note 2) ................ (2,269) (2,269) Exercise of stock options .................... 1 600 601 Net loss - year ended December 31, 1996 .................................. (8,288) (8,288) -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1996 ....................... 140 46,344 8,794 55,278 Issuance of Common Stock...................... 1 116 117 Tax benefit attributable to the exercise of stock options................................ 900 900 Net loss.................................. (3,209) (3,209) -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1997 ....................... $ $ 141 $ 47,360 $ 5,585 $ 53,086 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 2, 1997 1996 1995 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ........................................................ $ (3,209) $ (8,288) $ 5,247 Adjustments to reconcile net cash provided by (used in) operating activities: Deferred income taxes .................................................. (1,247) (2,449) 1,279 Depreciation and amortization of fixed assets .......................... 1,770 1,911 1,889 Amortization of inventory step up ...................................... 1,905 Amortization of intangibles and other assets ........................... 1,204 1,449 985 Write down of fixed assets ............................................. 260 Provision for losses on accounts receivable ............................ 282 231 1,065 Changes in assets and liabilities, net of the effects of acquisitions and disposals: Decrease (increase) in accounts receivable ............................. 4,986 876 (9,601) Decrease (increase) in recoverable income taxes ........................ 7,444 (127) (4,613) Decrease in inventories ................................................ 19,545 3,458 2,138 (Increase) decrease in prepaid expenses and other current assets ................................................ (513) 1,378 289 (Decrease) increase in accounts payable ................................ (10,156) 8,116 (6,286) (Decrease) increase in accrued expenses and other current liabilities ........................................... (335) (796) 3,012 -------- -------- -------- Net cash provided by (used in) operating activities .......................................................... 20,031 5,759 (2,691) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ................................................. (516) (1,016) (962) Proceeds from sale of fixed assets ....................................... 640 Increase in intangibles .................................................. (1,200) Acquisitions, net of cash acquired ....................................... (29,715) -------- -------- -------- Net cash used in investing activities ............................... (1,076) (1,016) (30,677) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt .............................................. (12,253) (7,100) (13,711) Proceeds of long-term debt ............................................... 25,000 Net (repayments) borrowings under revolving credit line .................. (11,460) 290 21,000 Proceeds from exercise of stock options .................................. 600 2,161 Issuance of common stock.................................................. 117 Tax benefit attributable to exercise of stock options..................... 900 -------- -------- -------- Net cash (used in) provided by financing activities .......................................................... (22,696) (6,210) 34,450 -------- -------- -------- NET (DECREASE) INCREASE IN CASH .............................................. (3,741) (1,467) 1,082 CASH, AT BEGINNING OF PERIOD ................................................. 3,998 5,465 1,606 -------- -------- -------- CASH, AT END OF PERIOD ....................................................... $ 257 $ 3,998 $ 2,688 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 DONNKENNY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 2, 1995, DECEMBER 31, 1996 AND DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS -- The Company designs, manufactures, imports and markets a broad line of moderately priced women's sportswear and sleepwear. In addition, the Company manufactures, imports and markets men's, women's and children's sportswear and intimate apparel featuring various licensed cartoon character images. The Company's products are primarily sold throughout the United States by department stores, specialty stores, and chain stores. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Donnkenny, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. CHANGE IN YEAR END -- In September 1996, the Company adopted December 31 as its fiscal year end. Prior to 1996, the Company's fiscal year ended on the first Saturday in the month of December. Summarized statement of operations and cash flow data for the transition period from December 3, 1995 through December 31, 1995 (the "Transition Period") is included herein (See Note 2). INVENTORIES -- Inventories are stated at the lower of cost or market using the first-in, first-out method (FIFO) (see Note 4). PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, where applicable, the term of the lease, if shorter (see Note 5). Estimated useful lives are as follows: Buildings 9 to 38 years Machinery and equipment 3 to 10 years Furniture and fixtures 7 to 10 years Leasehold improvements 7 to 10 years (or lease term if shorter) INTANGIBLE ASSETS -- Goodwill, which represents the excess purchase price over fair value of net assets acquired relates to the acquisition of the Company in 1989 following a change in control, and the sportswear divisions of Oak Hill Sportswear Corporation ("Oak Hill") and Beldoch Industries Corp. ("Beldoch") in 1995. Goodwill is amortized on a straight-line basis over the expected periods to be benefited, ranging from 20 to 40 years. Also included in intangible assets are organizational expenses and costs related to licenses acquired by the Company, which are being amortized using the straight-line method over periods of 5 to 20 years, respectively (see Note 6). F-6 ASSESSMENT OF ASSET IMPAIRMENT -- The Company periodically assesses the recoverability of the carrying value of long-lived assets, including identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment of recoverability of the carrying amount of an asset is based on estimated undiscounted future cash flows from the use of the asset and eventual disposition. If the estimated undiscounted future cash flows are less than the carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the fair value of the asset. The Company assesses the recoverability of goodwill by determining whether the amortization of goodwill over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operations or assets. If the estimated cash flows are less than the carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the estimated discounted cash flows. INCOME TAXES -- The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which is an asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. SFAS No. 109 requires that deferred tax assets are to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized (see Note 9). STOCK SPLIT -- On November 17, 1995, the Board of Directors authorized a two-for-one stock split that was paid to all holders of record on December 4, 1995. All references in the accompanying consolidated financial statements to number of shares, per share amounts, and prices of the Company's common stock for periods prior to December 4, 1995 have been restated to reflect the stock split. FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amount of significant financial instruments, which includes accounts receivable, accounts payable and accrued expenses, all approximated fair value as of December 31, 1997 and December 31, 1996 due to their short-term maturities. Long-term debt approximates fair value due to its variable interest rate. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (such as accounts receivable, inventories, restructuring reserves, and valuation allowances for income taxes), and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" which is effective for periods beginning after December 15, 1997. SFAS No. 131 requires that public companies report certain information about operating segments in their annual financial statements and in condensed financial statements of interim periods issued to shareholders. This statement also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is currently reviewing the impact of this statement on its current level of disclosure. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which is effective for fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This statement standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. The Company is currently reviewing the impact of this statement on its current level of disclosure. F-7 2. TRANSITION PERIOD The following information represents the condensed consolidated income statement and cash flow information for the transition period from December 3, 1995 to December 31, 1995: INCOME STATEMENT DATA Net sales ......................... $ 6,838 Gross profit ...................... 915 Operating expenses ................ 4,339 Operating loss .................... (3,424) Other expense ..................... (422) Net loss before income tax benefit (3,846) Net loss .......................... (2,269) CASH FLOW DATA Cash flow from operating activities $ 7,827 Cash flow from investing activities (11) Cash flow from financing activities (5,039) Net increase in cash .............. 2,777 Cash at beginning of period ....... 2,688 Cash at end of period ............. 5,465 3. ACQUISITIONS In June 1995, the Company acquired all of the issued and outstanding shares of Beldoch for $13,000 in cash and a $2,000 note payable due within one year of the closing date, bearing interest at 6%. The transaction was financed with long-term borrowings (see Note 8). The Company is obligated to pay the former owners additional consideration if certain financial results are achieved through 1998. In 1997, the Company paid $1,200, which was recorded as goodwill, and is being amortized over the remainder of the 20 year period subsequent to the acquisition. In July 1995, the Company completed the purchase of certain assets of Oak Hill for $14,600, financed by additional borrowings under the Company's revolving credit line. The excess of the purchase price over the fair market value of net assets acquired was recorded as goodwill and is being amortized over 20 years. The operating results of each acquisition are included in the Company's consolidated results of operations from the respective date of acquisition. The following unaudited pro forma information assumes the acquisitions of Beldoch and Oak Hill were completed as of the beginning of 1995. These results have been presented for comparative purposes only and do not purport to be indicative of results that would have occurred if the acquisitions had been made at the beginning of 1995, or results that may occur in the future. F-8 1995 -------- Net sales ............................................. $248,698 Operating income ...................................... 8,666 Net income ............................................ 384 Basic earnings per share .............................. 0.03 4. INVENTORIES Inventories consist of the following at December 31, 1997 and December 31, 1996: 1997 1996 ------- ------- Raw materials .......................... $ 4,209 $12,081 Work in process ........................ 5,584 4,808 Finished goods ......................... 17,455 29,904 ======= ======= $27,248 $46,793 ======= ======= If the first-in, first-out method of inventory valuation had been used at December 31, 1996, rather than the last-in, first-out method for certain divisions, inventories would have been approximately $404 higher than reported. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment consist of the following at December 31, 1997 and December 31, 1996: 1997 1996 ------- ------- Land and land improvements ..................... $ 740 $ 747 Buildings and improvements ..................... 8,476 8,691 Machinery and equipment ........................ 7,162 8,787 Furniture and fixtures ......................... 1,693 1,342 ------- ------- 18,071 19,567 Less accumulated depreciation and Amortization ................................ 8,451 7,793 ======= ======= $ 9,620 $11,774 ======= ======= F-9 6. INTANGIBLE ASSETS Intangible assets consist of the following at December 31, 1997 and December 31, 1996: 1997 1996 ------- ------- Goodwill $33,485 $32,059 Licenses 6,325 6,550 ------- ------- 39,810 38,609 Less accumulated amortization 7,364 6,159 ======= ======= $32,446 $32,450 ======= ======= 7. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other current liabilities consist of the following at December 31, 1997 and December 31, 1996: 1997 1996 ------ ------ Accrued Salaries, Benefits and Bonus $2,565 $3,127 Accrued Restructuring Expenses 1,503 0 Other Accrued Expenses 3,652 4,928 ====== ====== Total Accrued Expenses $7,720 8,055 ====== ====== 8. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997 and December 31, 1996: 1997 1996 ------- ------- Revolving Credit Borrowings (a) $21,540 $33,000 Senior Term Loan (b) 5,508 17,500 Other -- 261 ------- ------- 27,048 50,761 Less current maturities 5,000 50,761 ======= ======= $22,048 $ -- ======= ======= On April 30, 1997 the Company entered into an amended Credit Facility (the "Credit Facility") to, among other things, include the Company's operating subsidiaries Donnkenny Apparel, Inc., Megaknits Inc. and Beldoch Industries Corporation, as borrowers. The Credit Facility consists of a Term Loan, a Revolving Credit Agreement, and a Factoring Agreement. The purpose of the Credit Facility is to continue to finance increased working capital needs of the Company following the 1995 Beldoch and Oak Hill acquisitions and for general working capital purposes including the issuance of letters of credit. The Credit Facility will expire on March 31, 1999. Under the Credit Facility, F-10 The Chase Manhattan Bank serves as agent (and holds a 35% interest), the CIT Group/Commercial Services Inc. ("CIT") serves as collateral agent (and holds a 15% interest), and each of Fleet Bank, N.A. and the Bank of New York are co-lenders (each holding a 25% interest). (a) As of December 31, 1997, borrowings under the Revolving Credit Agreement amounts to $21.5 million. The total amount available under the Revolving Credit Agreement is $85 million subject to an asset based borrowing formula, with sublimits of $70 million for direct borrowings and $35 million for letters of credit. The interest rate is equal to the prime rate (8.5% at December 31, 1997) plus 1 1/2% per annum. Outstanding borrowings under the Revolving Credit Agreement in excess of an allowable overadvance bear interest at the prime rate plus 3 1/2%. The Revolving Credit Agreement also requires the Company to pay certain letter of credit fees and unused commitment fees. Advances and letters of credit are limited to (i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance. (b) As of December 31, 1997, the balance of the Term Loan is $5.5 million. The interest rate is equal to the prime rate (8.5% at December 31, 1997) plus 1 1/2% per annum and the amortization schedule calls for quarterly payments of approximately $1.3 million. The balloon payment, which is due on March 31, 1999 has been reduced from $7.5 million to $0.5 million primarily from the proceeds of tax refunds received by the Company in 1997. An excess cash flow recapture is payable annually within 15 days after receipt of the Company's audited fiscal year-end financial statements. The default interest rate, if applicable, is equal to 2% above the otherwise applicable rate. The Term Loan does not carry any prepayment penalty. In April, 1997, the Company also entered into a Factoring Agreement with CIT. The Factoring Agreement provides for a factoring commission equal to 0.45% of the gross amount of sales, plus certain customary surcharges. An additional fee of 0.20% was paid upon the conversion to a factored receivable arrangement. Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc., Beldoch Industries Corporation, and Megaknits, Inc. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with a maximum cumulative net loss test. At December 31, 1997, the Company was not in compliance with the covenant related to the maximum cumulative net loss test. On March 31, 1998, The Chase Manhattan Bank, as agent, issued a waiver for the violation of this covenant. Additionally, on March 31, 1998, the Credit Facility was amended to provide for a sublimit for direct borrowings of $60 million; a letter of credit line of $35 million; and required seasonal overadvances as requested by the Company. Any tax refunds received applicable to 1997 and prior years and proceeds from the sale of fixed assets are to be applied to reduce the balloon payment on the Term Loan. F-11 9. INCOME TAXES Income tax expense (benefit) for 1997, 1996 and 1995 is comprised of the following:
1997 1996 1995 ------- ------- ------ Current: Federal .................... $(1,537) $(1,462) $2,241 ------ State and local ............ 35 592 476 ------ Deferred ....................... 292 (2,449) 1,279 ------- ------- ------ $(1,210) $(3,319) $3,996 ======= ======= ======
A reconciliation of the statutory Federal tax rate and the effective rate follows:
1997 1996 1995 ---- ---- ---- Federal statutory tax rate ....................... (34)% (35)% 35% -- State and local taxes, net of Federal income tax benefit...................................... (3) (2) 4 Losses providing no state and local tax benefit.......................................... 4 4 Amortization of nondeductible goodwill ........... 5 3 3 -- Other ............................................ 1 1 1 --- --- -- (27)% (29)% 43% === === ==
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, DECEMBER 31, 1997 1996 ------- ------- Deferred tax assets: Accounts receivable allowances ............................ $ 470 $ 662 Inventory valuation ...................................... 1,991 2,356 Accrued expenses .......................................... 1,546 584 Restructuring charges ..................................... -- 448 State operating loss carryforwards ........................ 614 634 Federal operating loss carryforwards ...................... 822 Other ..................................................... 131 182 ------- ------- Total gross deferred tax assets ........................... 5,574 4,866 Less valuation allowance .................................. (465) (427) ------- ------- Total net deferred tax assets ............................ 5,109 4,439 ------- ------- Deferred tax liabilities: Property, plant and equipment ............................. (1,958) (2,294) Intangibles ............................................... (3,328) (3,569) ------- ------- Total gross deferred tax liabilities ...................... (5,286) (5,863) ------- ------- Net deferred tax liability ................................ $ (177) $(1,424) ======= =======
F-12 As of December 31, 1997 and December 31, 1996, the Company had deferred tax assets attributable to accounts receivable allowances, inventory valuation reserves, accrued expenses and other items. The Company considers these deferred tax assets to be fully realizable at the Federal tax level based upon the Company's anticipated future earnings and because many of these items are expected to reverse within the next twelve months. As of December 31, 1997 and December 31, 1996, the Company recorded a valuation allowance for a portion of its state net operating loss carryforwards. As of December 31, 1997, the following Federal and state net operating loss carryforwards were available: Net Operating Losses -------------------- Expiration Dates Federal State ----------------------------------------------- 2003 $1,676 $ - 2011 - 6,070 2012 742 5,550 During the fourth quarter of the fiscal year ended December 31, 1997, the Company recorded interest income of $500 related to prior year carry-back claims. 10. COMMITMENTS AND CONTINGENCIES a. In November 1996, ten designated class action lawsuits were commenced against the Company and certain former officers in the United States District Court for the Southern District of New York. The complaints in these actions allege various violations of the federal securities laws and seek an unspecified amount of monetary damages and other monetary relief. These actions have now been consolidated pursuant to court order and the plaintiffs filed a consolidated amended complaint. The Company is not presently in a position to determine the ultimate outcome of these legal proceedings or their impact on the financial condition of the Company. In September 1996, the Securities and Exchange Commission ("SEC") obtained an order directing a private investigation of the Company in connection with, among other things, the alleged overstatement of revenues and expenses for certain reporting periods. The Company is continuing to cooperate with the SEC's ongoing investigation which became a formal investigation in the latter part of 1996. b. In connection with contingent liabilities arising from the alleged inaccuracies in the Company's reporting of revenues and expenses for certain reporting periods, the Company has agreed to deposit $5,000 over a three year period to help defray claims, if any. c. Rental expense for operating leases for the fiscal years ended December 31, 1997, December 31,1996 and December 2, 1995 approximated $4,505, $5,207, and $2,996, respectively. Minimum future rental payments as of December 31, 1997 for operating leases with initial noncancelable lease terms in excess of one year, are as follows: YEAR ENDING DECEMBER 31, AMOUNT ------------ ------ 1998 .......... $ 3,683 1999 .......... 3,309 2000 .......... 2,445 2001 .......... 1,998 2002 .......... 1,851 Thereafter .... 8,640 ------- $21,926 d. At December 31, 1997, the Company was contingently liable on outstanding letters of credit issued amounting to $20,917. 11. EMPLOYEE BENEFIT PLAN The Company sponsors an Employees' Savings 401(k) Plan (the "Plan") covering substantially all of its employees. Contributions to the Plan are made by the Company at the discretion of the Board of Directors. The Company did not make contributions to the Plan in 1997, 1996, and 1995, except for the payment of administrative costs. 12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share, for the years ended December 31, 1997, December 31, 1996 and December 2, 1995: 1997 1996 1995 Number of shares on which basic earnings ---- ---- ---- per share is calculated: Average outstanding during the period 14,070 14,012 13,910 Add-incremental shares under stock compensation plans 0 0 76 -------- -------- ------- Number of shares on which diluted earnings per share is calculated 14,070 14,012 13,986 ======== ======== ======= Net (loss) income $ (3,209) $ (8,288) $ 5,247 ======== ======== ======= Basic (loss) income per share $ (0.23) $ (0.59) $ 0.38 ======== ======== ======= Diluted (loss) income per share $ (0.23) $ (0.59) $ 0.38 ======== ======== ======= Stock options to purchase 311,500 shares in the year ended December 2, 1995, were outstanding, but not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares, and therefore, the effect would be antidilutive. In the years ended December 31, 1997 and 1996, the incremental shares under stock plans were not considered for the diluted earnings per share calculation due to their antidilutive effect. As such, the amounts reported for basic and diluted earnings per share are the same. 13. SUPPLEMENTAL CASH FLOW INFORMATION a. Cash paid for interest and income taxes was $5,692 and $0, respectively, in 1997, $4,960 and $2,990, respectively, in 1996 and $3,993 and $7,409, respectively, in 1995. b. In connection with the acquisition of all the issued and outstanding shares of Beldoch and certain assets of Oak Hill for $32,400 (inclusive of a $2,000 note payable), the Company acquired assets with a fair value of $38,241 and assumed liabilities of $9,987 and recorded goodwill of $4,146. F-13 14. STOCK OPTIONS The Company has a stock award and incentive program that permits the issuance of up to 2,000,000 options on terms as determined by the Board of Directors. Under the terms of the plan, options granted may be either non-qualified or incentive stock options and the exercise price, determined by the Stock Option Committee, may not be less than the fair market value of a share on the date of the grant. Information regarding the Company's stock option plan is summarized below:
1997 1996 1995 --------------------------- ---------------------------- ------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- --------------- ----------- --------------- ---------- -------------- Outstanding at beginning of the year ............................... 658,800 $10.51 543,600 $ 8.26 727,000 $ 7.55 Granted .................................... 1,300,500 3.73 216,350 18.15 198,000 8.14 Exercised .................................. 0 0 (76,100) 7.89 (323,200) 6.69 Canceled ................................... (298,650) 9.26 (25,050) 12.80 (58,200) 8.03 ---------- --------------- ----------- --------------- ---------- -------------- Outstanding at end of year ................. 1,660,650 5.42 658,800 11.38 543,600 8.26 ========== =========== =========== Exercisable at end of year ................. 234,800 268,100 130,000 ========== =========== =========== Available for grant at year end ............ 240,050 1,341,200 1,456,400 ========== =========== ===========
The options outstanding at December 31, 1997 range in price as follows: # OF OPTIONS EXERCISE PRICE ------------ -------------- 402,900 $ 1.8064- 3.6125 965,000 $ 3.6126- 5.4188 ------------ 81,000 $ 7.2251- 9.0313 ------------ 21,200 $ 9.0313-10.8375 ------------ 55,000 $10.8376-12.6438 ------------ 135,550 $16.2564-18.0625 ============ 1,660,650 ============ The Company applies Accounting Principles Board Opinion No. 25, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans because the exercise price for stock options granted equaled the market price of the underlying stock at the date of grant. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share for the years ended December 31, 1997, December 31, 1996 and December 2, 1995 would have been reduced to the pro forma amounts indicated below: F-14
1997 1996 1995 ------------- ------------ --------- Net (loss) income: As reported ......................................................... $(3,209) $(8,288) $5,247 ======= ======= ====== Pro forma ........................................................... $(3,834) $(8,414) $5,185 ======= ======= ====== Basic net (loss) income per share: As reported ......................................................... $ (0.23) $ (0.59) $ 0.38 ======= ======= ====== Pro forma ........................................................... $ (0.27) $ (0.60) $ 0.37 ======= ======= ======
The weighted average fair value of the options granted during 1997, 1996 and 1995 were $2.37, $10.49 and $4.29, respectively. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 0% for all periods, volatility of 55%, 47% and 36%, risk-free interest rate of 6.51%, 6.90% and 6.41%, and an expected life of 7 years. 15. RESTRICTED STOCK AND WARRANTS Restricted Stock In 1996, the Company adopted a plan to issue up to 1,000,000 shares of restricted stock to employees of the Company. During 1997, 305,000 shares were granted to employees of the Company at no cost to the employees. Of the total number of restricted shares granted, 5,000 shares vested and were issued upon the date of grant at the fair market value of $2.94 per share. The remaining 300,000 restricted shares were granted at a per share price of $2.94 and vest as follows: 60,000 shares on March 31, 1999, and 240,000 shares on March 31, 2000. Compensation cost recorded in 1997 was $233,000, which represents the amortization of the value of the restricted stock award at the date of grant over the vesting period. Warrants On January 14, 1997 the Company issued warrants to purchase 75,000 shares of Common Stock at $5.00 per share to the principal of a company to rescind an acquisition transaction. The warrants are immediately exercisable and will expire July 23, 2004. 16. RESTRUCTURING CHARGES In the fourth quarter of 1997, the Company decided to discontinue the manufacture and sale of Mickey & Co. Licensed Character product line under a license agreement with the Disney Enterprises, Inc. and recorded a pre-tax restructuring charge of $1,723 and a charge to cost of goods sold of $548 for the write-down of merchandise inventories. The restructuring charge included: payments due under agreements with the licensor; write-downs of property, plant and equipment; costs related to lease terminations; employee severance payments; and other incremental charges which were primarily attributable to discontinuing the Licensed Character product lines. During the fourth quarter of 1995, the Company adopted a plan of restructuring and recorded a pretax charge of $2,815. The key elements of the restructuring plan included the costs associated with the consolidation of certain manufacturing facilities and the discontinuance of certain product lines. The restructuring provision included estimated costs of asset write-downs, lease terminations and other charges. 17. BUSINESS CONCENTRATIONS Substantially all of the Company's sales are made to customers in the United States. Sales to one chain store retailer accounted for approximately 15%, 19% and 15% of the Company's sales in Fiscal 1997, 1996 and 1995, respectively. No other customers accounted for more than eight percent of the Company's sales in fiscal 1997, 1996 and 1995, and no account receivable from any customer exceeded $4,408 at December 31, 1997. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. F-15 DONNKENNY, INC. INDEX TO FINANCIAL STATEMENT SCHEDULE Schedule II Valuation and Qualifying Accounts SCHEDULE II DONNKENNY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts For the Fiscal Years ended December 31, 1997, December 31, 1996, and December 2, 1995
BALANCE OF CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES DEDUCTIONS PERIOD --------------------------------------------------- -------------- Year ended December 31, 1997: Reserve for bad debts $ 968,000 (175,000) 282,000 $ 511,000 Reserve for discounts 1,272,000 3,872,000 4,935,000 209,000 -------------- -------------- $2,240,000 $ 720,000 ============== ============== Year ended December 31, 1996: Reserve for bad debts $ 897,000 233,000 162,000 $ 968,000 Reserve for discounts 1,112,000 6,357,000 6,197,000 1,272,000 -------------- -------------- $2,009,000 $ 2,240,000 ============== ============== Year ended December 2, 1995: Reserve for bad debts $ 468,000 795,000 666,000 $ 597,000 Reserve for discounts 413,000 3,686,000 2,750,000 1,349,000 -------------- -------------- $ 881,000 $ 1,946,000 ============== ==============
EX-10.43 2 CONSULTANT AGREEMENT CONSULTANT AGREEMENT AGREEMENT dated as of February 28, 1998 between Donnkenny Apparel, Inc. (the "Company") and Harvey Horowitz ("Horowitz"). W I T N E S S E T H : WHEREAS, by Employment Agreement dated as of September 5, 1996, Company agreed to employ Horowitz on the terms and conditions set forth in such Employment Agreement, and WHEREAS, Company and Horowitz have determined to terminate such Employment Agreement effective February 28, 1998 in its entirety, and WHEREAS, Company desires to employ Horowitz as consultant to perform the services set forth below in accordance with the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained it is agreed: 1. The Employment Agreement between Company and Horowitz dated as of September 5, 1996 is hereby terminated effective as of February 28, 1998. All sums due thereunder are acknowledged to have been paid, and the parties by their signatures below, release each other from any obligations thereunder. Company's pre-existing obligation to indemnify Horowitz against his proper acts as an officer and director of Company shall continue in effect and shall not be diminished as a consequence of entering into this Agreement. 2. Commencing March 1, 1998 and terminating December 31, 1999, Company hereby employs Horowitz to consult with it and Horowitz shall consult with the officers of Company concerning legal matters arising out of the business affairs of Company. -1- 3. Horowitz shall provide advice with respect to such legal matters and, at the instance of the officers of Company from time to time, shall negotiate or supervise negotiation or litigation of legal matters including that certain class action law suit entitled In Re Donnkenny Apparel, Inc. Securities Litigation which Horowitz shall oversee, at the instance of such officers, to its conclusion (notwithstanding such conclusion might occur beyond December 31, 1999). 4. The particular amount of time devoted by Horowitz may vary from day to day or week to week but shall generally be similar to the time devoted by Horowitz to duties as general counsel to Company prior to and during the time the Employment Agreement was in force. Notwithstanding the foregoing: (a) it is understood that Horowitz will be serving in a supervisory and consultant's role; and (b) in the final analysis Horowitz may utilize his reasonable good faith judgment as to the amount of time required. 5. Company will pay Horowitz the sum of $35,000 per month for the month of March 1998, $30,000 per month for the balance of calendar year 1998, and $25,000 per month for each calendar month of 1999, payable in advance on first of the month. Horowitz will also be paid for extraordinary travel expenses if travel is required by Company and approved in advance by the Chief Executive Officer or Chief Operating Officer. 6. Company shall use its best efforts to cause Horowitz to be nominated for election as a member of its Board of Directors at the annual meeting of its shareholders to take place during calendar year 1998. Commencing March 1st, 1998, so long as Horowitz is serving as a member of the Board of Directors, he shall be compensated as an outside director. 7. Horowitz will be entitled to participate in: (a) Company's executive health insurance plan at the Company's expense for the period ended December 31, 1998, and (b) the Company's Long Term Group Disability Insurance ("LTGDI") until December 31, 1999, unless -2- Horowitz obtains similar coverage before that date; provided Horowitz can be included therein. If not, Company shall pay on Horowitz' behalf monthly premiums for Long Term Disability Insurance up to the amount of the current premium allocable to him for the Company's LTGDI until December 31, 1999. Company shall also reimburse Horowitz in the sum of up to $2,000 for each year hereunder for Term Life Insurance for the period ended December 31, 1999. 8. (a) This Agreement shall terminate in the event Horowitz shall be unable for a period of three (3) consecutive months or for periods aggregating more than 20 weeks in any 52 week period to perform the services provided for herein. Should Company terminate this Agreement as a result of such inability to perform, compensation hereunder shall be paid until the end of the sixth (6th) month after which termination occurs but not for any period after December 31, 1999. Horowitz shall be considered unable to perform the services provided for herein if he is unable to attend to the duties required of him. Upon completion of the termination payments provided for in this paragraph, all of Company's obligations to pay compensation under this Agreement shall cease. (b) If Horowitz shall die during the term of employment, this Agreement shall terminate at the end of the month in which Horowitz' death takes place and Horowitz' estate shall continue to receive the compensation specified herein until the end of such month. (c) "Cause" shall be defined to mean (i) fraud, dishonesty or similar malfeasance, (ii) substantial refusal to comply or default in complying with Company's reasonable directions and/or failure to comply or perform any of the material terms and/or obligations of this Agreement and such refusal, default or failure continues for a period of more than ten (10) days after receipt by Horowitz of notice from Company setting forth in reasonable detail the activity by Horowitz which Company deems to be cause for termination of this Agreement or (iii) -3- Horowitz' alcohol or drug abuse. In case of Cause, Company may terminate this Agreement by notice to Horowitz. (d) This Agreement shall also terminate should Horowitz accept employment other than as an attorney with a firm engaged in the practice of law. Should Horowitz obtain employment as an attorney engaged in the practice of law, the services rendered to Company by Horowitz or any firm in which he is an employee, partner or member shall be covered by this Agreement unless otherwise agreed in advance by the Board of Directors of the Company. Notwithstanding the foregoing on termination due to the occurrence of the event set forth in this Section 8(d), Company shall pay Horowitz the sums set forth in Section 5 hereof through December 31, 1999 or until such payments reach $420,000, whichever sooner occurs, provided, however, should Horowitz violate Section 11 hereof, notwithstanding any remedy Company may have with respect to such violation, it shall pay Horowitz the sums set forth in Section 5 until the earlier of the date which is six (6) months from his acceptance of such employment or December 31, 1999; and provided further, however, that should Horowitz violate Section 10, 11(b)(ii), 11(c) or 12 hereof, all payments shall immediately cease. 9. Horowitz will act as an independent contractor in the performance of his duties under this Agreement. Accordingly, Horowitz shall be responsible for payment of all taxes including Federal, State and local taxes arising out of Horowitz' activities relating to this contract, including by way of illustration but not limitation, Federal and State income tax, Social Security tax, Unemployment Insurance taxes, and any other taxes or business license fees as required. -4- 10. Horowitz will not at any time, directly or indirectly, disclose or furnish to any other person, firm or corporation: (a) any information concerning the methods of conducting or obtaining business, of manufacturing or advertising products, or of obtaining customers of Company; (b) any confidential information acquired by him during the course of his employment by Company, including, without limiting the generality of the foregoing, the names of any customers or prospective customers of, or any person, firm or corporation who or which have or shall have traded or dealt with, Company (whether such customers have been obtained by Horowitz or otherwise); and/or (c) any confidential information relating to the products, designs, styles, processes, discoveries, materials, ideas, creations, inventions or properties of Company. 11. (a) During the term of this Agreement, Horowitz shall not engage, directly or indirectly, in any business which is competitive with the business now or at any time during the term of this Agreement conducted by Company. (b) During the term hereof and for the period that any payments are made pursuant hereto, Horowitz shall not: (i) engage, directly or indirectly, within the United States of America in any apparel business involving ladies' or children's wearing apparel which is directly competitive with the business conducted by Company; or (ii) directly or indirectly, on behalf of himself or any business in which he may, directly or indirectly, be engaged, recruit, solicit, induce (or attempt to induce), or have any part in, the diversion of any of Company's employees or sales representatives from their relationships with the Company or retain or employ any of Company's employees or sales representatives. -5- (c) Horowitz shall not at any time, during or after the termination of this Agreement, engage in any business which uses as its name, in whole or in part, "Donnkenny" or any other name used by Company during or prior to the term hereof. For the purposes of this paragraph 11, Horowitz will be deemed directly or indirectly engaged in a business if he participates in such business as proprietor, partner, joint venturer, stockholder, director, officer, lender, manager, employee, consultant, advisor or agent or if he controls such business. Horowitz shall not for purposes of this paragraph be deemed a stockholder or lender if he holds less than two (2%) percent of the outstanding equity or debt of any publicly owned corporation engaged in the same or similar business to that of Company, provided that Horowitz shall not be in a control position with regard to such corporation. 12. As between Horowitz and Company, all products, designs, styles, processes, discoveries, materials, ideas, creations, inventions and properties, whether or not furnished by Horowitz, created, developed, invented, or used in connection with Horowitz' employment hereunder or prior to this Agreement, will be the sole and absolute property of Company for any and all purposes whatever in perpetuity, whether or not conceived, discovered and/or developed during regular working hours. Horowitz will not have, and will not claim to have, under this Agreement or otherwise, any right, title or interest of any kind or nature whatsoever in or to any such products, designs, styles, processes, discoveries, materials, ideas, creations, inventions and properties. 13. Notices: Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by overnight nationally recognized courier service or by hand, as follows: -6- As to Horowitz: Harvey Horowitz, Esq. 239 East 79th Street New York, New York 10021 As to Company: Donnkenny Apparel, Inc. 1411 Broadway New York, New York 10018 Attn: Harvey Appelle, Chairman and Chief Executive Officer with a copy to: Hahn & Hessen LLP 350 Fifth Avenue, Suite 3700 New York, New York 10118 Attn: Herbert L. Ash, Esq. or to such other address as either party hereto may designate by notice given in accordance with this Agreement. 14. A party hereto may not assign this Agreement or any rights or obligations hereunder without the consent of the other party hereto; provided, however, that upon the sale or transfer of all or substantially all of the assets of Company, or upon the merger by Company into, or the combination with, another corporation, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, as the case may be. The provisions of this Agreement where applicable are binding upon the heirs of Horowitz and upon the successors and assigns of the parties hereto. 15. Waiver by either party of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent breach by such other party. 16. As used in this Agreement the term "Company" shall also include any subsidiary or affiliate of Company. -7- 17. Any controversy arising out of or relating to this Agreement, including any modification or amendment thereof, shall be resolved by arbitration in the City of New York, pursuant to the rules then obtaining of the American Arbitration Association. The arbitrators sitting in any controversy shall have no power to alter or modify any express provision of this Agreement, or make any award which by its terms effects such alteration or modification. The parties consent to the application of the New York or Federal Arbitration Statutes and to the jurisdiction of the Supreme Court of the State of New York, and of the United States District Court of the Southern District of New York, for judgment on an award and for all other purposes in connection with said arbitration and further consent that any notice, process or notice of motion or other application to either of said Courts or Judges thereof, or of any notice in connection with any arbitration hereunder, may be served in or out of the State or Southern District of New York by certified or registered mail, return receipt requested, or by personal service, provided a reasonable time for appearance is allowed, or in such manner as may be permitted under the rules of the American Arbitration Association or of either of said Courts. Judgment upon the award rendered may be entered by any Court having jurisdiction. Any provisional remedy which, but for this provision to arbitrate disputes, would be available at law, shall be available to the parties hereto pending the final award of the arbitrators. The parties hereto recognize that irreparable damage may result to the Company and its business and properties if Horowitz fails or refuses to perform his obligations under this Agreement and that the remedy at law for any such failure or refusal may be inadequate. Accordingly, notwithstanding any other provisions hereof to arbitrate disputes arising hereunder, Company has not waived its rights to seek any provisional remedies (including, without limitation, injunctive relief) and damages. The institution of any arbitration proceedings shall not bar injunctive relief, -8- nor shall any arbitration proceedings bar injunctive relief, or any other provisional remedy, pending the final award of the arbitrators. Payments due to Horowitz hereunder shall continue during the pendency of any such arbitration proceeding but shall be adjusted retroactively if necessary and repaid by Horowitz should the arbitration determination require same; the continuation of such payments being agreed to as an accommodation to Horowitz pending the conclusion of the arbitration proceeding. 18. This instrument contains the entire agreement of the parties as to the subject matter hereof and supersedes and replaces all prior oral or written agreements between the parties. It may not be changed orally, but only by an amendment to this Agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 19. This Agreement shall be construed in accordance with the laws of New York. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. DONNKENNY APPAREL, INC. By: /s/ Harvey Appelle -------------------------------- Harvey Appelle, Chairman and Chief Executive Officer /s/ Harvey Horowitz -------------------------------- Harvey Horowitz -9- EX-10.44 3 EIGHTH AMENDMENT WAIVER March 31, 1998 Donnkenny Apparel, Inc. Beldoch Industries Corporation Megaknits, Inc. 1411 Broadway New York, New York Re: Credit Agreement dated as of June 5, 1995, as amended to date (the "Credit Agreement"), among Donnkenny Apparel, Inc., Beldoch Industries Corporation, Megaknits, Inc., (the "Borrower"), the Lenders named therein, the Guarantors named therein, the CIT Group/Commercial Services, Inc., as Administrative Agent and The Chase Manhattan Bank, as Agent for such Lenders ------------------------------------------------- Gentlemen: Reference is made to the Credit Agreement, and particularly, Section 7.11, Pre-Tax Income. We understand that Borrowers were not in compliance with said covenant for the period ended December 31, 1997 and have requested that the Lenders waive compliance for such period. The Lenders hereby agree to waive compliance with Section 7.11 solely for the period ended December 31, 1997. Lender's waiver is specific for the period ended December 31, 1997, and is not intended to waive the provisions of any other section of the Credit Agreement. Very truly yours, THE CHASE MANHATTAN BANK By: /s/ Jay Linde --------------------------------- Name: Jay Linde Title: Vice President THE CIT GROUP/COMMERCIAL SERVICES, INC. By: /s/ Lori Kudish --------------------------------- Name: Lori Kudish Title: Associate Vice President THE BANK OF NEW YORK, By: --------------------------------- Name: Joanne Collett Title: Vice President FLEET BANK N.A. By: /s/ Amy H. Witryol --------------------------------- Name: Amy H. Witryol Title: Vice President EX-10.45 4 TENTH AMENDMENT AGREEMENT TENTH AMENDMENT AGREEMENT TENTH AMENDMENT AGREEMENT, dated as of March 31, 1998, to the Credit Agreement, dated as of June 5, 1995 (as heretofore or hereafter amended, supplemented or modified from time to time in accordance with its terms, the "Credit Agreement"), among Donnkenny Apparel, Inc., Beldoch Industries Corporation and Megaknits, Inc. (collectively, the "Borrowers"), the lenders named therein (the "Lenders"), the guarantors named therein (the "Guarantors"), The CIT Group/Commercial Services, Inc., as Administrative Agent, and The Chase Manhattan Bank, as agent (the "Agent") for Lenders. Terms used herein and not otherwise defined herein shall have the meanings attributed thereto in the Credit Agreement. WHEREAS, the Borrowers have requested that the Lenders amend certain provisions of the Credit Agreement, and the Lenders, subject to the terms and conditions set forth herein, are willing to do so. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and subject to the fulfillment of the conditions set forth below, the parties hereto agree as follows: SECTION 1. AMENDMENT UNDER CREDIT AGREEMENT 1.1 The definition of "Inventory Amount" in Article I of the Credit Agreement is hereby amended in its entirety to read as follows: "`Inventory Amount' shall mean, during any month, the amount set forth below as corresponds to such month: Month Inventory Amount January 1998 $ 13,400,000 February 1998 13,700,000 March 1998 13,300,000 April 1998 12,900,000 May 1998 14,300,000 June 1998 18,700,000 July 1998 20,750,000 August 1998 21,900,000 September 1998 17,300,000 October 1998 13,000,000 November 1998 11,900,000 December 1998 12,700,000 January 1999 13,400,000 February 1999 13,700,000 March 1999 13,300,000" 1.2 The definitions of "Excess Collateral Requirement" and "Overadvance Amount" in Article I of the Credit Agreement are hereby amended in their entirety to read as follows: "Excess Collateral Requirement" shall mean, during any End of Month Period or Intramonth Period, as applicable, the amounts set forth below as correspond to the applicable period commencing in the months set forth below, and zero as to any other date:
------------------------------- --------------------------- ------------------------------ Excess Collateral Excess Collateral Requirement for End Requirement for Intramonth Month of Month Period Period ------------------------------- --------------------------- ------------------------------ October 1998 $4,560,000 $ -0- ------------------------------- --------------------------- ------------------------------ November 1998 5,068,000 560,000 ------------------------------- --------------------------- ------------------------------ December 1998 4,164,000 1,068,000 ------------------------------- --------------------------- ------------------------------ January 1999 2,236,000 164,000 ------------------------------- --------------------------- ------------------------------ February 1999 3,784,000 -0- ------------------------------- --------------------------- ------------------------------ March 1999 3,065,000 -0- ------------------------------- --------------------------- ------------------------------
For purposes of this paragraph, the terms "End of Month Period" and "Intramonth Period" shall have their respective meanings as set forth in the definition of "Overadvance Amount." "`Overadvance Amount' shall mean, during any End of Month Period and Intramonth Period, the amounts set forth below as correspond to the End of Month Period and the Intramonth Period during the months set forth below:
Overadvance Overadvance Amount Amount during the during the Month End of Month Period Intramonth Period -------------------------------------------------------------------------------------------- January 1998 $ -0- $ 4,200,000 February 1998 -0- 1,764,000 March 1998 -0- 216,000 April 1998 1,828,000 4,000,000 May 1998 3,394,000 5,828,000 June 1998 5,220,000 7,394,000 July 1998 7,347,000 11,000,000 August 1998 5,734,000 11,347,000 September 1998 461,000 9,734,000 October 1998 -0- 4,461,000 November 1998 -0- -0- 2 December 1998 -0- -0- January 1999 -0- -0- February 1999 -0- 1,764,000 March 1999 -0- 216,000
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." 1.3 Section 2.01(b) of the Credit Agreement is hereby amended by amending the proviso to the second sentence thereof to read in its entirety as follows: "provided, however, that in no event shall the aggregate principal amount of Revolving Credit Loan outstanding at any time to the Borrowers exceed $60,000,000." 1.4 Section 2.09(d) of the Credit Agreement is hereby amended by deleting the phrase "in excess of $2,000,000 in the aggregate" from the second sentence thereof, by substituting "1997" for "1996" in such sentence and by adding the following additional sentences to such subsection to read in their entirety as follows: "Within one (1) Business Day of 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), the Borrowers shall make a mandatory prepayment of the Term Loans in an amount equal to 100% of the proceeds received (net of taxes due and any reasonable expenses of sale) which proceeds shall be applied as set forth in paragraph (f) below. Nothing contained in this paragraph (d) shall be or be deemed to be a consent to the sale of any assets." 1.5 Section 2.17(c) of the Credit Agreement is hereby amended by deleting the reference to "$70,000,000" at the end of the second sentence thereof and substituting therefore a reference to "$60,000,000." 1.6 A new Section numbered Section 4.23 shall be added to the Credit Agreement to read in its entirety as follows: "Section 4.23. Year 2000. The Cost to the Borrowers of reprogramming and testing of the Borrowers' computer systems and related equipment to permit proper functioning in and following the year 2000 and of the reasonably foreseeable consequences of year 2000 to the Borrowers (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or have a Material Adverse Effect." 3 1.7 Subsection (b) of Section 6.03 (Insurance) of the Credit Agreement is hereby amended by adding thereto the following additional proviso: "and provided, further, that at all times the Borrowers shall keep in full force and effect the directors and officers liability insurance presently being maintained, and in the amounts presently being maintained," 1.8 Subsections (a) and (b) of Section 6.05 of the Credit Agreement are hereby amended in their entirety to read as follows: "(a) within 90 days after the end of each Fiscal year, (i) a Consolidated balance sheet and income statement showing the financial condition of the Parent and it subsidiaries as of the close of such Fiscal Year and the results of their operations during such year, and (ii) a Consolidated statement of shareholders' equity and a Consolidated statement of cash flow, as of the close of such Fiscal Year, all the foregoing Consolidated financial statements to be audited by independent public accountants acceptable to the Administrative Agent (which report shall not contain any qualification except with respect to new accounting principles mandated by the Financial Accounting Standards Board) and to be in form and substance acceptable to the Administrative Agent. (b) within 45 days after the end of each of the first three fiscal quarters, (i) an unaudited Consolidated balance sheet and income statement showing the financial condition and results of operations of the Parent and its subsidiaries as of the end of each such quarter and (ii) a Consolidated statement of cash flow for the fiscal quarter just ended and prepared and certified by the Financial Officer of the Parent as presenting fairly the financial condition and results of operations of the Parent and its subsidiaries and as having been prepared in accordance with GAAP, subject to normal year-end audit adjustments." 1.9 A new Section numbered 6.16 shall be added to the Credit Agreement to read in its entirety as follows: "Section 6.16. Year 2000. Take all actions necessary to complete by January 1, 1999 any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the Borrowers' computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrowers' systems interface) and the testing of all such systems and equipment, as so programmed." 1.10 Sections 7.07, 7.11 and 7.12 of the Credit Agreement are hereby amended in their entirety to read as follows: 4 "SECTION 7.07. Capital Expenditures. Permit the aggregate amount of payments made for capital expenditures, including Capitalized Lease Obligations and Indebtedness secured by Liens permitted under Section 7.01(e) hereof, in Fiscal Year 1998 to exceed $3,500,000 for the Parent and its subsidiaries on a Consolidated basis. SECTION 7.11. Pre-Tax Income. Permit Net Income of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis in any Fiscal Year to be less than $750,000. SECTION 7.12. Tangible Net Worth. Permit the Tangible Net Worth of the Parent and its Subsidiaries on a Consolidated basis to be less than (a) $17,500,000 at any time through August 31, 1998 and (b) $19,500,000 at any time thereafter." 1.11 Subparagraph (j) of Article VIII is hereby amended in its entirety to read as follows: "(j) (x) a judgment (not reimbursed by insurance policies of any Loan Party) or decree for the payment of money, a fine or penalty which when taken together with all other such judgments, decrees, fines and penalties shall exceed $325,000 shall be rendered by a court or other tribunal against any Loan Party and (i) shall remain undischarged or unbonded for a period of 30 consecutive days during which the execution of such judgment, decree, fine or penalty shall not have been stayed effectively or (ii) any judgment creditor or other person shall legally commence actions to collect on or enforce such judgment, decree, fine or penalty, or (y) Borrowers' directors and officers liability insurance carriers at any time for any reason shall either deny liability to pay or fail to pay any judgment, award or settlement amount arising from or in connection with the shareholders' litigation pending against the Borrowers and certain Affiliates." 1.12 Schedule 2.01(b) annexed to the Credit Agreement is hereby amended in its entirety to read as Schedule 2.01(b) annexed hereto. 1.13 Except for the specific amendments set forth in Sections 1.1 through 1.12, nothing herein shall be deemed to be an amendment of any covenant or agreement contained in the Credit Agreement, and the Borrowers and Guarantors hereby agree that all of the covenants and agreements contained in the Credit Agreement, are hereby ratified and confirmed in all respects. 5 SECTION 2. CONDITIONS PRECEDENT Section 1 of this Tenth Amendment Agreement shall become effective upon the execution and delivery of counterparts hereof by the parties listed below and the fulfillment of the following conditions: (1) The representations and warranties contained in Article V of the Credit Agreement shall be true and correct in all material respects. (1) No unwaived event has occurred and is continuing which constitutes an Event of Default under the Credit Agreement or would constitute such an Event of Default but for the requirement that notice be given or time elapse or both. (2) The Agent shall have received for the ratable benefit of the Lenders a waiver and amendment fee in the amount of $100,000. SECTION 3. MISCELLANEOUS 3.1 The Borrowers reaffirm and restate the representations and warranties set forth in Article V of the Credit Agreement and all such representations and warranties shall be true and correct in all material respects on the date hereof with the same force and effect as if made on such date, except as they may specifically refer to an earlier date. 3.2 Except as herein expressly amended, the Credit Agreement is ratified and confirmed in all respects and shall remain in full force and effect in accordance with its terms. 3.3 This Tenth Amendment Agreement may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page by telecopier shall be effective as delivery of a manually executed counterpart. 3.4 THIS TENTH AMENDMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. 3.5 The parties hereto shall, at any time and from time to time following the execution of this Tenth Amendment Agreement, execute and deliver all such further instruments. 6 and take all such further action as may be reasonably necessary or appropriate in order to carry out the provisions of this First Amendment Agreement. THE CHASE MANHATTAN BANK as Agent and Lender By: /s/Jay Linde --------------------------------- Name: Jay Linde Title: Vice President THE CIT GROUP/COMMERCIAL SERVICES, INC., as Administrative Agent and Lender By: /s/Lori Kudish --------------------------------- Name: Lori Kudish Title: Associate Vice President THE BANK OF NEW YORK, as Lender By: --------------------------------- Name: Joanne Collett Title: Vice President FLEET BANK N.A., as a Lender By: /s/Amy H. Witryol --------------------------------- Name: Amy H. Witryol Title: Vice President 7 DONNKENNY APPAREL, INC., as a Borrower By: /s/ Stuart S. Levy --------------------------------- Name: Stuart S. Levy Title: Vice President of Finance BELDOCH INDUSTRIES CORPORATION, as a Borrower By: /s/ Stuart S. Levy --------------------------------- Name: Stuart S. Levy Title: Vice President of Finance MEGAKNITS, INC., as a Borrower By: /s/ Stuart S. Levy --------------------------------- Name: Stuart S. Levy Title: Vice President of Finance DONNKENNY, INC., as a Guarantor By: /s/ Stuart S. Levy --------------------------------- Name: Stuart S. Levy Title: Vice President of Finance CHRISTIANSBURG GARMENT COMPANY, INCORPORATED, as a Guarantor By: /s/ Stuart S. Levy --------------------------------- Name: Stuart S. Levy Title: Vice President of Finance 8 SCHEDULE 2.01(b) Revolving Credit Commitments
Approximate Revolving Percentage of Credit Total Revolving Lender Commitment Credit Commitment - ------ ---------- ----------------- The Chase Manhattan Bank $29,814,770 35.0762% 1411 Broadway 5th Floor New York, NY 10018 Attn: Jay T. Linde The Bank of New York $21,296,325 25.0545% One Wall Street New York, NY 10286 Attn: Joanne M. Collett Fleet Bank N.A. $21,296,325 25.0545% 777 Main Street Hartford, CT 06115 Attn: Ed Walsh The CIT Group/Commercial Services, Inc. $12,592,580 14.8148% 1211 Avenue of the Americas New York, NY 10036 Attn: Lori Kudish
Sublimit for Revolving Credit Loans -----------------------------------
Approximate Lender Sublimit Percentage - ------ -------- ----------- The Chase Manhattan Bank $21,045,720 35.0762% The Bank of New York $15,032,700 25.0545% Fleet Bank $15,032,700 25.0545% The CIT Group/Commercial Services, Inc. $ 8,888,880 14.8148%
9 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 DEC-31-1997 257 0 24,453 720 27,248 60,394 18,071 8,451 102,460 22,040 0 0 0 141 52,945 102,460 245,963 0 196,633 0 48,512 282 4,955 (4,419) (1,210) (3,209) 0 0 0 (3,209) (.23) (.23)
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