-----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, RkQ/8bR71uKoDTnOZAlJJ5WoGpQhuh8mDvYs1ZfQtHz3GNvRwPPkUPdlHNmWVYx2 P2xlhYCinKMysz/JHAUHVA== 0000950136-99-000426.txt : 19990403 0000950136-99-000426.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950136-99-000426 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99583504 BUSINESS ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2127307770 MAIL ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-21940 DONNKENNY, INC. (Exact name of registrant as specified in its charter) Delaware 51-0228891 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1411 Broadway New York, New York 10018 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 730-7770 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant, based on a closing sale price of the Common Stock on the Nasdaq National Market on March 13, 1999 of $1.06 per share, was approximately $15,019,712*. As of March 13, 1999, 14,169,540, shares of Common Stock of Registrant were outstanding. *For purposes of this report, the number of shares held by non-affiliates was determined by aggregating the number of shares held by Officers and Directors of Registrant, and by others who, to Registrant's knowledge, own more than 10% of Registrant's Common Stock, and subtracting those shares from the total number of shares outstanding. 1 PART 1 ITEM 1. BUSINESS Donnkenny, Inc. (together with its subsidiaries, the "Registrant" or the "Company") was incorporated in Delaware in 1978 and is a holding company with four subsidiaries, three of which, during 1998, were operating subsidiaries, Donnkenny Apparel, Inc. ("Donnkenny Apparel"), Beldoch Industries Corporation ("Beldoch") and MegaKnits, Inc. ("MegaKnits"). The knitting and sewing operation conducted at the MegaKnits facility located in West Hempstead, NY was sold by the Company on February 2, 1999. The Company designs, manufactures, imports and markets a broad line of moderately priced women's sportswear labels, all of which are engaged in the same line of business. REGULATORY INVESTIGATION By letter dated August 15, 1996, the Company was notified by the Securities and Exchange Commission (the "SEC") that it was the subject of an informal investigation concerning alleged inaccuracies in the reporting of revenues and expenses by the Company for certain reporting periods. On or about November 10, 1996, the Company learned that the SEC had entered a formal order of investigation in the matter. Following the restatement of the Company's financial statements for the fiscal years ended December 2, 1995 and December 3, 1994, on February 2, 1999, the Company negotiated a resolution of these charges and, without admitting or denying the charges, and without monetary penalty being assessed against the Company, has consented to the issuance of an administrative cease-and-desist order. PRODUCTS The Company designs, manufactures, imports, and markets broad lines of moderately priced women's sportswear. The Company's major labels include Casey & Max (R), Donnkenny(R), Pierre Cardin (R) and Victoria Jones (R). Victoria Jones At the beginning of 1998, the Company combined its separate moderate knit and sweater labels, Beldoch Popper and Victoria Jones into one label under the name Victoria Jones. The Victoria Jones label represents moderately-priced womens' knit and sweater products which are sold to department stores, specialty stores and chains including Belk, May Company, Kohl's, Dillard's, Saks, Inc., Stage Stores, Catherine's, J.C. Penney and Sears. Its products are marketed for missy, large sizes and petites. Approximately 68% of these products are imported, predominately from Hong Kong, China and India. In addition, it sells exclusive private label products to such customers as QVC, Dayton Hudson Corp. and Lane Bryant. Casey & Max Casey & Max manufactures and imports novelty woven tops and sportswear. The Casey & Max line consists of moderately-priced products sold to department stores, specialty stores and chains including Belk, Kohl's, Dillard's, Federated, May Company, Saks, Inc., Stage Stores, Catherine's, J.C. Penney and Sears. The products are marketed for missy, large sizes and petites. Approximately 98% of these products are imported, predominately from Hong Kong, China and India. In addition, it sells exclusive private label products to such customers as QVC and Dayton Hudson Corp. Donnkenny Donnkenny manufactures and imports moderately-priced women's career and casual coordinated merchandise as well as fashion products marketed for missy, large sizes and petites. Its major customers include Stage Stores, Saks, Inc., Catherine's, Sterns, Bealls, J.C. Penney and Sears. Donnkenny has been an established brand name for over 60 years. Approximately 57% of Donnkenny products are manufactured domestically. In addition, it also sells exclusive private label products to such customers as J.C. Penney and QVC. Pierre Cardin Pierre Cardin produces women's knitwear pursuant to a license. The Pierre Cardin product is sold to better knitwear departments of department stores and specialty stores. Its major customers include Federated, Belk, Sam's Club, Saks, Inc., and the Chadwick's Catalog. Approximately 66% of these products are imported, predominately from Hong Kong, China, and India. In addition, it also sells exclusive private label products to such customers as Saks, Inc. and the Bonton. 2 MANUFACTURING AND IMPORTING Approximately 29% of the Company's products sold in its year ended December 31, 1998 ("Fiscal 1998") were manufactured in the United States, as compared with 34% in its year ended December 31, 1997 ("Fiscal 1997"). In Fiscal 1998, the Company's domestically produced products were manufactured at the Company's production facilities in Virginia and West Hempstead, New York and by several outside contractors. The remaining 71% of the Company's products sold in Fiscal 1998 were produced abroad and imported into the United States, principally from Hong Kong, China, India, Guatemala, Turkey, Bangladesh, the Dominican Republic, and the Philippines. The percentage of the Company's products which are manufactured in the United States is expected to decrease further during the Company's year ending December 31, 1999 ("Fiscal 1999"). The Company's purchases from its foreign suppliers are effected through individual purchase orders specifying the price and quantity of the items to be produced. Generally, the Company does not have any long-term, formal arrangements with any of the suppliers which manufacture its products. The Company continually seeks additional suppliers throughout the world for its sourcing needs. One foreign contractor accounted for 10% of the Company's products, but no other domestic or foreign contractor manufactured more than 8% of the Company's products in Fiscal 1998. Virtually all of the Company's merchandise imported into the United States is subject to United States duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas that limit the amount of certain categories of merchandise that may be imported into the United States. Because the United States may, from time to time, impose new quotas, duties, tariffs or other import controls or restrictions, the Company monitors import and quota-related developments. Attendant with the Company's increased reliance on foreign manufacturing is a risk of excess inventory. The Company must commit to its foreign manufacturers and suppliers four to six months in advance of its selling season, usually before the Company has received its orders from its customers. Thus, there exists the risk that the purchase orders by the Company's customers will be less than the amount manufactured. The Company believes that this risk is outweighed by the cost savings to the Company by manufacturing such products abroad. Conversely, in the event there exists excess demand for the Company's products, the lengthy production time for imported goods makes it impossible for the Company to return to the market to purchase additional goods for the same selling season. The Company's relationships with foreign suppliers are also subject to the additional risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds and in certain parts of the world, political instability. The Company's operations have not been materially affected by any of such factors to date. However, due to the large portion of the Company's products which are produced abroad, any substantial disruption of its relationships with its foreign suppliers could have a material adverse effect on the Company's operations and financial condition. The portion of the Company's products which it currently imports from Asia is further subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The Company's risks associated with the Company's Asian operations may be higher in 1999 than historically has been the case, due to the fact that financial markets in East and Southeast Asia continue to experience difficult conditions, including a currency crisis. As a result of this economic volatility, the currencies of many countries in this region have lost value relative to the U.S. dollar. Because the Company does not enter into foreign currency transactions, the Company has experienced no foreign currency transaction losses since the beginning of this crisis. However, its operations in the region are subject to an increased level of economic instability. In the countries which have experienced the highest degree of instability (Korea, Taiwan and Indonesia), the Company's purchasing activities have been minimal. The impact of these regional events on the Company's business, and in particular its sources of supply, cannot be determined at this time. Approximately 58% of the products sold by the Company in Fiscal 1998 were manufactured in Asia. CUSTOMERS In Fiscal 1998 , the Company shipped orders to approximately 14,700 stores in the United States. This customer base represents approximately 2,600 accounts. Of the Company's net sales for Fiscal 1998, department stores accounted for approximately 58.5%, wholesale clubs for approximately 15.2%, mass merchants for approximately 12.8%, specialty retailers for approximately 3.8%, catalog customers for approximately 3.4%, chain stores for approximately 3.3%, and other customers for approximately 3.0%. The Company markets its products to major department stores, including J. C. Penney, Dillard's, May Company, Federated, Stage Stores, Proffitt's, Sears, Sam's Club, as well as mass merchants including K-Mart. The Company's also sells exclusive private label products to catalog specialty retailers and suppliers. In addition, the Company manufactures products exclusively for J.C. Penney under its D.K. Gold label. 3 In Fiscal 1998, sales to Wal-Mart accounted for 15.4% and sales to J.C. Penney accounted for 12.9% of the Company's net sales. The loss of, or significantly decreased sales to, these customers could have a material adverse effect on the Company's consolidated financial condition and results of operations. The Company's Electronic Data Interchange computer system ("EDI") connects the Company to approximately 39 of its large customers and, in Fiscal 1998,was used to place 49% of the Company's order dollars. The Company is also linked by EDI to several of its major suppliers, which allows the Company to review purchase orders for fabric on a weekly basis. SALES AND MARKETING At January 31, 1999, the Company had a 23 person sales force, of whom 13 were Company employees and 10 were independent commissioned sales representatives. These sales representatives are located in 11 cities and provide nationwide coverage to retailers ranging from individual specialty shops to national chain stores and catalogs. The Company's principal showrooms are in New York City. RAW MATERIALS SUPPLIERS The Company's sources of fabric and trim supply are well established. As a result of the large, steady purchases each year by the Company of fabrics and trim for its production of certain styles, the Company is a major customer of several of the larger synthetic textile producers. The Company typically experiences little difficulty in obtaining domestic raw materials and believes that the current and potential sources of fabric and trim supply are sufficient to meet its needs for the foreseeable future. TRADEMARKS AND PROPRIETARY RIGHTS The Company owns and has registered in the United States, and in certain foreign jurisdictions, the following trademarks under which a variety of the Company's products are sold: Beldoch Popper(R), Casey & Max(R), Donnkenny(R), Victoria Jones(R),. Upon compliance with the trademark statutes of the United States and the relevant foreign jurisdictions, these trademark registrations may be renewed. The Company holds licensing rights to manufacture, import and sell women's sportswear in the United States and the U.S. Virgin Islands with the Pierre Cardin(R) trademark, including sweaters, pants, skirts, knitwear, jeans, swimwear and activewear. Such license is automatically continued from year to year at the Company's option provided net sales equal specified minimums. The Company's sales during Fiscal 1998 surpassed the minimum requirements of this license, and the Company intends to renew this license for an additional one year period. BACKLOG At March 13, 1999, the Company had unfilled, confirmed customer orders of approximately $59 million, compared to approximately $62 million of such orders at March 15, 1998, with such orders generally scheduled for delivery within three to six months of confirmation, although some extend until the end of the fiscal year. The amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of the production and shipment of garments, which in some instances may be delayed or accelerated at the customer's request. Accordingly, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. There can be no assurance that cancellations, rejections and returns will not reduce the amount of sales realized from the backlog of orders. COMPETITION The women's apparel business is highly competitive and consists of many manufacturers and distributors, none of which accounts for a significant percentage of total sales in the overall market, but many of which are larger and have substantially greater resources than the Company. The Company competes with both domestic manufacturers and importers, primarily on an item-by-item basis, with respect to brand name recognition, price, quality and availability. 4 EMPLOYEES As of January 31, 1999, the Company had 622 full-time employees, of whom 152 were salaried and 470 were paid on an hourly basis. The Company had 8 part-time employees, all of whom work on an hourly basis. The Company's hourly labor force is non-union. The Company believes relations with its employees are good. ENVIRONMENTAL MATTERS The Company believes that it is in material compliance with all applicable federal, state and local environmental laws. The Company does not currently anticipate the need to make material capital expenditures to remain in compliance with applicable federal, state and local environmental laws. ITEM 2. PROPERTIES During Fiscal 1998, the Company's production requirements continued to shift from domestically owned or leased facilities to foreign sourced suppliers. During 1998 and into 1999, several domestic facilities were closed and sold by the Company. The following table indicates the facilities owned or leased at December 31, 1998 and facilities that have been disposed of. As of March 13, 1999, the Company operated six facilities in Virginia, one in Charleston, South Carolina, one in New York state and one in Hong Kong.
Location Approximate Square Owned or - -------- Footage Function Leased ------- -------- ------ Christiansburg, Virginia(1)............... 109,000 Finishing Owned Floyd, Virginia........................... 79,600 Fabric warehouse, sewing, cutting Owned Independence Grayson, Virginia............ 70,350 Sewing, finishing Owned Independence Kendon, Virginia............. 37,550 Company leasing to third party Owned Rural Retreat, Virginia................... 61,230 Company leasing/Storage Owned Wytheville, Virginia...................... 161,800 Distribution, administration Owned Charleston, South Carolina(2)............. 200,000 Distribution Center Leased West Hempstead, New York(3)............... 150,000 Knitting and Sewing Leased New York, New York(4) 47,050 Offices and principal showrooms Leased Hong Kong (Comet Building) (5) 2,200 Administration, sourcing, quality Leased ------- control TOTAL................................. 918,780 =======
- --------------------- 1) This facility was sold on March 17, 1999. 2) This facility is leased, with annual rental payments totaling $460,125, and is subject to a 3% annual rental escalation, until March 19, 2006, at which time the lease expires. 3) This facility was sold on February 2, 1999. 4) Annual rental payments for the New York office/showroom space are approximately $2,000,000 in the aggregate. The Company sublet approximately 4,000 square feet in 1998, offsetting the rental payments by approximately $100,000. The leases for the New York office/showrooms expire in 2006 and 2008. 5) Lease expires in 2000. Management believes that its current facilities are sufficient to meet its needs for the foreseeable future. 5 ITEM 3. LEGAL PROCEEDINGS IN RE DONNKENNY, INC. SECURITIES LITIGATION, 96 Civ. 8452 (MGC): Beginning in November 1996, ten putative class action complaints were filed in the United States District Court for the Southern District of New York. Plaintiffs have filed a Consolidated Complaint which names as defendants the Company, as well as Edward T. Creevy, Ronald Hollandsworth and Richard Rubin all of whom are former officers and/or directors of the Company, and KPMG Peat Marwick LLP ("KPMG"), the Company's former Independent Auditors. The Consolidated Complaint alleges that defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, by, among other things, preparing false financial statements which allegedly overstated sales and revenues. The Consolidated Complaint seeks compensatory damages, prejudgement interest, attorneys fees and costs. On April 2, 1997, the Court appointed Emanon Partners, L.P. ("Emanon") as the lead plaintiff in the action and ruled that Emanon may select the law firms of Wolf Popper, LLP and Milberg Weiss Bershad Hynes & Lerach, LLP as co-lead counsel. On December 5, 1997, the Court granted KPMG's motion to dismiss the Consolidated Complaint as to KPMG. The Company is also party to legal proceedings arising in the ordinary course of its business. Management believes that the ultimate resolution of proceedings will not, in the aggregate, have a material adverse effect on the financial condition, results of operations, liquidity or business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of Fiscal 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Registrant's Common Stock is traded on the Nasdaq National Market under the symbol "DNKY." The Common Stock began trading on the Nasdaq National Market on June 17, 1993. The following table sets forth the quarterly high and low closing prices of a share of Common Stock as reported by the Nasdaq National Market for the Company's two most recent fiscal years, plus the interim period through March 13, 1999. PERIOD HIGH LOW - ------ ---- --- Fiscal 1997 First Quarter.............. $ 5 3/8 $ 2 1/8 Second Quarter............. 4 3/4 2 3/8 Third Quarter.............. 4 9/16 3 1/8 Fourth Quarter............. 5 3/16 2 1/2 6 Fiscal 1998 First Quarter.............. $ 3 5/32 2 1/2 Second Quarter............. 4 1/2 2 3/4 Third Quarter.............. 3 13/32 1 1/4 Fourth Quarter............. 2 1/2 15/16 Fiscal 1999 Ten Weeks Ended March 13, 1999........... 2 1/4 1 1/16 On March 13, 1999, the closing price for a share of Common Stock, as reported by the Nasdaq National Market, was $1.06 per share. The number of holders of record for Registrant's Common Stock as of March 13, 1999 was 86. The Company currently anticipates that it will retain all its earnings for use in the operation and expansion of its business and, therefore, does not anticipate that it will pay any cash dividends in the foreseeable future. In addition, the Company's existing credit facilities and the proposed facility each prohibit the Company from declaring or paying dividends. 7 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data as of December 31, 1998 and December 31, 1997 and for each of the fiscal years in the three year period ended December 31, 1998 have been derived from the Company's consolidated financial statements included elsewhere in this Form 10-K which have been audited by Deloitte & Touche LLP, independent auditors, whose report thereon is also included herein. The selected consolidated financial data as of December 2, 1995 and December 3, 1994 and for the fiscal years then ended have been derived from the Company's consolidated financial statements, which are not included herein. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and its Subsidiaries and related notes thereto incorporated by reference herein.
Year Ended ---------------------------------------------------------------- DECEMBER 3, DECEMBER 2, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- CONSOLIDATED STATEMENT OF OPERATIONS DATA: (In thousands, except per share data) Net sales ........................ $ 145,784 $ 197,960 $ 255,179 $ 245,963 $ 197,861 Cost of sales .................... 102,584 145,460 202,580 196,633 157,069 --------- --------- --------- --------- --------- Gross profit ..................... 43,200 52,500 52,599 49,330 40,792 Selling, general and administrative expenses ........ 26,005 34,676 57,603 45,867 39,086 Amortization of goodwill and other related acquisition costs . 1,145 985 1,449 1,204 1,321 Restructuring Charge ........... 2,815 1,723 1,180 Gain on sale of license .......... (1,116) --------- --------- --------- --------- --------- Operating profit (loss) .......... 17,166 14,024 (6,453) 536 (795) Interest expense, net ............ 2,870 4,135 5,154 4,955 3,913 --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary charge ........... 14,296 9,889 (11,607) (4,419) (4,708) Income taxes (benefit) ........... 5,717 4,254 (3,319) (1,210) (644) --------- --------- --------- --------- --------- Income (loss) before extraordinary charge ........... 8,579 5,635 (8,288) (3,209) (4,064) Extraordinary charge related to early extinguishment of debt, net of taxes ................... 295 -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) ................ $ 8,284 $ 5,635 $ (8,288) $ (3,209) $ (4,064) ========= ========= ========= ========= ========= BASIC INCOME (LOSS) PER COMMON SHARE (1): Income (loss) before extraordinary item ............. $ .64 $ .41 $ (.59) $ (.23) $ (.29) Extraordinary item ............... (.02) -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) ................ $ .62 $ .41 $ (.59) $ (.23) $ (.29) ========= ========= ========= ========= ========= Shares used in the calculation of basic income (loss) per share .... 13,330 13,910 14,012 14,070 14,150 ========= ========= ========= ========= ========= DILUTED INCOME (LOSS) PER COMMON SHARE(1): Income (loss) before extraordinary item ........................... $ 0.63 $ 0.40 $ (0.59) $ (0.23) $ (0.29) Extraordinary item ............... 0.02 -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) ................ $ 0.61 $ 0.40 $ (0.59) $ (0.23) $ (0.29) ========= ========= ========= ========= ========= Shares used in the calculation of diluted income (loss) per share ...................... 13,687 13,986 14,012 14,070 14,150 --------- --------- --------- --------- --------- CONSOLIDATED BALANCE SHEET DATA: Working capital .................. $ 53,817 $ 80,270 $ 16,917 $ 38,354 $ 42,661 Total assets ..................... 107,937 157,486 139,433 102,460 100,215 Long-term debt, including current portion ................ 28,315 62,611 50,761 27,048 32,055 Stockholders' equity ............. 57,351 65,147 55,278 53,086 49,258
- --------- (1) All per share amounts and the shares used in the calculation of basic income (loss) per share have been retroactively restated to reflect the two-for-one stock split paid on December 18, 1995 to stockholders of record on December 4, 1995 and the effects of SFAS 128. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth selected operating data of the Company as percentages of net sales, for the periods indicated below:
DECEMBER 31, DECEMBER 31, DECEMBER 31, FISCAL YEAR ENDED 1996 1997 1998 - ---------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 79.4 79.9 79.4 ----- ----- ----- Gross profit 20.6 20.1 20.6 Selling, general and administrative expenses 22.6 18.7 19.7 Amortization of goodwill and other related acquisition 0.5 0.5 0.7 costs Restructuring charges -- 0.7 0.6 ----- ----- ----- Operating income/(loss) (2.5) 0.2 (0.4) Interest expense, net 2.0 2.0 2.0 ----- ----- ----- Loss before income taxes (4.5) (1.8) (2.4) Income tax (benefit) (1.3) (0.5) (0.3) ----- ----- ----- Net (loss) (3.2%) (1.3%) (2.1%) ===== ===== =====
COMPARISON OF FISCAL 1998 WITH FISCAL 1997 NET SALES Net Sales decreased by $48.1 million or 19.6% from $246.0 million in Fiscal 1997 to $197.9 million in Fiscal 1998. The decline in net sales was primarily the result of exiting the licensed character business, which accounted for $37.9 million of the decline and decreases in Victoria Jones of $18.8 million due to general softness in the sweater business resulting from warmer weather during the winter of 1998. The decreases were partially offset by increases in Casey & Max of $8.0 million and $5.6 million in Pierre Cardin. The Company continues to stress its strategy of diversifying its product mix while selling to a broad range of retail stores. GROSS PROFIT Gross profit for Fiscal 1998 was $40.8 million, or 20.6% of net sales, compared to $49.3 million, or 20.1% of net sales, for Fiscal 1997. Significant factors that contributed to the decline in gross profit included the exiting of the licensed character business and general softness in the sweater business from the warm weather during the winter of 1998. Additionally, in the fourth quarter of Fiscal 1998, the Company recorded inventory write offs of $0.7 million related to the sale of the West Hempstead Facility. 9 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased from $45.9 million in Fiscal 1997 to $39.1 million in Fiscal 1998. As a percentage of net sales, these costs increased from 18.7% in Fiscal 1997 to 19.7% in Fiscal 1998. Included in Fiscal 1998 were charges totaling $1.5 million related to the closing of the Company's outlet stores, consolidating office facilities, cancellation of lease agreements and professional fees associated with system installations. Included in Fiscal 1997 are charges in the amount of approximately $4.1 million, the largest component of which is $3.5 million in additional professional fees as the result of legal fees associated with the previously reported class action lawsuits, legal and accounting fees associated with the restatement of prior year quarterly and annual financial statements and consulting services related to the Company's amended credit facility. Excluding these charges, the balance of selling, general and administrative expenses for Fiscal 1998 was $37.6 million or 19.0% of net sales and for Fiscal 1997, $41.8 million, or 17.0% of net sales. The $4.2 million decline in selling, general and administrative expense is due to reductions in all expense categories except design and sample expense and administrative expenses. RESTRUCTURING CHARGES During Fiscal 1998, the Company's production requirements continued to shift from domestically owned or leased facilities to out sourced suppliers. During 1998 and into 1999 several domestic facilities were closed and sold by the Company. In the fourth quarter of 1998, the Company recorded a pre-tax charge of $1.2 million in connection with the sale of its West Hempstead facility which occurred on February 2, 1999. The restructuring charge included write-offs of property, plant, equipment, employee severance payments and other incremental charges directly attributable to the sale of the manufacturing facility. In the fourth quarter of 1997, the Company decided to discontinue the manufacture and sale of the Mickey & Co. licensed character product line under a license agreement with Disney Enterprises, Inc. and recorded a pre-tax restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5 million for the write-down of merchandise inventories. The restructuring charge included payments due under agreements with the licensor; write-downs of property, plant and equipment; costs related to lease terminations; employee severance payments; and other incremental charges directly attributable to discontinuing the licensed character product lines. INCOME FROM OPERATIONS In Fiscal 1998, the Company reported a loss from operations of $0.8 million, versus income from operations of $0.5 million in Fiscal 1997. PROVISION FOR INCOME TAXES The Company's tax benefit in Fiscal 1998 amounts to 13.7% of pre-tax losses, as compared to a benefit of 27.4% for Fiscal 1997. The benefit in Fiscal 1998 is lower than the Company's historical tax rate due to the recording of a valuation allowance on a portion of deferred tax assets related to net operating loss carryforwards. NET LOSS In Fiscal 1998 the Company reported a net loss of $4.1 million, or ($0.29) per share, versus a net loss of $3.2 million, or ($0.23) per share in Fiscal 1997. COMPARISON OF FISCAL 1997 WITH FISCAL 1996 NET SALES Net Sales decreased by $9.2 million or 3.6% from $255.2 million in fiscal 1996 to $246.0 million in Fiscal 1997. The decline in net sales was primarily the result of decreases in the licensed character business which was down $35.6 million or 46.9%. The decline was due to the discontinuation of Lewis Frimel and the decrease in sales of other licensed character lines. The decrease was partially offset by increases in the Company's core labels - Donnkenny, Beldoch and Oak Hill which had increases of $8.1 million, $9.8 million and $8.8 million, respectively. The Company continues to stress its strategy of diversifying its product mix while selling to a broad range of retail stores. Sportswear accounted for approximately 84% of 1997 net sales while the licensed character business accounted for the remaining 16%. 10 GROSS PROFIT Gross profit for Fiscal 1997 was $49.3 million, or 20.1% of net sales, compared to $52.6 million, or 20.6% of net sales, for Fiscal 1996. Significant factors that contributed to the decline in gross profit included the sell off of inventory resulting from the closing of Lewis Frimel; softness in other licensed character lines and excess supply of these products in the market place; softness in the sweater business due to warmer weather during the winter of 1997; and approximately $0.3 million, applicable to sales returns and allowances recorded in the fourth quarter of 1997 in the normal course of business. Additionally, in the fourth quarter of Fiscal 1997, the Company decided to discontinue certain licensed character lines, and as a result recorded additional markdowns of $0.5 million. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased from $57.6 million in Fiscal 1996 to $45.9 million in Fiscal 1997. As a percentage of net sales, these costs decreased from 22.6% in Fiscal 1996 to 18.7% in Fiscal 1997. Included in Fiscal 1997 are charges in the amount of approximately $4.1 million, the largest component of which is $3.5 million in additional professional fees as the result of legal fees associated with the previously reported class action lawsuits, legal and accounting fees associated with the restatement of prior year quarterly and annual financial statements and consulting services related to the Company's amended credit facility. Included in Fiscal 1996 were charges totaling $4.2 million or 1.7% of net sales related to the following: the rescission of the Fashion Avenue acquisition of $0.5 million; severance relating to departing employees of $0.9 million and professional fees of $2.8 million associated with the class action lawsuits, legal and accounting fees related to the special investigation and restatements of prior year financial results. Excluding these charges, the balance of selling, general and administrative expenses for Fiscal 1997 was $41.8 million or 17.0% of net sales and for Fiscal 1996, $53.4 million, or 20.9% of net sales. The $11.6 million decline in selling, general and administrative expense is due to reductions in all expense categories except distribution and factoring fees. Distribution expenses increased as a result of higher temporary employee expenses in the South Carolina distribution facility, which were mostly offset by savings from the closing of the Mississippi distribution facility and lower costs at the West Hempstead distribution facility. As a result of the amended credit facility discussed below, the Company incurred $1.0 million in factoring fees which were not incurred in Fiscal 1996. The reductions in other selling, general and administrative categories included: Design and Sample expense decreases which were primarily the result of synergies resulting from consolidating company activities and reduced sample expense related to the discontinuation of the licensed character business; decreases in Sales expenses as the result of headcount and advertising reductions and lower sales commissions related to the reduced road force; decreases in Administrative expenses resulting from headcount reductions; and occupancy expense reductions which were primarily the result of closing the Plainview and Mississippi distribution facilities in Fiscal 1996. RESTRUCTURING CHARGE In the fourth quarter of 1997, the Company decided to discontinue the manufacture and sale of the Mickey & Co. licensed character product line under a license agreement with Disney Enterprises, Inc. and recorded a pre-tax restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5 million for the write-down of merchandise inventories. The restructuring charge included payments due under agreements with the licensor; write-downs of property, plant and equipment; costs related to lease terminations; employee severance payments; and other incremental charges directly attributable to discontinuing the licensed character product lines. INCOME FROM OPERATIONS In Fiscal 1997, the Company reported income from operations of $0.5 million, versus a loss from operations of $6.5 million in Fiscal 1996. PROVISION FOR INCOME TAXES The Company's tax benefit in Fiscal 1997 amounts to 27.4% of pre-tax losses, as compared to a benefit of 28.6% for Fiscal 1996. The benefit in Fiscal 1997 is lower than the Company's historical tax rate due to the recording of a valuation allowance on a portion of deferred tax assets related to state net operating loss carryforwards. 11 NET LOSS In Fiscal 1997 the Company reported a net loss of $3.2 million, or ($0.23) per share, versus a net loss of $8.3 million, or ($0.59) per share in Fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise from the funding of working capital needs, primarily inventory and accounts receivable, and interest and principal payments related to certain indebtedness and capital expenditures. The Company's borrowing requirements for working capital fluctuate throughout the year. Capital expenditures were $2.5 million for Fiscal 1998, compared to $0.5 million in Fiscal 1997. In Fiscal 1999, the Company is permitted to spend up to $2.0 million on capital investments in accordance with the Revolving Credit Agreement described below. As part of the 1999 capital expense budget, the Company has committed to spend approximately $0.5 million for upgrading computer systems to increase efficiencies and become Year 2000 compliant. At the end of Fiscal 1998, direct borrowings under the revolving credit facility were $31.6 million. Additionally, the Company had letters of credit outstanding of $24.3 million, with unused availability of $10.7 million. At the end of Fiscal 1997, direct borrowings and letters of credit outstanding under the prior credit facility were $27.0 and $20.9 million, respectively. On December 31, 1998, the final Term Loan payment was made in accordance with the Revolving Credit Agreement. On June 30, 1998, the Company entered into a secured term loan in the amount of $483,000. The interest rate is fixed at 8.75% and the loan requires monthly principal and interest payments through June 2001. As of December 31, 1998, the principal balance of this loan amounted to $411,000. Software, machinery and equipment secure this loan. On April 30, 1997, the Company entered into an amended credit facility (the "Credit Facility") to, among other things, include the Company's operating subsidiaries Donnkenny Apparel, MegaKnits, and Beldoch as borrowers. The Credit Facility consisted of a Term Loan, a Revolving Credit Agreement, and a Factoring Agreement. The purpose of the Credit Facility was to provide for working capital needs of the Company including, the issuance of letters of credit. Under the Credit Facility, The Chase Manhattan Bank serves as agent (and holds a 35% interest), the CIT Group/Commercial Services Inc. ("CIT") serves as collateral agent (and holds a 15% interest), and each of Fleet Bank, N.A. and the Bank of New York are co-lenders (each holding a 25% interest). In April 1997, the Company also entered into a Factoring Agreement with CIT. The Factoring Agreement provides for a factoring commission equal to 0.45% of the gross amount of sales, plus certain customary surcharges. An additional fee of 0.20% was paid upon the conversion to a factored receivable arrangement. On November 13, 1998, the Company and the Company's operating subsidiaries Donnkenny Apparel, Megaknits, and Beldoch, as borrowers, entered into an Amended and Restated Credit Facility (the "Amended Credit Facility"). The purpose of the Amended Credit Facility was to, among other things, provide for general working capital needs of the Company, including the issuance of letters of credit and to extend the Amended Credit Facility to March 31, 2000. The Amended Credit Facility provides for a total amount available under the Revolving Credit Agreement of $75 million subject to an asset based borrowing formula, with sublimits of $55 million for direct borrowings and, $35 million for letters of credit and certain overadvances. The interest rate (10% at December 31, 1998) is equal to the prime rate (8.5% at December 31, 1998) plus 1 1/2% per annum. Outstanding borrowings under the Revolving Credit Agreement in excess of an allowable overadvance will bear interest at the prime rate plus 3 1/2%. The Revolving Credit Agreement also requires the Company to pay certain letter of credit fees and unused commitment fees. Advances and letters of credit will be limited to (i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance. Certain proceeds from the sale of fixed assets and income tax refunds are to be applied to reduce the overadvance facility. On March 29, 1999, the Company entered into a Second Waiver and Amendment Agreement to the Amended Credit Facility which became effective on February 28, 1999 to support the Company's 1999 business plan. Additionally, the Second Waiver and Amendment waived any existing default for the year ended December 31, 1998 with respect to the Company's non-compliance with covenants related to Net Tangible Worth and the Cumulative Net Loss tests. Pursuant to this amendment, the interest rate on borrowings was increased to 2 1/2% above the prime rate and shall be further increased by 1/8 of 1% on each of July 1, 1999, August 1, 1999, and September 1, 1999 and the applicable percentage shall be increased by 1/4 of 1% on the first day of each month thereafter, commencing October 1, 1999. A fee of $150,000 is payable on June 30, 1999. 12 Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Beldoch and MegaKnits. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with a maximum cumulative net loss test. During Fiscal 1998, cash used in operating activities was $1.4 million, principally as the result of increases in accounts receivable and other non-current assets, partially offset by decreases in inventories and recoverable income taxes. During Fiscal 1997, the Company's operating activities generated $20.0 million more cash than it used, principally as the result of decreases in accounts receivable, inventories and recoverable income taxes, partially offset by decreases in accounts payable. Cash used in Fiscal 1998 for investing activities included $2.5 million for the purchase of fixed assets and the $1.8 million earnout payment related to the acquisition of Beldoch, which was partially offset by proceeds from the sale of fixed assets. Cash used in Fiscal 1997 included the purchase of fixed assets for the Company's South Carolina distribution facility of $0.5 million and included purchases of machinery and equipment, building improvements and leasehold improvements; and the $1.2 million earnout payment related to the acquisition of Beldoch. Cash provided by financing activities in Fiscal 1998 was $5.0 million, which represented repayments of $5.6 million on the Term Loan, offset by net borrowings under the Revolving Credit Agreement of $10.1 million and the proceeds from an equipment loan of $0.5 million. Cash used in financing activities in Fiscal 1997 was $22.7 million, which represented repayments of $12.0 million for a senior term loan, the repayment of a Virginia State Loan of $0.3 million and net repayments under the revolving credit line of $11.5 million. The Company believes that cash flows from operations and amounts available under the revolving credit agreement will be sufficient for its needs for the foreseeable future. OTHER ITEMS AFFECTING THE COMPANY Competition The apparel industry in the United States is highly competitive and characterized by a number of multi-line manufacturers (such as the Company) and a larger number of specialty manufacturers. The Company faces substantial competition in its markets from manufacturers in both categories. Apparel Industry Cycles and other Economic Factors The apparel industry historically has been subject to substantial cyclical variation, with consumer spending on apparel tending to decline during recessionary periods. A decline in the general economy or uncertainties regarding future economic prospects may affect consumer spending habits, which, in turn, could have a material adverse effect on the Company's results of operations and its financial condition. Retail Environment Various retailers, including some of the Company's customers, have experienced declines in revenue and profits in recent periods and some have been forced to file for bankruptcy protection. To the extent that these financial difficulties continue, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. 13 Seasonality of Business and Fashion Risk The Company's principal products are organized into seasonal lines for resale at the retail level during the Spring, Summer, Transition, Fall and Holiday Seasons. Typically, the Company's products are designed as much as one year in advance and manufactured approximately one season in advance of the related retail selling season. Accordingly, the success of the Company's products is often dependent on the ability to successfully anticipate the needs of retail customers and the tastes of the ultimate consumer up to a year prior to the relevant selling season. Foreign Operations The Company's foreign sourcing operations are subject to various risks of doing business abroad, including indirect vulnerability to currency fluctuations, quotas and, in certain parts of the world, political instability. Any substantial disruption of its relationships with its foreign suppliers could adversely affect the Company's operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas, which limit the amount of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocation could adversely affect the Company's operations. Asian Operations The Company's operations in Asia are subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluation's and controls. The Company's risks associated with the Company's Asian operations may be higher in 1999 than has historically been the case, due to the fact that financial markets in East and Southeast Asia continue to experience difficult conditions, including a currency crisis. As a result of this economic volatility, the currencies of many countries in this region have lost value relative to the US dollar. Although the Company has experienced no material foreign currency transaction losses since the beginning of the crisis, its operations in the region are subject to an increased level of economic instability. Approximately 74.5% of the products sold by the Company in Fiscal 1998 were manufactured in Asia. The impact of these events on the Company's business, and in particular its sources of supply, cannot be determined at this time. Factors that May Affect Future Results and Financial Condition The Company's future operating results and financial condition are dependent upon its ability to successfully design, manufacture, import and market apparel. Year 2000 Issue The Company recognizes the need for, and is in the final phases of implementation of, a comprehensive program intended to upgrade the operating systems, hardware and software, which should eliminate any issues involving Year 2000 compliance. Certain of the Company's current software systems, without modification, would be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of improving the Company's information systems to provide enhanced support to all operating areas, the Company will upgrade to new financial and operating systems. Such upgrade will provide for or eliminate any issues involving Year 2000 compliance because all software to be implemented is designed to be Year 2000 compliant. The Company anticipates that its cost for such upgrade will be approximately $0.5 million for Fiscal 1999. The Company anticipates that it will complete its systems conversion in time to accommodate Year 2000 issues. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. The Company does not currently have any information concerning Year 2000 compliance status of its suppliers and customers. The Company plans to initiate communications with all of its significant customers, suppliers, and contractors to determine their plans to remedy any Year 2000 issues that arise in their business. The Company plans to complete this project prior to December 31, 1999; however, there can be no assurance that the systems of the other companies on which the Company's systems rely will be timely converted and would not have a material adverse effect on the Company's systems. The Company is currently evaluating its non-information technology systems (embedded technology) issues and is also developing its contingency plans for its information technology systems and believes that it will complete both issues in time to accommodate Year 2000 issues. 14 If the Company is unsuccessful in completing remediation of non-compliant systems, and if customers or vendors cannot rectify Year 2000 issues, the Company could incur additional costs, which may be substantial, to develop alternative methods of managing its business and replacing non-compliant equipment, and may experience delays in receipts from vendors, shipments to customers, or payments to vendors. The Company has not yet established a contingency plan in the event of non-compliance. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes standards for the accounting and reporting for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has determined that this statement will not have a significant impact on its financial statements or disclosures, as it does not engage in derivative or hedging transactions. Forward Looking Statements This Form 10-K (including by not limited to the sections hereof entitled "Business" and "Management's Discussion and Analysis") contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward looking statement includes a statement of the assumptions or bases underlying such forward looking statement, the Company cautions that assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, there can be no assurance that the statement of the expectation or belief will result, or be achieved or accomplished. The words "believe", "expect", "estimate", "project", "seek", "anticipate" and similar expressions may identify forward-looking statements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Financial Statements following item 14 of this Annual Report of Form 10-K 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Harvey A. Appelle, a director of the Company, was appointed Chairman of the Board and Chief Executive Officer of the Company on December 19, 1996. Mr. Appelle had been the President of HarGil Capital Associates Ltd., a private investment firm, since 1994. From 1983 to 1993, he was a Managing Director of the Investment Banking Division of Merrill Lynch Pierce Fenner & Smith Inc. and a Senior Vice President of Merrill Lynch Interfunding Inc. Mr. Appelle is 54 years old. Lynn Siemers-Cross, a director of the Company, became President and Chief Operating Officer of the Company on April 14, 1997. Prior thereto, she was President of the Oak Hill Division of the Company, and had been President of the Oak Hill Division for more than five years. Ms. Siemers-Cross is 40 years old. Beverly Eichel, has been Executive Vice President and Chief Financial Officer of the Company since October 1998. Prior thereto, she was Executive Vice President and Chief Financial Officer of Danskin, Inc. from June 1992 to September 1998, and had been its Corporate Controller from October 1987 to June 1992. Ms. Eichel also serves as Secretary of the Company. Ms. Eichel is 41 years old. Herbert L. Ash, a director of the Company, was a partner at the law firm of Hahn & Hessen, LLP, Attorneys, since 1972 having become counsel to that firm as of January 1, 1999. Mr. Ash has been a director of Hampton Industries, Inc., a manufacturer of apparel, since 1994. He is also a Trustee of the National Jewish Medical and Research Center, in Denver, Colorado. Mr. Ash is 57 years old. Sheridan C. Biggs, a director of the Company, is Executive-in-Residence at the Graduate Management Institute at Union College. Prior to that, he was a senior partner of Price Waterhouse, the accounting and consulting firm; he was with that firm for thirty-one years until his retirement in 1994. During his career at Price Waterhouse, Mr. Biggs served as a Vice Chairman and member of the firm's management committee. Mr. Biggs is 64 years old. Robert H. Cohen, a director of the Company, is the founder, President and Chief Executive Officer of Recharge Corporation of America, a recycling company formed on July 1, 1995. He has also been Chief Executive Officer of R.J.C. Development Corporation, a real estate company, since 1987. For several years prior to founding Recharge Corporation of America, Mr. Cohen invested for his own account, having retired in 1996 as President and Chief Executive Officer of Craftex Creations, Inc., a manufacturer of intimate apparel, and in 1993 of Shamrock Outlet Stores, Inc. From 1987 to 1992, Mr. Cohen served on the board of the Intimate Apparel Council of the American Apparel Manufacturers' Association. Mr. Cohen is 60 years old. James W. Crystal, a director of the Company, has been President, since 1978, and Chairman of the Board since 1989, of Frank Crystal & Co., Inc., international insurance brokers. Mr. Crystal is 61 years old. Harvey Horowitz, a director of the Company, served as Vice President, and General Counsel of the Company from October 1, 1996 to February 28, 1998 when he resigned his office as Vice President. For more than five years, prior to October 1, 1996, he was a partner of the law firm Squadron, Ellenoff, Plesent & Sheinfeld, LLP. Mr. Horowitz is a director of Biofield Corp., a medical device company. Mr. Horowitz is 56 years old. Daniel H. Levy, a director of the Company, has been a principal of and consultant to LBK Consulting Inc., a retail consulting business, since January 1997 and during the period of 1994 to April 1996. From April 1996 through January 1997, he served as Chairman of the Board and Chief Executive Officer of Best Products, Inc., a retail sales company which filed for bankruptcy in September 1996. From 1993 through 1994, Mr. Levy served as Chairman of the Board and Chief Executive Officer of Conran's, a retail home furnishings company. From 1991 to 1993, he was Vice Chairman and Chief Operating Officer of Montgomery Ward, a retail sales company. Mr. Levy is a director of Whitehall Jewelers Inc. Mr. Levy is 56 years old. Robert H. Martinsen, a director of the Company, worked at Citicorp/Citibank for thirty-eight years until his retirement in 1995. At that point, he was Chairman of Credit Policy. Prior to that, he was in charge of corporate business in Asia. Prior to that, he was Chairman and President of Citibank's asset based finance subsidiary, Citicorp Industrial Credit. Mr. Martinsen is 64 years old. 16 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 1998, all Section 16(a) reporting requirements applicable to the Company's officers, directors and greater than ten percent shareholders were complied with, except that Form 5 reports for Mr. Appelle and Ms. Siemers-Cross were not timely filed for the fiscal year ended December 31, 1998 resulting in the failure by Mr. Appelle and Ms. Siemers-Cross to report one transaction each. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth compensation paid for the fiscal years ended December 31, 1998, December 31, 1997, and December 31, 1996 to those persons who were, at December 31, 1998 (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company (collectively, the "Named Executive Officers"). The information in the following tables with respect to the number of shares of Common Stock underlying options, option exercise prices and the number of shares of Common Stock acquired upon the exercise of options has been retroactively restated to reflect the two-for-one stock split paid to all holders of Common Stock of record on December 4, 1995 (the "Stock Split").
SUMMARY COMPENSATION TABLE ---------------------------- LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------------------------------------- RESTRICTED SECURITIES ALL OTHER FISCAL STOCK UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS/SARS (1) - ---------------------------------------------------------------------------------------------------------------------- Harvey A. Appelle (2)(6) Chairman of the Board and 1998 $402,652 $ 2,880 Chief Executive Officer 1997 400,000 $174,000 $440,625 50,000 2,880 Lynn Siemers-Cross (4)(7) President and Chief 1998 $502,550 $ 1,020 Operating Officer 1997 500,000 $212,500 $440,625 50,000 660 Beverly Eichel (8) Executive Vice President and 1998 $ 63,462 $50,000 150,000 $255 Chief Financial Officer Harvey Horowitz (2)(5) 1998 $70,442 Vice President and General 1997 405,000 $ 750 Counsel 1996 124,444 2,880 Stuart S. Levy (2)(3) 1998 $240,526 $ 2,634 Vice President - Finance and 1997 361,667 $25,000 $ 14,650 11,000 Chief Financial Officer 1996 31,667
(1) Represents insurance premiums paid by, or on behalf of, the Company during the covered fiscal year with respect to term life insurance for the benefit of the Named Executive Officer. (2) This individual became an Executive Officer of the Company in 1996. (3) On November 4, 1997, this individual's salary increased to $350,000 per annum. Compensation for 1998 represents salary through August 1998, the date of resignation. (4) This individual became an Executive Officer of the Company in 1997. (5) This individual resigned his office as Vice President on February 28, 1998 and entered into a two-year consulting agreement with the Company. (6) Bonus for 1997 was paid in 69,600 shares of common stock. (7) Bonus for 1997 was a $150,000 cash payment and 25,000 shares of common stock. (8) This individual became an Executive Officer of the Company in 1998. Annual compensation represents prorated compensation from date of hire in October 1998 and a signing bonus paid in connection with the execution of her employment agreement with the Company. 17 EMPLOYMENT AGREEMENTS Harvey Appelle On June 12, 1997, Mr. Appelle entered into a three-year employment agreement with the Company to serve as its Chairman of the Board and Chief Executive Officer. The agreement provides for a base annual salary of $400,000 for the first two years of the term and of $500,000 for the third year of the term, as well as a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee of the Board, as well as certain insurance benefits. In addition, in connection with the execution of the employment agreement, the Compensation Committee granted to Mr. Appelle 150,000 restricted shares and options to purchase an aggregate of 150,000 additional shares at a price equal to the closing price of the Common Stock on the date of grant. The agreement further provides for an incentive cash bonus equal to the appreciation over five years of 50,000 shares of stock. The restricted shares, options and right to receive the incentive cash bonus will vest over the term of the agreement, subject to acceleration in the event of a change in control of the Company. The agreement provides that in the event Mr. Appelle's employment is terminated (except in certain limited circumstances) following a change in control of the Company, Mr. Appelle will have the right to receive severance benefits equal to three times the sum of the last annual salary inclusive of performance bonus (but not incentive bonus). Lynn Siemers-Cross On June 12, 1997, Ms. Siemers-Cross entered into a four-year employment agreement with the Company to serve as its President and Chief Operating Officer. The agreement provides for a base annual salary of $500,000, a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee, but not less than $150,000 for Fiscal 1997, as well as certain insurance and other benefits. In addition, in connection with the execution of the employment agreement, the Compensation Committee granted to Ms. Siemers-Cross 150,000 restricted shares and options to purchase an aggregate of 150,000 additional shares at a price equal to the closing price of the Common Stock on the date of grant. The agreement further provides for an incentive cash bonus equal to the appreciation over five years of 50,000 shares of stock. The restricted shares, options and right to receive the incentive cash bonus will vest over the term of the agreement, subject to acceleration in the event of a change in control of the Company. The agreement provides that in the event Ms. Siemers-Cross' employment is terminated (except in certain limited circumstances) following a change in control of the Company, Ms. Siemers-Cross will have the right to receive severance benefits equal to three times the sum of the last annual salary inclusive of performance bonus (but not incentive bonus). Beverly Eichel On September 28, 1998, Ms. Eichel entered into a two-year employment agreement the Company to serve as Executive Vice President and Chief Financial Officer, providing for a base salary of $275,000 per annum and a one time signing bonus of $50,000. The agreement provides for a discretionary performance bonus based on the achievement of goals to be set annually by the Compensation Committee of the Board, as well as certain insurance benefits. In addition, in connection with the commencement dates the agreement provides for the grant of options to purchase 150,000 shares of Common Stock at an exercise price equal to the fair market value on the date of grant, vesting over three years. The agreement provides that in the event Ms. Eichel's employment is terminated (except in certain limited circumstances) following a change in control of the Company, Ms. Eichel will have the right to receive severance benefits equal to one and one half times the sum of the last annual salary inclusive of performance bonus. 18 Harvey Horowitz On February 28, 1998, Mr. Horowitz entered into a two-year consulting agreement with the Company, which agreement superseded Mr. Horowitz's employment agreement with the Company dated September 5, 1996. Under the new agreement, Mr. Horowitz agrees to provide certain consulting services to the Company and its officers with respect to legal matters arising out of the business affairs of the Company. The new agreement provides for monthly payments to be made by the Company to Mr. Horowitz equal to $35,000 for March 1998, $30,000 per month thereafter for the balance of calendar year 1998, and $25,000 per month throughout calendar year 1999. Mr. Horowitz will continue to receive certain insurance and other benefits and the Company agrees to use its best efforts to cause Mr. Horowitz to be nominated for election as a member of its Board of Directors at the annual meeting of its shareholders to take place during calendar year 1999. 1998 STOCK OPTIONS GRANTS The Company strives to distribute stock option awards broadly throughout the organization. Stock option awards are based on the individual's position and contribution to the Company. The Company's long term performance ultimately determines compensation from stock options because stock option value is entirely dependent on the long term growth of the Company's common stock price. The following table sets forth certain information concerning options granted to the Chief Executive Officer and the Named Executive Officers during Fiscal 1998, including information concerning the potential realizable value of such options. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS OPTION TERM (1) -------------------------------------------------------------- ----------------------------- NUMBER OF SECURITIES % OF TOTAL EXERCISE UNDERLYING # OF OPTIONS PRICE (3) EXPIRATION NAME OPTION (#) GRANTED IN 1998 ($/SH) DATE 5% ($) 10% ($) ---- ---------- - --------------- ------ ---- ------ ------- Harvey Appelle Lynn Siemers-Cross Herbert L. Ash (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910 Sheridan C. Biggs (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910 Robert H. Cohen (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910 James W. Crystal (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910 Beverly Eichel (4) 150,000 28.04% 1.0000 10/13/08 94,334 239,061 Harvey Horowitz (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910 Daniel H. Levy (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910 Robert H. Martinsen (2) 5,000 .93% 2.8750 7/28/08 9,040 22,910
(1) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the SEC and, therefore, are not intended to forecast possible future appreciation, if any, of the Company's stock price. (2) Represents options granted to Messrs. Ash, Biggs, Cohen, Crystal, Horowitz, Levy and Martinsen as directors pursuant to the Company's 1994 Non-Employee Director Option Plan. (3) All options were granted at an exercise price equal to the market value of the Company's common stock on the date of grant. (4) Options were granted pursuant to Ms. Eichel's employment agreement. 19 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR ENDED OPTION VALUES(1)
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT ACQUIRED DECEMBER 31, 1998 DECEMBER 31, 1998 (2) ON EXERCISE VALUE ----------------- --------------------- (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE --- -------- ----------- ------------- ----------- ------------- Harvey Appelle (3) 0 0 137,500 35,000 0 0 Lynn Siemers-Cross (4) 0 0 115,000 35,000 0 0 Herbert L. Ash 0 0 20,000 0 0 0 Sheridan C. Biggs 0 0 20,000 0 0 0 Robert H. Cohen 0 0 20,000 0 0 0 James W. Crystal 0 0 32,500 0 0 0 Harvey Horowitz 0 0 27,500 0 0 0 Daniel H. Levy 0 0 20,000 0 0 0 Robert H. Martinsen 0 0 20,000 0 0 0 Beverly Eichel (4) 0 0 0 150,000 0 $131,250
(1) All options were granted at an exercise price equal to market value of the common stock on the date of grant. (2) Amount reflects the market value of the underlying shares of common stock at the closing sales price reported on the Nasdaq National Market on December 31, 1998 ($1-7/8) per share. (3) Represents 22,500 options granted to him under the Company's 1994 non-employee director option plan and 115,000 options granted to him in connection with the execution of his employment agreement. (4) All options were granted in connection with the execution of her employment agreement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of March 15, 1999, with respect to beneficial ownership of the Company's Common Stock by: (i) each of the Company's directors, (ii) each of the Company's Named Executive Officers, (iii) each person who is known by the Company beneficially to own more than 5% of the Company's Common Stock, and (iv) by all directors and executive officers who served as directors or executive officers of March 15,1999 as a group. All information in the table below with respect to the Common Stock of the Company has been restated to reflect the two-for-one stock split paid to all holders of Common Stock of record on December 4, 1995. For purposes of the Proxy Statement, beneficial ownership is defined in accordance with 13d-3 under the Securities Exchange Act of 1934, as amended and means generally the power to vote or dispose of the securities, regardless of any economic interest therein.
NAME AND ADDRESS COMMON STOCK OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED ------------------- --------------------- ---------------- Amber Arbitrage LDC 2,322,450(2) 16.4% c/o Custom House Fund Management Limited 31 Kildare Sheet Dublin 2, Ireland Putnam Investments, Inc. 1,296,350(3) 9.1% 1 Post Office Square Boston, MA 02109 Pioneering Management Corporation 490,000(4) 3.5% 60 State Street Boston, MA 02109 Harvey A. Appelle 407,100(5) 2.9% Lynn Siemers-Cross 214,700(6) 1.5% Herbert L. Ash 21,500(7) * 20 Sheridan C. Biggs 21,000(8) * Robert H. Cohen 21,000(9) * James W. Crystal 33,500(10) * Harvey Horowitz 30,000(11) * Daniel H. Levy 25,000(12) * Stuart S. Levy 5,000(13) * Robert H. Martinsen 53,000(14) * All directors and officers as a group (10 persons) [831,800] 5.9%
- ------- * Less than 1%. (1) Percentage to be based on the number of shares of Common Stock outstanding as of March 13, 1999. (2) Based on information contained in Schedule 13G filed with the Company on May 13, 1998. (3) Based on information contained in Schedule 13G/A filed with the Company on February 4, 1999. Includes shares held by Putman Investment Management, Inc. and Putman Advisory Company, Inc. (4) Based on information contained in Scheduled 13G/A filed with the Company on October 15, 1998. (5) Includes 22,500 shares underlying currently exercisable stock options which have been granted to Harvey A. Appelle pursuant to the Company's 1994 Non-Employee Director Option Plan, 150,000 shares underlying currently exercisable stock options which have been granted to Mr. Appelle pursuant to his employment agreement, 30,000 vested shares out of 150,000 restricted shares granted to Mr. Appelle pursuant to his employment agreement and 69,600 shares of stock issued to him as part of Fiscal 1997 compensation. The above does not include 120,000 shares of restricted stock pursuant to Mr. Appelle's employment agreement, which become vested March 31, 2000. Also not included are 100,000 options issued as part of Fiscal 1998 Compensation, which are exercisable after May 15, 1999 and will become exercisable in various dates through the year 2004. (6) Includes 4,500 shares of underlying options which have been granted on April 19, 1996 to Lynn Siemers-Cross pursuant to the Company's 1992 Stock Option Plan and 150,000 shares underlying options which have been granted pursuant to Ms. Siemers-Cross' employment which is summarized in this Form 10-K under the caption "Executive Compensation - Employment Agreements". Also includes 30,000 shares of restricted stock pursuant to Ms. Siemers-Cross' employment agreement. Also includes 25,000 shares of stock issued as part of Fiscal 1997 compensation. The above does not include 120,000 of restricted stock pursuant to Ms. Siemers-Cross' employment agreement, which become vested March 31, 2000. Also not included are 3,000 options which have been granted on April 19, 1996 and 100,000 options issued as part of Fiscal 1998 compensation which are exercisable after May 15, 1999 and will become exercisable in various dates through the year 2004. (7) Includes 20,000 shares underlying options which have been granted to Herbert L. Ash pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (8) Includes 20,000 shares underlying options which have been granted to Sheridan C. Biggs pursuant to the Company's 1994 Non-Employee Director Option Plan. Also includes 1,000 shares held by Mr. Biggs. (9) Includes 20,000 shares underlying options which have been granted to Robert H. Cohen pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (10) Includes 32,500 shares underlying options which have been granted to James W. Crystal pursuant to the Company's 1994 Non Employee Director Option Plan. Such options are currently exercisable. (11) Includes 30,000 shares underlying options which have been granted to Harvey Horowitz pursuant to the Company's 1994 Non-Employee Director Option Plan. Such options are currently exercisable. (12) Includes 20,000 shares underlying options which have been granted to Daniel A. Levy pursuant to the Company's 1994 Non Employee Director Option Plan. Such options are currently exercisable. (13) Includes 5,000 shares underlying options which have been granted pursuant to Stuart S. Levy's employment. (14) Includes 20,000 shares underlying options which have been granted to Robert H. Martinsen pursuant to the Company's 1994 Non Employee Director Option Plan. Also includes 11,000 shares held by Mr. Martinsen's spouse. Such options are currently exercisable. 21 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Crystal is Chairman and President of Frank Crystal & Co., Inc., which provides insurance brokerage services to the Company. Frank Crystal & Co., Inc. received approximately $169,000 in commissions during 1998 for services rendered to the Company. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Independent Auditors' Report Consolidated Balance Sheets at December 31, 1998 and December 31, 1997 Consolidated Statements of Operations for the Years ended December 31, 1998, December 31, 1997 and December 31, 1996. Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1998, December 31, 1997 and December 31, 1996. Consolidated Statements of Cash Flows for the Years ended December 31, 1998, December 31, 1997 and December 31, 1996. Notes to Consolidated Financial Statements 2. Financial Statement Schedule Valuation and Qualifying Accounts 3. The Exhibits, which are listed on the Exhibit Index attached hereto (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of Fiscal 1998. 22 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DATED: MARCH 31, 1999 DONNKENNY, INC. BY: HARVEY A. APPELLE, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY IN THE CAPACITIES AND ON THE DATES INDICATED. DATED: MARCH 31, 1999 /s/ Harvey A. Appelle --------------------------------------------------------- HARVEY A. APPELLE, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) /s/ Lynn Siemers-Cross --------------------------------------------------------- DATED: MARCH 31, 1999 LYNN SIEMERS-CROSS, PRESIDENT AND CHIEF OPERATING OFFICER /s/ Beverly Eichel --------------------------------------------------------- DATED: MARCH 31, 1999 BEVERLY EICHEL, CHIEF FINANCIAL OFFICER, EXECUTIVE VICE PRESIDENT-FINANCE AND SECRETARY (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ Herbert L. Ash --------------------------------------------------------- DATED: MARCH 31, 1999 HERBERT L. ASH, DIRECTOR /s/ Sheridan C. Biggs --------------------------------------------------------- DATED: MARCH 31, 1999 SHERIDAN C. BIGGS, DIRECTOR /s/ Robert H. Cohen --------------------------------------------------------- DATED: MARCH 31, 1999 ROBERT H. COHEN, DIRECTOR /s/ James W. Crystal --------------------------------------------------------- DATED: MARCH 31, 1999 JAMES W. CRYSTAL, DIRECTOR /s/ Harvey Horowitz --------------------------------------------------------- DATED: MARCH 31, 1999 HARVEY HOROWITZ, DIRECTOR /s/ Daniel H. Levy --------------------------------------------------------- DATED: MARCH 31, 1999 DANIEL H. LEVY, DIRECTOR /s/ Robert H. Martinsen --------------------------------------------------------- DATED: MARCH 31, 1999 ROBERT H. MARTINSEN, DIRECTOR
23 EXHIBIT INDEX
Exhibit Description Sequentially No. of Exhibit Numbered Page - ------- ----------- ------------- 3.1 Amended and Restated Certificate of Incorporation of Donnkenny, Inc., dated May 15, 1992.1 3.3 Certificate of Ownership and Merger of DHC Holding Corporation into Donnkenny, Inc.1 3.4 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Donnkenny, Inc., dated May 18, 1993.2 3.5 By-laws of Donnkenny, Inc., dated May 18, 1993.2 4.1 Specimen form of Common Stock Certificate.4 10.12 Amended and Restated Donnkenny, Inc. 1992 Stock Option Plan.9 10.13 Form of Indemnification Agreement with Directors and Executive Officers.2 10.14 Donnkenny, Inc. Employees Savings 401(k) Plan.1 10.22 Employment Agreement between Richard Rubin and the Company, dated September 23, 1992.3 10.23 Lease Purchase Agreement among The Industrial Development Authority of Dickenson County, Virginia, Donnkenny, Inc. and the County of Dickenson, Virginia, dated July 31, 1989.3 10.24 Loan Agreement between The Industrial Development Authority of Dickenson County, Virginia and Donnkenny Apparel, Inc., dated as of June 8, 1992.3 10.25 Credit Agreement among Donnkenny Apparel, Inc. the Lenders Named therein and Chemical Bank, as Agent, dated February 2, 1995.5 10.26 Satisfaction and Termination Agreement among Donnkenny, Inc., Donnkenny Apparel, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, and Prudential Reinsurance Company, dated February 2, 1995.5 10.27 Release of Security Interest-Marks among Donnkenny, Inc., Donnkenny Apparel, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company and Prudential Reinsurance Company, dated February 2, 1995.5 10.28 Asset Purchase Agreement between Oak Hill Sportswear Corporation and Donnkenny Apparel, Inc., dated as of May 23, 1995,5 together with Amendment No. 1 thereto, dated as of June 26, 1995.8 10.29 Stock Purchase Agreement among Donnkenny Apparel, Inc. and all of the Shareholders of Beldoch Industries Corporation, dated June 5, 1995.6 24 10.30 Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries Corporation, the Guarantors Named therein, the Lenders Named therein and Chemical Bank, as Agent, dated June 5, 1995.7 10.31 Employment Agreement between Richard Rubin and the Company, dated November 30, 1995.9 10.32 Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors.9 10.33 Donnkenny, Inc. 1996 Restricted Stock Plan.12 10.34 Stock Purchase Agreement between Donnkenny Apparel, Inc. and Mel Weiss, dated as of September 3, 1996.10 10.35 Employment Agreement between Harvey Horowitz and the Company, dated September 5, 1996.13 10.36 Settlement Agreement between Richard Rubin and the Company, dated December 18, 1996.11 10.37 Rescission Agreement between Donnkenny Apparel, Inc. and the Company, dated December 18, 1996.13 10.38 Employment Agreement between Stuart S. Levy and the Company, dated January 28, 1997.13 10.39 Seventh Amendment, Waiver and Release Agreement, dated as of January 31, 1997, to the Credit Agreement, dated as of June 5, 1995 among the Company, the Lenders Named Therein, the Guarantors Named Therein and the Chase Manhattan Bank.15 10.40 Eighth Amendment Agreement, dated as of April 28, 1997, to the Credit Agreement, dated as of June 5, 1995 among the Company, the Lenders Named Therein, the Guarantors Named Therein and the Chase Manhattan Bank.16 10.41 Employment Agreement between Harvey A. Appelle and the Company, dated April 14, 1997.14 10.42 Employment Agreement between Lynn Siemers-Cross and the Company, dated April 14, 1997.14 10.43 Consultant Agreement between Harvey Horowitz and the Company, dated February 28, 1998. 10.44 Eighth Amendment Waiver dated as of June 5, 1995 to the Credit Agreement, dated as of April 28, 1997 among the Company, the Lenders 10.45 Named Therein and the Chase Manhattan Bank. Tenth Amendment Agreement, dated as of March 31, 1998 to the Credit Agreement, dated as of June 5, 1995 among the Company, the Lenders Named Therein, The Guarantors Named Therein and the Chase Manhattan Bank. 10.46 Employment Agreement between Beverly Eichel and the Company dated September 28, 1998.17 10.47 Second Waiver and Amendment Agreement dated as of February 28, 1999 to the Credit Agreement, dated as of June 5, 1995 among the Company, the Lenders Named Therein and the Chase Manhattan Bank. 25 10.48 Commission's Order Instituting Public Administrative Proceedings, Make Findings and Instituting a Cease-and-Desist Order and Offer of Settlement of Donnkenny, Inc. released on February 2, 1999. 21 Subsidiaries of the Company. - ------------------ (1) Incorporated herein by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-48243), as filed with the Commission on May 29, 1992 (the "Registration Statement"). (2) Incorporated herein by reference to Amendment No. 4 to the Registration Statement (Registration No. 33-48243), as filed with the Commission on May 24, 1993. (3) Incorporated herein by reference to Amendment No. 3 to the Registration Statement (Registration Statement No. 33-48243), as filed with the Commission on May 10, 1993. (4) Incorporated herein by reference to Amendment No. 5 to the Registration Statement (Registration No. 33-48243), as filed with the Commission on June 11, 1993. (5) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 3, 1994. (6) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on June 2, 1995. (7) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on June 17, 1995. (8) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on August 8, 1995. (9) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 2, 1995. (10) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on September 21, 1996. (11) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on December 19, 1996. (12) Incorporated herein by reference to the Company's 1996 Proxy Statement, filed March 22, 1996. (13) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (14) Incorporated herein by reference to the Company's Report on Form 10-Q, filed with the Commission on August 6, 1997. (15) Incorporated herein by reference to the Company's Report on Form 8-K, as filed with the Commission on February 20, 1997. (16) Incorporated herein by reference to the Company's Report on Form 10-Q, filed with the Commission on May 16, 1997. (17) Incorporated herein by reference to the Company's Report on Form 10-Q filed with the Commission on November 15, 1998.
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Donnkenny, Inc. We have audited the accompanying consolidated balance sheets of Donnkenny, Inc. and subsidiaries as of December 31, 1998 and December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the fiscal years in the three year period ended December 31, 1998. Our audits also included the financial statements schedule listed in the Index at item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects the financial position of Donnkenny, Inc. at December 31, 1998 and December 31, 1997, and the results of their operations and cash flows for each of the fiscal years in the three year period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP New York, New York March 19, 1999 (March 29, 1999 as to Note 15) F-1 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31, 1998 1997 -------- -------- CURRENT ASSETS: Cash .................................................................... $ 503 $ 257 Accounts Receivable, net of allowances of $620 and $720 respectively .................................................... 29,363 24,453 Recoverable income taxes ................................................ 655 1,181 Inventories ............................................................. 21,972 27,248 Deferred tax assets ..................................................... 3,080 5,109 Prepaid expenses and other current assets ............................... 1,265 2,146 Assets held for sale .................................................... 1,799 -- -------- -------- Total current assets .................................................... 58,637 60,394 PROPERTY, PLANT AND EQUIPMENT, NET ............................................ 6,337 9,620 OTHER ASSETS .................................................................. 2,327 -- INTANGIBLE ASSETS ............................................................. 32,914 32,446 -------- -------- TOTAL ......................................................................... $100,215 $102,460 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ....................................... $ 154 $ 5,000 Accounts payable ........................................................ 8,391 9,320 Accrued expenses and other current liabilities .......................... 7,431 7,720 -------- -------- Total current liabilities ........................................... 15,976 22,040 -------- -------- LONG-TERM DEBT 31,901 22,048 DEFERRED TAX LIABILITIES ...................................................... 3,080 5,286 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock $.01 par value; authorized 500 shares, issued none Common stock, $.01 par value; authorized 20,000 shares, issued and outstanding 14,170 and 14,075, shares in 1998 and 1997, respectively ........................ 142 141 Additional paid-in capital .............................................. 47,595 47,360 Retained earnings........................................................ 1,521 5,585 -------- -------- Total stockholders' equity .............................................. 49,258 53,086 -------- -------- TOTAL ......................................................................... $100,215 $102,460 ======== ========
See accompanying notes to consolidated financial statements. F-2 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ NET SALES ........................................................... $ 197,861 $ 245,963 $ 255,179 COST OF SALES ....................................................... 157,069 196,633 202,580 ------------ ------------ ------------ Gross Profit ............................................... 40,792 49,330 52,599 OPERATING EXPENSES: Selling, general and administrative expenses .................. 39,086 45,867 57,603 Amortization of goodwill and other related acquisition costs ........................................... 1,321 1,204 1,449 Restructuring charge .......................................... 1,180 1,723 -- ------------ ------------ ------------ Operating income (loss) .................................... (795) 536 (6,453) OTHER EXPENSE: Interest expense (net of interest income of $10, $500 and $0) ....................................................... 3,913 4,955 5,154 ------------ ------------ ------------ (Loss) before income taxes ................................. (4,708) (4,419) (11,607) INCOME TAX (BENEFIT) ................................................ (644) (1,210) (3,319) ------------ ------------ ------------ NET (LOSS) .................................................... (4,064) $ (3,209) $ (8,288) ============ ============ ============ Basic and diluted (loss) per common share ..................... $ (0.29) $ (0.23) $ (0.59) ------------ ------------ ------------ Shares used in the calculation of basic and diluted (loss) per common share ................................... 14,150,000 14,070,000 14,012,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3
DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) RETAINED TOTAL PREFERRED COMMON ADDITIONAL PAID-IN STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS EQUITY ------- ------- ------- ------- ------------- BALANCE, DECEMBER 31, 1995 .............. $ -- $ 139 $45,744 $17,082 $62,965 Exercise of stock options ..... -- 1 600 -- 601 Net loss ...................... -- -- -- (8,288) (8,288) ------- ------- ------- ------- ------- BALANCE, DECEMBER 31, 1996 .............. -- 140 46,344 8,794 55,278 Issuance of Common Stock ...... -- 1 116 -- 117 Tax Benefit attributable to the exercise of stock options ... -- -- 900 -- 900 Net loss ...................... -- -- -- (3,209) (3,209) ------- ------- ------- ------- ------- BALANCE, DECEMBER 31, 1997 .............. -- 141 47,360 5,585 53,086 Issuance of Common Stock ...... -- 1 235 -- 236 Net loss ...................... -- -- -- (4,064) (4,064) ------- ------- ------- ------- ------- BALANCE, DECEMBER 31, 1998 .............. $ -- $ 142 $47,595 $ 1,521 $49,258 ------- ------- ------- ------- -------
See accompanying notes to consolidated financial statements. F-4 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 -------- -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) .............................................. (4,064) $ (3,209) $ (8,288) Adjustments to reconcile net cash (used in) provided by operating activities: Deferred income taxes ................................ (177) (1,247) (2,449) Depreciation and amortization of fixed assets ........ 1,687 1,770 1,911 Loss on disposal of fixed assets ..................... 506 -- -- Amortization of intangibles and other assets ......... 1,321 1,204 1,449 Write down of fixed assets ........................... 907 260 -- Provision for losses on accounts receivable .......... 45 282 231 Changes in assets and liabilities: (Increase) decrease in accounts receivable ........... (4,955) 4,986 876 Decrease (increase) in recoverable income taxes ...... 526 7,444 (127) Decrease in inventories .............................. 5,276 19,545 3,458 Decrease (increase) in prepaid expenses and other current assets ..................................... 881 (513) 1,378 (Increase) in other non-current assets ............... (2,327) -- -- (Decrease) increase in accounts payable .............. (929) (10,156) 8,116 (Decrease) in accrued expenses and other current liabilities ......................... (53) (335) (796) -------- -------- -------- Net cash (used in) provided by operating activities (1,356) 20,031 5,759 - --------------------------------------------------------------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ................................ (2,452) (516) (1,016) Proceeds from sale of fixed assets ...................... 836 640 -- Increase in intangibles ................................. (1,789) (1,200) -- -------- -------- -------- Net cash used in investing activities ............. (3,405) (1,076) (1,016) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ............................. (5,580) (12,253) (7,100) Proceeds of long-term debt .............................. 483 -- -- Net borrowings (repayments) under revolving credit line . 10,104 (11,460) 290 Proceeds from exercise of stock options ................. -- -- 600 Issuance of Common Stock ................................ -- 117 -- Tax benefit attributable to exercise of stock options ... -- 900 -- -------- -------- -------- Net cash provided by (used in) financing activities 5,007 (22,696) (6,210) -------- -------- -------- NET INCREASE (DECREASE) CASH .................................. 246 (3,741) (1,467) CASH, AT BEGINNING OF PERIOD .................................. 257 3,998 5,465 ======== ======== ======== CASH, AT END OF PERIOD ........................................ $ 503 $ 257 $ 3,998 ======== ======== ======== Supplemental Disclosures Income taxes paid ....................................... $ 72 $ -- $ 2,990 ======== ======== ======== Interest paid ........................................... $ 4,072 $ 5,692 $ 4,960 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 DONNKENNY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business -- The Company designs, manufactures, imports and markets a broad line of moderately priced women's sportswear and operates in one business segment. The Company's products are primarily sold throughout the United States by retail chains, department stores and smaller specialty shops. Principles of Consolidation -- The consolidated financial statements include the accounts of Donnkenny, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Change in Year End -- In September 1996, the Company adopted December 31 as its fiscal year end. Prior to 1996, the Company's fiscal year ended on the first Saturday in the month of December. Inventories -- Inventories are stated at the lower of cost or market using the first-in, first-out method (FIFO) (see note 2). Property, Plant and Equipment -- Property, plant and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, where applicable, the term of the lease, if shorter (see note 3). Estimated useful lives are as follows: Buildings 9 to 38 years Machinery and equipment 3 to 10 years Furniture and fixtures 7 to 10 years Leasehold improvements 7 to 10 years (or lease term if shorter) Other Assets -- In connection with contingent liabilities arising from the Company's alleged inaccuracies in the reporting of revenues and expenses for certain reporting periods, the Company has agreed to deposit $5,000 in an escrow account with the Company's insurance carrier over a three year period to help defray any claims, if any. At December 31, 1998, $2,083 has been deposited and has been included in other assets. Intangible Assets -- Goodwill, which represents the excess purchase price over fair value of net assets acquired relates to the acquisition of the Company in 1989 following a change in control, and the sportswear division of Oak Hill Sportswear Corporation ("Oak Hill") and Beldoch Industries Corporation ("Beldoch") in 1995. Goodwill is amortized on a straight-line basis over the expected periods to be benefited, ranging from 20 to 40 years. Also included in intangible assets are organizational expenses and costs related to licenses acquired by the Company, which are being amortized using the straight-line method over periods of 5 to 20 years, respectively (see note 4). Assessment of Asset Impairment -- The Company periodically assesses the recoverability of the carrying value of long-lived assets, including identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment of recoverability of the carrying amount of an asset is based on estimated undiscounted future cash flows from the use of the asset and eventual disposition. If the estimated undiscounted future cash flows are less than the carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the fair value of the asset. The Company assesses the recoverability of goodwill by determining whether the amortization of goodwill over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operations or assets. If the estimated cash flows are less than the carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the estimated discounted cash flows. F-6 Income Taxes -- The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which is an asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. SFAS No. 109 requires that deferred tax assets are to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized (see note 7). Fair Value of Financial Instruments -- The carrying amount of significant financial instruments, which includes accounts receivable, accounts payable and accrued expenses, all approximated fair value as of December 31, 1998 and December 31, 1997 due to their short-term maturities. Long-term debt approximates fair value due to either its variable interest rate or short term maturities. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (such as accounts receivable, inventories, restructuring reserves, and valuation allowances for income taxes), and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INVENTORIES Inventories consisted of the following at December 31, 1998 and December 31, 1997: 1998 1997 ------- ------- Raw materials .. $ 2,155 $ 4,209 Work in process. 4,235 5,584 Finished goods.. 15,582 17,455 ------- ------- $21,972 $27,248 ======= ======= 3. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment consisted of the following at December 31, 1998 and December 31, 1997: 1998 1997 ------- ------- Land and land improvements ..................... $ 410 $ 740 Buildings and improvements ..................... 6,241 8,476 Machinery and equipment ........................ 6,295 7,162 Furniture and fixtures ......................... 1,719 1,693 ------- ------- 14,665 18,071 ------- ------- Less accumulated depreciation and Amortization ................................ 8,328 8,451 ------- ------- $ 6,337 9,620 ======= ======= 4. INTANGIBLE ASSETS Intangible assets consisted of the following at December 31, 1998 and December 31, 1997: 1998 1997 ------- ------- Goodwill ....................................... $35,274 $33,485 Licenses ....................................... 6,325 6,325 ------- ------- 41,599 39,810 Less accumulated amortization .................. 8,685 7,364 ======= ======= $32,914 $32,446 ======= ======= F-7 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES. Accrued expenses and other current liabilities consisted of the following at December 31, 1998 and December 31, 1997: 1998 1997 ------ ------ Accrued Salaries, Benefits and Bonus ............... $1,995 $2,565 Accrued Insurance .................................. 1,000 1,000 Due to Former Owners of Subsidiary ................. 880 0 Accrued Restructuring Expense ...................... 548 1,503 Other Accrued Expenses ............................. 3,008 2,652 ------ ------ Total .............................................. $7,431 $7,720 ====== ====== 6. LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1998 and December 31, 1997: 1998 1997 ------- ------- Revolving Credit Borrowings (a) $31,644 $21,540 Senior Term Loan (b) -- 5,508 Other (c) 411 -- ------- ------- 32,055 27,048 Less current maturities 154 5,000 ------- ------- $31,901 $22,048 ======= ======= On April 30, 1997 the Company entered into an amended Credit Facility (the "Credit Facility") to, among other things, include the Company's operating subsidiaries Donnkenny Apparel, MegaKnits and Beldoch, as borrowers. The Credit Facility consisted of a Term Loan, a Revolving Credit Agreement, and a Factoring Agreement. The purpose of the Credit Facility was for general working capital purposes including the issuance of letters of credit. Under the Credit Facility, the Chase Manhattan Bank serves as agent (and holds a 35% interest), the CIT Group/Commercial Services Inc. (CIT) serves as collateral agent (and holds a 15% interest), and each of Fleet Bank, N.A. and the Bank of New York are co-lenders (each holding a 25% interest). In April 1997, the Company also entered into a Factoring Agreement with CIT. The Factoring Agreement provides for a factoring commission equal to 0.45% of the gross amount of sales, plus certain customary surcharges. An additional fee of 0.20% was paid upon the conversion to a factored receivable arrangement. On November 13, 1998, the Company and its operating subsidiaries, Donnkenny Apparel, MegaKnits, and Beldoch, entered into an Amended and Restated Credit Facility (the "Amended Credit Facility") to, among other things, provide for general working capital needs of the Company including letters of credit and to extend the Amended Credit Facility to March 31, 2000. The Amended Credit Facility was as follows: the total amount available under the Revolving Credit Agreement is $75 million subject to an asset based borrowing formula, with sublimits of $55 million for direct borrowings, $35 million for letters of credit and certain overadvances. The interest rate (10% at December 31, 1998 and 1997) is equal to the prime rate (8.5% at December 31, 1998 and 1997) plus 1 1/2% per annum. Outstanding borrowings under the Revolving Credit agreement in excess of an allowable overadvance will bear interest at the prime rate plus 3 1/2 %. The Revolving Credit Agreement also requires the Company to pay certain letters of credit fees and unused commitment fees. Advances and letters of credit will be limited to (i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance. Proceeds from the sale of fixed assets and income tax refunds are to be applied to reduce the overadvance facility. (a) As of December 31, 1998, the borrowings under the Revolving Credit Agreement amounted to $31.6 million. (b) As of December 31, 1998, the Term Loan was paid in full. (c) Other debt consists of a secured term loan that was entered into on June 30, 1998 in the amount of $483. As of December 31, 1998 the principal balance of this loan amounted to $411. The interest rate is fixed at 8.75% and the loan requires monthly principal and interest payments of $15 through June 2001. Software, machinery and equipment secure this obligation. F-8 Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Beldoch, and Megaknits. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with a maximum cumulative net loss test. 7. INCOME TAXES Income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 is comprised of the following: 1998 1997 1996 ------- ------- ------- Current: Federal .................... $ -- $(1,537) $(1,462) State and local ............ (310) 35 592 Deferred ....................... (334) 292 (2,449) ======= ======= ======= $ (644) $(1,210) $(3,319) ======= ======= ======= A reconciliation of the statutory Federal tax rate and the effective rate is as follows: 1998 1997 1996 ---- ---- ---- Federal statutory tax rate ............................. (34)% (34)% (35)% State and local taxes, net of Federal income tax benefit ................................. (2) (3) (2) Losses providing no state and local tax benefit ........................................ 3 4 4 Nondeductible items .................................... 7 5 3 Losses providing no federal tax benefit ................ 20 -- -- Reduction of valuation allowance........................ (8) -- -- Other .................................................. -- 1 1 --- --- --- (14)% (27%) (29)% === === === F-9 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Deferred tax assets: Accounts receivable allowances ........................ $ 232 $ 470 Inventory valuation ................................... 874 1,991 Accrued expenses ...................................... 1,118 1,546 Restructuring charges ................................. 720 -- State operating loss carryforwards .................... 848 614 Federal operating loss carryforwards .................. 2,570 822 Other ................................................. 136 131 ------- ------- Total gross deferred tax assets ................... 6,498 5,574 ------- ------- Deferred tax liabilities: Property, plant and equipment ......................... (1,738) (1,958) Intangibles ........................................... (3,182) (3,328) ------- ------- Total gross deferred tax liabilities .............. (4,920) (5,286) ------- ------- Net deferred tax asset .................................... 1,578 288 Less valuation allowance .................................. (1,578) (465) ======= ======= Net deferred tax liability................................. $ -- $ (177) ======= =======
As of December 31, 1998 and 1997, the Company recorded a valuation allowance against the net deferred tax assets due to uncertainty of the realization of certain net operating loss carryforwards. As of December 31, 1998, the following Federal and State net operating loss carryforwards were available: Net Operating Losses -------------------- Expiration Dates Federal State ------ ----- 2001-2002 ................................................. $ -- $ 510 2011 ...................................................... -- 5,561 2012 ...................................................... 601 5,409 2013 ...................................................... -- 5,540 2014-2017 ................................................. -- 1,341 2018 ...................................................... 5,615 -- 2019-2022 ................................................. 1,341 -- During the years ended December 31, 1998 and 1997, the Company recorded interest income of $10 and $500 related to prior year carry back claims. 8. COMMITMENTS AND CONTINGENCIES a. In November 1996, ten designated class action lawsuits were commenced against the Company and certain former officers in the United States District Court for the Southern District of New York. The complaints in these actions allege various violations of the federal securities laws and seek an unspecified amount of monetary damages and other monetary relief. These actions have now been consolidated pursuant to court order and the plaintiffs filed a consolidated amended complaint. The Company is not presently in a position to determine the ultimate outcome of these legal proceedings or their impact on the financial condition of the Company. b. In September 1996, the Securities and Exchange Commission ("SEC") obtained an order directing a private investigation of the Company in connection with, among other things, the alleged overstatement of revenues and misstatement of expenses for certain reporting periods. On February 2, 1999, the Company negotiated a resolution of the SEC's charges and, without admitting or denying the charges, and without any monetary penalty being assessed against the Company, has consented to the issuance of an administrative cease-and-desist order. F-10 c. In connection with contingent liabilities arising from the alleged inaccuracies in the Company's reporting of revenues and expenses for certain reporting periods, the Company has agreed to deposit $5,000 in a escrow account with the Company's insurance carrier over a three year period to help defray claims, if any. d. Rental expense for operating leases for the years ended December 31, 1998, 1997, and 1996 approximated $4,557, $4,505 and $5,207, respectively. Minimum future rental payments as of December 31, 1998 for operating leases with initial noncancelable lease terms in excess of one year, are as follows: Year Ending December 31, Amount ------------------------ ------ 1999..................................... $ 3,307 2000 ................................... 2,871 2001 .................................... 2,396 2002 .................................... 2,163 2003 .................................... 1,776 Thereafter .............................. 2,306 ----- $14,819 ------- e. At December 31, 1998, the Company was contingently liable for outstanding letters of credit issued amounting to $24,257. 9. EMPLOYEE BENEFIT PLAN The Company sponsors an Employees' Savings 401(k) Plan (the "Plan") covering substantially all of its employees. Contributions to the Plan are made by the Company at the discretion of the Board of Directors. The Company did not make contributions to the Plan in the years ended December 31, 1998, 1997 and 1996, except for the payment of administrative expenses. 10. EARNINGS PER SHARE Basic EPS excludes dilution and is computed by dividing net income or loss attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, warrants to purchase common stock and common stock options using the treasury stock method) were exercised or converted into common stock. Potentially issuable common shares in the diluted EPS computation are excluded in net loss periods, as their effect would be antidilutive. The following table sets forth the computation of basic and diluted earnings per share, for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 -------- -------- ------- Number of shares on which basic and diluted earnings per share is calculated ............................................................ 14,150 14,070 14,012 ======== ======== ======== Net (loss) ........................................................................... $ (4,064) $ (3,209) $ (8,288) ======== ======== ======== Basic and diluted (loss)per share .................................................... $ (0.29) $ (0.23) $ (0.59) ======== ======== ========
In the years ended December 31, 1998, 1997 and 1996, the incremental shares under stock plans of 431,250, 305,000 and 0 were not considered for the diluted earnings per share calculation due to their antidilutive effect. As such, the amounts reported for basic and diluted earnings per share are the same. F-11 11. STOCK BASED COMPENSATION a. Stock Options The Company has a stock award and incentive program that permits the issuance of up to 2,000,000 options on terms as determined by the Board of Directors. Under the terms of the plan, options granted may be either non-qualified or incentive stock options and the exercise price, determined by the Stock Option committee, may not be less than the fair market value of a share on the date of the grant. Information regarding the Company's stock option plan is summarized below:
1998 1997 1996 ----------------------------- --------------------------- --------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE WEIGHTED- EXERCISE EXERCISE AVERAGE OPTIONS PRICE OPTIONS PRICE OPTIONS EXERCISE PRICE ------------- -------------- ----------- -------------- ---------- --------------- Outstanding at beginning of the year ............... 1,660,650 $ 5.42 658,800 $ 10.51 543,600 $ 8.26 Granted ....................... 500,000 1.13 1,300,500 3.73 216,350 18.15 Exercised ..................... -- -- -- -- (76,100) 7.89 Cancelled ..................... (420,500) 6.04 (298,650) 9.26 (25,050) 12.80 ---------- ----------- ---------- ----------- ------------ ------------ Outstanding at end of year .... 1,740,150 4.04 1,660,650 5.42 658,800 11.38 ========== ========== ============ Exercisable at end of year .... 484,160 234,800 268,100 ========== ========== ============ Available for grant at year end 259,850 339,350 1,341,200 ========== ========== ============
The options outstanding at December 31, 1998 range in price as follows: # OF OPTIONS EXERCISE PRICE --------- -------------- 475,000 $ .9375 - 2.8750 1,005,300 $ 2.8750 - 4.4375 29,200 $ 8.3125 - 9.9375 230,650 $ 9.9375 - 18.0625 ---------- 1,740,150 ========== The Company applies Accounting Principles Board Opinion No. 25, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans because the exercise price for stock options granted equaled the market price of the underlying stock at the date of grant. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share for the years ended December 31, 1998, 1997 and 1996 would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 ---- ---- ---- Net (loss) As reported ........................... $ (4,064) $(3,209) $ (8,288) ========== ======= ========= Pro forma ............................ $ (4,777) $(3,834) $ (8,414) ========== ======= ========= Basic and diluted net (loss) per share: As reported ........................ $ (0.29) $ (0.23) $ (0.59) ========== ======= ========= Pro forma ............................. $ (0.34) $ (0.27) $ (0.60) ========== ======= ========= F-12 The weighted average Black - Scholes value of the options granted during 1998, 1997 and 1996 were $0.83, $2.37, and $10.49, respectively. The following weighted-average assumptions were used in the Black - Scholes option-pricing model for grants in 1998, 1997 and 1996 respectively: dividend yield of 0% for all periods, volatility of 71%, 55%, and 47%, risk-free interest rate of 4.82%, 6.51%, and 6.90% and an expected life of 7 years. b. Restricted Stock In 1996, the Company adopted a plan to issue up to 1,000,000 shares of restricted stock to employees of the Company. During 1997, 305,000 shares were granted to employees of the Company at no cost to the employees. Of the total number of restricted shares granted, 5,000 shares vested and were issued upon the date of grant at the fair market value of $2.94 per share. The remaining 300,000 restricted shares were granted at a per share price of $2.94 and vest as follows: 60,000 shares on March 31, 1999 and 240,000 shares on March 31, 2000. Compensation cost recorded in 1998 and 1997 was $328 and $233, respectively, which represents the amortization of the value of the restricted stock award at the date of grant over the vesting period. c. Warrants On January 14, 1997, the Company issued warrants to purchase 75,000 shares of Common Stock at $5.00 per share to the principal of a company to rescind an acquisition transaction. The warrants are immediately exercisable and will expire July 23, 2004. d. Stock Bonus The Company issued 94,600 shares of common stock to certain key employees during the quarter ended June 30, 1998 as payment for 1997 bonuses, which were accrued and recorded as compensation expense of $236 in the year ended December 31, 1997. e. Stock Appreciation Rights In 1997, the Company awarded stock appreciation rights to two Executive Officers. These officers will be paid an amount equal to the appreciation over 5 years of 100,000 shares of stock. No compensation expense was recorded for these stock appreciation rights in 1998 or 1997. 12. RESTRUCTURING CHARGES In the fourth quarter of 1998, the Company recorded a pre-tax charge of $1.2 million and a charge to cost of goods sold of $0.7 million for the write-down of inventory in connection with the sale of its West Hempstead facility that occurred on February 2, 1999. The $1.2 million charge included a loss on the sale of property, plant and equipment, employee severance payments and other incremental charges directly attributable to the sale of the manufacturing facility. At December 31, 1998, assets held for sale included three facilities, two of which were sold subsequent to December 31, 1998. In the fourth quarter of 1997, the Company decided to discontinue the manufacture and sale of the Mickey & Co. licensed character product line under a license agreement with Disney Enterprises, Inc. and recorded a pre-tax restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5 million for the write down of merchandise inventories. The $1.7 million restructuring charge included: payments due under agreements with the licensor; write-downs of property, plant and equipment; costs related to lease terminations; employee severance payments; and other incremental charges which were primarily attributable to discontinuing the licensed character product lines. 13. BUSINESS CONCENTRATIONS Substantially all of the Company's sales are made to customers in the United States. Sales to one chain store retailer accounted for approximately 13%, 15% and 19% of the Company's sales in 1998, 1997 and 1996, respectively and accounts receivable from this customer was $2,763 at December 31, 1998. Sales to one wholesale club increased to 15% in 1998 from 8% in 1997 and accounts receivable from this customer was $8,653 at December 31, 1998. No other customers accounted for more than eight percent of the Company's sales in 1998, 1997 and 1996. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. F-13 14. SHAREHOLDERS RIGHTS PLAN On April 2, 1998, the Company's board of directors authorized a stockholder rights plan. Under the terms of the plan, stockholders of record at the close of business on April 13, 1998, received a dividend distribution of one preferred stock purchase right for each outstanding share of the Company's common stock held. The rights will become exercisable only in the event, with certain exceptions, an acquiring party accumulates fifteen percent or more of the Company's voting stock, or if a party announces an offer to acquire fifteen percent or more. The rights will expire on April 1, 2008. Each right will entitle stockholders to buy one one-hundredth of a share of a new series of preferred stock at an exercisable price of $14.00. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either the Company's stock or shares in an "acquiring entity" at half of market-value. Further, at any time after a person or group acquires fifteen percent or more (but less than fifty percent) of the Company's outstanding voting stock, the Board of Directors may, at its option, exchange part or all of the rights (other than rights held by the acquiring person or group, which will become void) for shares of the Company's common stock on a one-for-one basis. The Company will be entitled to redeem the rights at $0.01 per right at any time until the tenth day following the acquisition of a fifteen percent position in its voting stock. 15. SUBSEQUENT EVENT On March 29, 1999, the Company entered into a Second Waiver and Amendment Agreement to the Amended Credit Facility effective as of February 28, 1999 to support the Company's 1999 business plan. Additionally, the Second Waiver and Amendment waived any existing default for the year ended December 31, 1998 with respect to the Company's non-compliance of the covenants related to Net Tangible Worth and the Cumulative Net Loss tests. Pursuant to this amendment, the interest rate on borrowings was increased to 2 1/2% above the prime rate and shall be further increased by 1/8 of 1% on each of July 1, 1999, August 1, 1999 and September 1, 1999; and the applicable percentage shall be increased by 1/4 of 1% on the first day of each month thereafter, commencing October 1, 1999. A fee of $150,000 is payable on June 30, 1999. F-14 DONNKENNY, INC. INDEX TO FINANCIAL STATEMENT SCHEDULE Schedule II Valuation and Qualifying Accounts ..................... SCHEDULE II DONNKENNY, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998, DECEMBER 31, 1997, AND DECEMBER 31, 1996
BALANCE BALANCE AT CHARGED TO AT END BEGINNING COSTS AND OF OF PERIOD EXPENSES DEDUCTIONS PERIOD ----------- ------------ ------------ ----------- Year ended December 31, 1998: Reserve for bad debts ... $ 511,000 45,000 (46,000) $ 602,000 Reserve for discounts ... 209,000 1,190,000 1,381,000 18,000 ----------- ----------- $ 720,000 $ 620,000 =========== =========== Year ended December 31, 1997: Reserve for bad debts ... $ 968,000 (175,000) 282,000 $ 511,000 Reserve for discounts ... 1,272,000 3,872,000 4,935,000 209,000 ----------- ----------- $ 2,240,000 $ 720,000 =========== =========== Year ended December 31, 1996: Reserve for bad debts ... $ 897,000 233,000 162,000 $ 968,000 Reserve for discounts ... 1,112,000 6,357,000 6,197,000 1,272,000 ----------- ----------- $ 2,009,000 $ 2,240,000 =========== ===========
EX-10.47 2 SECOND WAIVER AND AMENDMENT AGREEMMENT DATED AS OF FEBRUARY 28, 1999 TO THE CREDIT AGREEMENT SECOND WAIVER AND AMENDMENT AGREEMENT SECOND WAIVER AND AMENDMENT AGREEMENT, dated as of February 28, 1999, to the Credit Agreement, dated as of June 5, 1995, as amended and restated as of November 13, 1998 (as the same has been amended pursuant to the First Waiver and Amendment dated as of January 29, 1999, or may be further amended, supplemented or modified from time to time in accordance with its terms, the "Credit Agreement"), among Donnkenny Apparel, Inc., a Delaware corporation ("DKA"), Megaknits, Inc., a New York corporation ("Megaknits"), Beldoch Industries Corporation, a Delaware corporation ("BIC"; BIC, together with DKA and Megaknits, the "Borrowers"), the Guarantors named therein and signatories thereto, the lenders named in Schedules 2.01(a) and (b) of the Credit Agreement (collectively, the "Lenders"), The CIT Group/Commercial Services, Inc., as collateral agent for the Lenders (in such capacity, the "Collateral Agent") and The Chase Manhattan Bank (formerly known as Chemical Bank) as lead arranger and administrative agent for the Lenders (in such capacity, the "Administrative Agent"). Capitalized terms used herein but not otherwise defined herein shall have the meanings attributed thereto in the Credit Agreement. WHEREAS, the parties to the Credit Agreement have agreed to waive certain provisions the Credit Agreement and to amend certain provisions of the Credit Agreement. 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. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 The definition of "Inventory Amount" contained in Section 1.01 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 amount: Month Inventory Amount ----- ---------------- February 1999 $13,500,000 March 1999 12,300,000 April 1999 12,600,000 May 1999 14,500,000 June 1999 14,200,000 July 1999 14,700,000 August 1999 17,600,000 September 1999 16,800,000 October 1999 14,100,000 Month Inventory Amount ----- ---------------- November 1999 14,000,000 December 1999 13,700,000 January 2000 13,500,000 February 2000 13,500,000 March 2000 12,300,000 1.2 The definition of "Overadvance Amount" contained in Section 1.01 of the Credit Agreement is hereby amended in its entirety to read as follows: "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 Month Amount during the Amount during the ----- End of Month Period Intramonth Period ------------------- ----------------- February 1999 $4,600,000 $9,000,000 March 1999 3,600,000 9,600,000 April 1999 3,000,000 8,600,000 May 1999 6,900,000 8,000,000 June 1999 6,600,000 11,900,000 July 1999 7,600,000 11,600,000 August 1999 6,900,000 12,600,000 September 1999 4,600,000 11,900,000 October 1999 2,900,000 9,600,000 November 1999 2,000,000 7,900,000 December 1999 3,600,000 7,000,000 January 2000 4,000,000 8,600,000 February 2000 4,600,000 9,000,000 March 2000 3,600,000 9,600,000 ; provided, however, that each of the foregoing amounts shall be reduced by the aggregate amount of cash proceeds received by the Parent and/or any of its Subsidiaries (i) as tax refunds (other than (i) the $1,537,000 tax refund received by the Borrowers in November 1998 and (ii) the $275,000 tax refund received by the Borrowers from the State of Virginia related to the 1997 tax year) and (ii) as proceeds (net of taxes due and any reasonable expenses of sale) from the sale or other disposition of any assets of the Parent and/or any of its Subsidiaries (other than the sale of the Lee County building and the Elkton County building and land and excluding sales of inventory in the ordinary course of business consistent with past practices and the potential sale of the Christiansburg, Virginia real property ). The foregoing shall not be deemed to be a consent by the Agent, the Administrative Agent or any Lender to any sale of assets. For purposes of this paragraph, (i) the term "End of Month Period" shall mean the period commencing on the last Business Day of a month and ending on the fifth day of the immediately following month and (ii) the term "Intramonth Period" shall mean the period commencing on the sixth day of a month and ending on the day immediately preceding the last Business Day of the same month. 1.3 Section 2.05(a) of the Credit Agreement is hereby amended in its entirety to read as follows: (a) Subject to the provisions of Section 2.05(b), Section 2.08 and 2.09(c) hereof, each Loan shall bear interest at a rate per annum equal to the Prime Rate plus the Applicable Percentage then in effect. In the event of any change in the Prime Rate, the rate of interest hereunder shall change as of the first day of the month following any change, so as to remain equal to the Applicable Percentage then in effect above the Prime Rate. For the purposes hereof, the "Applicable Percentage" shall initially be 2 1/2%, provided that (i) the Applicable Percentage shall be increased by one-eighth of one percent (_ of 1%) on each of July 1, 1999, August 1, 1999 and September 1, 1999 and (ii) the Applicable Percentage shall be increased by one quarter of one percent (1/4 of 1%) on the first day of each month thereafter, commencing October 1, 1999. 1.4 Section 2.06(a) of the Credit Agreement is hereby amended by adding the following proviso at the end of the first sentence thereof: provided, further, that the Revolving Credit Commitment Fee shall be increased by one-tenth of one percent (1/10 of 1%) on the first day of each month, commencing July 1, 1999. 1.5 Section 6.15 of the Credit Agreement is hereby amended in its entirety to read as follows: SECTION 6.15. Fee. If the Revolving Credit Termination Date shall not have occurred by June 30, 1999, the Borrowers shall pay, on June 30, 1999, a fee of $150,000 to the Administrative Agent for the ratable benefit of the Lenders (based upon each Lender's Commitment). 1.6 Section 7.11 of the Credit Agreement is hereby amended by (x) restating clauses (i) and (ii) in their entirety and (y) adding a new clause (iii) thereto, in each case to read as follows: (i) $1,800,000 for the fiscal quarters ending March 31, 1999 and June 30, 1999, (ii) $3,300,000 for the fiscal quarter ending September 30, 1999 and (iii) $7,700,000 for each fiscal quarter thereafter; 3 1.7 Section 7.12 of the Credit Agreement is hereby amended by deleting the amount "$19,500,000" and substituting the amount "$16,000,000" therefor. SECTION 2. WAIVERS UNDER CREDIT AGREEMENT 2.1 The Lenders hereby waive any existing Default or Event of Default that arose under Section 7.11 of the Credit Agreement solely as a result of the Parent's and its Subsidiaries' failure to have EBITDA (on a Consolidated basis) of at least $5,800,000 for the four fiscal quarter period ended December 31, 1998; provided, however, that EBITDA of the Parent and its Subsidiaries (on a Consolidated basis) for such period shall not have been less than $2,200,000. 2.2 The Lenders hereby waive the provisions of Section 7.03 of the Credit Agreement solely for the purpose of permitting the Parent to incur Indebtedness of $880,000 to the selling shareholders of BIC, provided that such Indebtedness constitutes Subordinated Indebtedness and is evidenced by a note that is in form and substance satisfactory to the Lenders. 2.3 The Lenders hereby waive the provisions of Section 7.05 of the Credit Agreement solely for the purpose of permitting the Borrowers to sell the property described on Schedule I hereto, such sale to be in form and substance satisfactory to the Lenders. 2.4 Except for the specific waivers set forth above, nothing herein shall be deemed to be a waiver of any covenant or agreement contained in the Credit Agreement. SECTION 3. CONDITIONS PRECEDENT Upon the execution and delivery of counterparts of this Second Amendment Agreement (this "Agreement") by the parties listed below and the fulfillment of the following conditions, this Agreement shall be deemed to have become effective as of the date hereof: 3.1 All representations and warranties contained in this Agreement, the Credit Agreement or otherwise made in writing to the Administrative Agent or any Lender in connection herewith shall be true and correct in all material respects after giving effect to the amendments contained in this Agreement. 3.2 No event shall have occurred and be continuing which constitutes a Default or an Event of Default. 3.3 The Administrative Agent shall have received such other documents as the Lenders or the Administrative Agent or Administrative Agent's counsel shall reasonably deem necessary. 4 SECTION 4. MISCELLANEOUS 4.1 Each of the Borrowers reaffirms and restates the representations and warranties set forth in the Credit Agreement, as applicable, and all such representations and warranties shall be true and correct on the date hereof with the same force and effect as if made on such date after giving effect to the amendments contained in this Agreement. 4.2 Except as herein expressly amended, the Credit Agreement and the other documents executed and delivered in connection therewith are each ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. 4.3 Except as specifically set forth herein, nothing herein contained shall constitute a waiver or be deemed to be a waiver of any existing Defaults or Events of Default, and the Lenders and Administrative Agent reserve all rights and remedies granted to them by the Credit Agreement, the other documents executed and delivered in connection therewith, by law and otherwise. 4.4 This 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. A facsimile signature page shall constitute an original for the purposes hereof. 4.5 Each of the Guarantors, by its signature below, (i) confirms in favor of the Lenders that it consents to this Agreement, (ii) agrees that it has no defense, offset, claim, counterclaim or recoupment with respect to any of its obligations or liabilities with respect to its guarantee and (iii) hereby irrevocably and unconditionally confirms to the Agent, the Administrative Agent and the Lenders that its guarantee is and shall continue to be in full force and effect in accordance with its terms and shall continue to be applicable to the Credit Agreement, as amended hereby. 4.6 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC. By: /s/ Harvey A. Appelle ------------------------------- Name: Harvey A. Appelle Title: Chairman of the Board of Directors and Chief Executive Officer BELDOCH INDUSTRIES CORPORATION By: /s/ Harvey A. Appelle ------------------------------- Name: Harvey A. Appelle Title: Chairman of the Board of Directors and Chief Executive Officer CHRISTIANSBURG GARMENT COMPANY INCORPORATED By: /s/ Harvey A. Appelle ------------------------------- Name: Harvey A. Appelle Title: Chairman of the Board of Directors and Chief Executive Officer MEGAKNITS, INC. By: /s/ Harvey A. Appelle ------------------------------- Name: Harvey A. Appelle Title: Chairman of the Board of Directors and Chief Executive Officer DONNKENNY, INC. By: /s/ Harvey A. Appelle ------------------------------- Name: Harvey A. Appelle Title: Chairman of the Board of Directors and Chief Executive Officer 6 THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as Administrative Agent and Lender By: /s/ Joseph A. Abruzzo ------------------------------- Name: Joseph A. Abruzzo Title: Vice President THE CIT GROUP/COMMERCIAL SERVICES, INC., as Collateral Agent and Lender By: /s/ Jeffrey Heller ------------------------------- Name: Jeffrey Heller Title: Vice President THE BANK OF NEW YORK By: /s/ Joanne M. Collett ------------------------------- Name: Joanne M. Collett Title: Vice President FLEET BANK N.A. By: /s/ Steven R. Navarro ------------------------------- Name: Steven R. Navarro Title: Senior Vice President 7 EX-21 3 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Subsidiary Jurisdiction of Incorporation - ---------- ----------------------------- Christiansburg Garment Company Delaware Donnkenny Apparel, Inc. Delaware Beldoch Industries Corporation Delaware MegaKnits, Inc. New York EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 DEC-31-1998 503,000 0 29,983,000 620,000 21,972,000 58,637,000 14,398,000 8,061,000 100,215,000 15,976,000 0 0 0 142,000 49,116,000 100,215,000 197,861,000 197,861,000 157,069,000 157,069,000 41,542,000 45,000 3,913,000 (4,708,000) (644,000) (4,064,000) 0 0 0 (4,064,000) (0.29) (0.29)
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