-----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, Jl0DsA21OqAKhBHj797W5jvSSUiEjob0BcpoL+P/o3OWyWSzsaARiBzv6Hq1qf4c PHU5kIthLaIs8HYtJQmtJg== 0001193805-03-001166.txt : 20031211 0001193805-03-001166.hdr.sgml : 20031211 20031211122119 ACCESSION NUMBER: 0001193805-03-001166 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20031001 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20031211 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21940 FILM NUMBER: 031048963 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 8-K/A 1 e300800_8ka-donnkenny.txt AMENDMENT TO CURRENT REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K-A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): October 1, 2003 --------------- Donnkenny, Inc. --------------- (Exact name of registrant as specified in its charter) Delaware 0-21940 51-0228891 -------- ------- ---------- (State or jurisdiction of (Commission (I.R.S. Employer incorporation) File No.) Identification No.) 1411 Broadway, New York, NY 10018 --------------------------------- (Address of principal executive offices) (Zip Code) (212) 790-3900 -------------- (Registrant's telephone number, including area code) Not applicable -------------- (Former Name of Former Address, if changed since last report) Explanatory Statement On October 7, 2003, Donnkenny, Inc. (the "Company") filed a Current Report on Form 8-K to report the Company's acquisition of certain assets of Robyn Meredith, Inc. The Company undertook to file the financial information required by Item 7 of the Form 8-K within sixty (60) days of its filing. The Company is filing this amendment to its Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2003 to amend Item 7 "Financial Statements, Pro Form Financial Information and Exhibits" to include the financial statements of the business acquired as set forth below. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial statements of business acquired INDEPENDENT AUDITOR'S REPORT To the Stockholders of Robyn Meredith, Inc. We have audited the accompanying balance sheet of Robyn Meredith, Inc. as of December 31, 2002, and the related statements of operations, stockholders' deficiency and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Robyn Meredith, Inc. as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ SHUBERT GOODMAN AND HUTTNER, LLP March 24, 2003 Jenkintown, Pennsylvania ROBYN MEREDITH, INC. Balance Sheet December 31, 2002 Assets Current Assets Cash $ 3,825 Accounts receivable, net of allowance for doubtful accounts of $145,025 5,403,800 Inventory 4,039,000 Note receivable 240,000 Current maturities of notes receivable - related party 39,492 Prepaid and other current assets 258,297 Deferred tax asset 29,100 Investments - securities 6,220 ------------ 10,019,734 Property and equipment, net of accumulated depreciation 393,935 Deferred tax asset 103,900 Deposits 39,028 Deposits - related party 223,046 Notes receivable - related party, net of current maturities 147,369 Intangible assets - net of accumulated amortization of $7,932 63,547 ------------ $ 10,990,559 ============ Liabilities and Stockholders' Deficiency Current liabilities Current maturities of long-term debt $ 56,088 Current maturities of capital lease obligations 61,427 Accounts payable 3,160,013 Accrued expenses 106,875 ------------ 3,384,403 Long-term debt, net of current maturities 6,675,731 Capital lease obligations - net of current maturities 57,642 Subordinated note payable - officers 1,300,000 Stockholders' deficiency Common stock, no par value; authorized 2,500 shares, issued and outstanding 208 shares 830 Additional paid-in capital 241,286 Accumulated deficiency (487,763) Other comprehensive loss (4,990) Notes receivable affiliate (176,580) ------------ (427,217) ------------ $ 10,990,559 ============ See accompanying notes to financial statements. -2- ROBYN MEREDITH, INC. Statement of Operations For the Year Ended December 31, 2002 Net sales $ 27,121,207 Cost of goods sold 21,042,293 ------------ Gross profit 6,078,914 ------------ Operating expenses Administrative expenses 1,567,713 Selling expenses 1,228,096 Sample and design expenses 1,758,967 Warehouse and distribution expenses 1,214,379 Loss due to dock strike 290,000 Trade agreement - bad debt 146,564 ------------ 6,205,719 ------------ Loss from operations (126,805) ------------ Other income (expense) Realized gain on investment 20,464 Other income 58,251 Interest expense (514,985) Loss on disposal of assets (1,538) ------------ (437,808) ------------ Loss before provision for state income taxes (564,613) Benefit for state income taxes 4,935 ------------ Net loss $ (559,678) ============ Net loss per share - basic $ (2,690.76) ============ Net loss per share - diluted $ (2,690.76) ============ Shares used in per-share calculation - basic 208 ============ Shares used in per-share calculation - diluted 208 ============ See accompanying notes to financial statements. -3- ROBYN MEREDITH, INC. Statement of Stockholders' Deficiency For the Year Ended December 31, 2002
Common Stock Additional Other Notes ------------ Paid-In Accumulated Comprehensive Comprehensive Receivable Shares Amount Capital Deficiency Income (Loss) Income (Loss) Affiliate Total ------ ------ ------- ---------- ------------- ------------- --------- ----- Balance - December 31, 2001 208 $ 830 $ 241,286 $ 71,915 $ -- $ (11,434) $(213,544) $ 89,053 Net loss -- -- (559,678) (559,678) -- -- (559,678) Other comprehensive income Unrealized gain on investment (inclusive of income tax benefit of $635) -- -- -- 6,444 6,444 -- 6,444 --------- Comprehensive income loss -- -- -- $(553,234) -- -- -- ========= Payment from notes receivable - affiliate -- -- -- -- 36,964 36,964 --- --------- --------- --------- --------- --------- --------- Balance - December 31, 2002 208 $ 830 $ 241,286 $(487,763) $ (4,990) $(176,580) $(427,217) === ========= ========= ========= ========= ========= =========
See accompanying notes to financial statements. -4- ROBYN MEREDITH, INC. Statement of Cash Flows For the Year Ended December 31, 2002 Cash flows from operating activities Net loss $ (559,678) ------------ Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 108,487 Deferred tax expense (1,635) Bad debt expense (10,549) Gain on investment (20,464) Loss on disposition of equipment 1,538 (Increase) decrease in Accounts receivable 1,408,257 Inventories (1,167,447) Prepaid and other current assets 55,378 Other assets 94,563 Deposits (5,058) Increase (decrease) in Accounts payable 217,798 Accrued expenses (61,416) ------------ Total adjustments 619,452 ------------ Net cash provided by operating activities 59,774 ------------ Cash flows from investing activities Payments for property and equipment (47,315) Proceeds from the sale of investments, net 81,990 Payments from notes receivable 33,668 Issuance of notes receivable (370,000) ------------ Net cash used in investing activities (301,657) ------------ Cash flows from financing activities Proceeds from notes payable 30,600,000 Payments on notes payable (30,275,504) Proceeds from issuance of long-term debt -- Payments of capital lease obligations (66,316) Payment of long-term debt (55,745) Payment on notes receivable - against retained earnings 36,964 ------------ Net cash provided by financing activities 239,399 ------------ Net change in cash (2,484) Cash - beginning of year 6,309 ------------ Cash - end of year $ 3,825 ============ See accompanying notes to financial statements. -5- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 1- Summary of Significant Accounting Policies Operations Robyn Meredith, Inc. (the "Company") manufacture ladies' private label branded apparel and sell to locations in the Continental USA, Canada, and Puerto Rico. The Company operates as a single segment. Credit is provided to most customers. The Company maintains credit insurance, which provides for payment on approved accounts that become more than 90 days past due. At December 31, 2002 approximately 8% of the accounts receivable balance either exceeded the insured limits or was not covered by the credit insurance. Revenue Recognition Revenue is recognized upon shipment of goods to customers, which is when title passes. The Company provides an allowance for estimated returns. Inventory Inventory is stated at the lower of cost or market. The inventory was valued using specific identification methods. Property and Equipment Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets as follows: Estimated Method Useful Life ------ ----------- Transportation equipment Straight-line 3-5 years Machinery and equipment Straight-line 5 years Leasehold improvements Straight-line 10-15 years Furniture and fixtures Straight-line 7 years Computer equipment Straight-line 3-5 years Intangible Assets Intangible assets represent the amount paid for the purchase of the Annie Alexander trademark, which is being amortized on a straight-line basis over ten years, which approximates $7,900 per year. Comprehensive Income As of January 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and presentation of comprehensive income, its components and accumulated balances. Comprehensive income, as defined, includes all changes to equity except those resulting from investments by or distributions to owners and consists of unrealized holding gains and losses in marketable equity securities. -6- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 1- Summary of Significant Accounting Policies - (continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. Income Tax Status The Company has elected to be taxed as a S Corporation under the Internal Revenue Code, accordingly there is no federal income taxes payable by the Company. Under this election, the profits, losses, credits, and deductions of the Company is passed through to the individual stockholders. The Company is subject to state income taxes only. Fair Value of Financial Instruments The Company estimates that the carrying value of its financial instruments approximates the fair value at the balance sheet date. Shipping and Handling Costs Shipping and handling costs are included in operating expenses. Approximately $315,000 is included in warehouse and distribution expenses. Concentration of Cash Balance The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash. Note 2- Recent Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that require companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment is effective for fiscal years beginning after May 15, 2002. Earlier application was encouraged. Adoption of SFAS No. 145 on January 1, 2003 did not have an impact, on the Company's Financial Statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". -7- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 2- Recent Accounting Pronouncements - continued SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003. This Statement did not have an impact on the Company's Financial Statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure amendments to Statement 123 contained in SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. This Statement did not have an impact on the Company's Financial Statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. This Statement did not have an impact on the Company's Financial Statements. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of SFAS 150 will not have an impact on the Company's reported financial position, results of operations or cash flows. Note 3- Inventory Inventory at December 31, 2002 were as follows: Raw materials $ 576,257 Work in process 650,700 Finished goods 2,812,043 ---------- $4,039,000 ========== Note 4- Note Receivable Note receivable from a customer, due in monthly installments of $60,898, including interest at 12.0%, through April 2003. -8- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 5- Notes Receivable - Related Party and Affiliate Related Party Note receivable from an affiliated company, related through common ownership, due in monthly installments of $2,513, including interest at 6.0% through December 2007. $130,000 Note receivable from an affiliated company, related through common ownership, due in monthly installments of $1,255, including interest at 7.5% through December 2006. 51,914 Note receivable from an affiliated company, related through common ownership, due in monthly installments of $1,672, including interest at 8.5% through March 2003. 4,947 Affiliate Note receivable from an affiliated company, related through common ownership, due in monthly installments of $4,228, including interest at 7.0% through December 2006. 176,580 -------- 363,441 Less amount included in stockholders' equity 176,580 -------- 186,861 Less current maturities 39,492 -------- $147,369 ======== The approximate aggregate amounts of all notes receivable maturities for the years ending December 31, are as follows: Related Party Affiliate Total ----- --------- ----- 2003 $ 39,492 $ 39,636 $ 79,128 2004 36,861 42,502 79,363 2005 39,333 45,574 84,907 2006 41,973 48,868 90,841 2007 29,202 -- 29,202 -------- -------- -------- $186,861 $176,580 $363,441 ======== ======== ======== -9- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 6- Property and Equipment Transportation equipment $ 209,453 Machinery and equipment 445,002 Leasehold improvements 73,393 Furniture and fixtures 285,783 Computer equipment 470,368 ---------- 1,483,999 Less accumulated depreciation 1,090,064 ---------- Net property and improvements $ 393,935 ========== Machinery and equipment and computer equipment include assets recorded under capital leases of $48,548 and $135,714 respectively. Related accumulated depreciation was $55,747. Depreciation expense for the year was $100,555. Note 7- Investments The Company classifies investments as available for sale. The following summarizes the Company's investments at December 31, 2002:
Gross Gross Unrealized Unrealized Fair Carrying Gains Losses Value Amount ----- ------ ----- ------ Marketable equity securities $ -- $(5,480) $ 6,220 $ 6,220
-10- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 8- Long-Term Debt On March 21, 2003 the Company amended its financing facility set to expire on September 30, 2004. The facility as amended provides for advances of the lessor of: $9,000,000 or an amount equal to the sum of 85% of eligible receivables, the lessor of 50% of eligible inventory or $4,500,000. The financing facility provides for monthly over advances ranging from $800,000 to $1,400,000 for the periods February 1, 2003, through December 31, 2003 (except in September and December, 2003, where no additional funds are available). The obligations bear interest at a revolving interest rate ranging between the bank's base rate plus .5% to 1.0% depending on the Company's fixed charge ratio as of the preceding quarter. The amended note is collateralized by substantially all of the assets of the Company, and personal guarantees of the stockholders. The note limits the Company's ability to incur additional debt and has a prepayment penalty of .5% of the sum of the Maximum Revolving Advance Amount, plus the outstanding principal balance of the Term Loan if the Company were to terminate the agreement prior to the expiration date. The amended note requires maintaining certain levels of net worth and a certain fixed charge ratio on a quarterly basis. At December 31, 2002 the Company was not in compliance with these loan covenants but obtained a waiver of financial covenant defaults from the bank. $6,659,427 Notes payable to lenders ranging from $197 to $1,591 per month through February, 2007 to be repaid in equal monthly installments including interest at 5.9% - 7.25% over terms of four to five years, collateralized by the related equipment acquired. 162,392 ---------- 6,731,819 Less current maturities 56,088 ---------- Long-term debt $6,675,731 ========== The approximate aggregate amount of all long-term maturities for the years ending December 31, is as follows: 2003 $ 56,088 2004 6,628,859 2005 29,520 2006 15,794 2007 1,558 ---------- $6,731,819 ========== The banks' base rate was 4.25% at December 31, 2002. The Euro dollar rate was 3.89% at December 31, 2002. -11- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 9- Subordinated Notes Payable - Officer Notes payable to the officers of the Company ($1,150,000) that have been subordinated to the bank (see Note 8). Interest was charged at varying rates of interest averaging 11.67%. There is a balloon principal payment due January 2, 2004. Note payable to the son of an officer of the Company ($150,000) that has been subordinated to the bank (see Note 8). The loan can be converted to shares of Robyn Meredith, Inc. stock at book value as of December 31, 1998. Interest was charged at rate of 3.0% with a balloon principal payment due January 2, 2004. Effective January 1, 2003 the rights under this note to convert the loan into shares representing 10% of the outstanding shares of the Company was exercised. Interest expense was $151,638 for the year ended December 31, 2002. Note 10- Related Party Transactions The Company paid $251,503 to an affiliated company for production and manufacturing. The Company leases a building from an affiliated company owned and controlled by an officer of the Company at a current monthly rent of $5,416 under a lease expiring December 31, 2003. Rent expense was $60,000 for the year ended December 31, 2002. The Company leases its offices and warehouse from a partnership owned and controlled by stockholders and officers at a current monthly rent of $23,705 under a lease expiring June 30, 2013. Rent expense was $284,460 for the year ended December 31, 2002. The Company has various leases with a related company under common control, expiring through December 2013. Rent expense was $369,849 for the year ended December 31, 2002. Note 11- Capital Lease Obligations The Company has entered into various capital leases for equipment expiring through 2006, with aggregate monthly payments of $7,128. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2002: For the Years Ending December 31, ------------ 2003 $ 73,879 2004 39,241 2005 11,882 2006 10,892 2007 -- -------- Net minimum lease payments 135,894 Less: amount representing interest 16,825 -------- Present value of minimum lease payments 119,069 Less: current maturities 61,427 -------- Long-term maturities $ 57,642 ======== -12- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 11- Capital Lease Obligations - continued The present value of minimum future obligations shown above is calculated based on interest rates ranging from 7% to 18%. Note 12- Operating Leases The Company leases equipment, office, and warehouse space under various operating leases, including those with related companies (see Note 10), expiring in various years through 2013. Monthly payments under the current leases are approximately $73,000. The following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2002. Rental expense on operating leases was $872,184 for the year ended December 31, 2002. For the Years Related Party Ended Rental Other Lease December 31, Total Obligations Obligations ------------ ----- ----------- ----------- 2003 $ 878,000 $ 700,000 $178,000 2004 594,000 559,000 35,000 2005 515,000 505,000 10,000 2006 472,000 472,000 -- 2007 385,000 385,000 -- Thereafter 1,988,000 1,988,000 -- ---------- ---------- -------- Total minimum future rental payments $4,832,000 $4,609,000 $223,000 ========== ========== ======== Note 13- Income Taxes Deferred state tax attributes, resulting from differences between financial accounting amounts and tax bases of assets and liabilities of December 31, 2002 are as follows: Current assets and liabilities Allowance for doubtful accounts $13,000 Inventory overhead capitalization 16,100 ------- Net current deferred tax asset $29,100 ======= -13- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 13- Income Taxes - (continued) Noncurrent assets and liabilities Depreciation $ (3,400) Net operating loss carryforward 203,300 --------- 199,900 Valuation allowance (96,000) --------- Net noncurrent deferred tax asset $ 103,900 ========= The provisions for income taxes for the years ending December 31, 2002, consist of the following: Current tax expense $ 21,500 Deferred tax expense 3,065 Net change in valuation allowance (29,500) -------- $ (4,935) ======== The Company provides for a valuation allowance for expected impairments of deferred tax assets. The provisions for income taxes for 2002 differ from the amounts that would result from applying statutory rates because of the application of certain nondeductible expenses. State operating losses approximating $2,500,000 expire in years through 2007. Note 14- Retirement Plans The Company maintains a profit-sharing plan, covering substantially all non-union employees. Contributions to the profit-sharing plan are discretionary and are determined by the Board of Directors. No contributions were made by the Company for the year ended December 31, 2002. -14- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 15- Supplemental Disclosures of Cash Flow Information Cash paid during 2002 for: Interest $512,759 ======== Income taxes $ 1,015 ======== Note 16- Current Vulnerability Due to Certain Concentrations Major Customers The Company had two major customers that accounted for 42% of total sales, during the year ended December 31, 2002 and three major customers that accounted for 71% of accounts receivable as of December 31, 2002. Major customers are considered to be those that account for more than 10% of total sales. Major Suppliers The Company had two major suppliers that accounted for 34% of total purchases during the year ended December 31, 2002 and 50% of accounts payable as of December 31, 2002. Note 17- Noncash Investing and Financing Activities During the year ended December 31, 2002, the Company purchased additional equipment for $191,368. In conjunction with the acquisition, liabilities were assumed as follows: Cost of equipment acquired $ 191,368 Cash paid (47,315) --------- Liabilities assumed $ 144,053 ========= Note 18- Contingencies Robyn Meredith, Inc. and an affiliated company have guaranteed real estate mortgages and loans owed by their stockholders. The approximate outstanding balances on these obligations at December 31, 2002 was $3,484,000. The guarantees expire between January 2007 and December 2008. At December 31, 2002, the Company had $639,769 in outstanding letters of credit. The Company entered into a lease agreement effective January 1, 1997, which allows the Company an abatement in the amount of the fixed rent payable for a period of fourteen months. The entire fixed rent shall become immediately due and payable upon default by the Company. The amount due upon default is approximately $144,700. Rent expense is recognized on a straight-line basis over the life of the lease. This lease expires on December 31, 2003. -15- ROBYN MEREDITH, INC. Notes to Financial Statements December 31, 2002 Note 19- Subsequent Event The Company's current financing facility requires an additional $200,000 in cash contributions to the Company by the officers. The additional required cash contributions are $100,000 on or before April 30, 2003 and $100,000 on or before May 31, 2003. Note 20- Net Loss Per Share Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period. The effect of stock option awards is antidilutive and, accordingly, stock options to purchase 20 shares of common stock have been excluded from the calculation of diluted loss per share for the year ended December 31, 2002. -16- ROBYN MEREDITH, INC. Balance Sheet Unaudited September 30,
Assets 2003 2002 ---- ---- Current assets Cash $ 14,888 $ 14,606 Accounts receivable, net of allowance for doubtful accounts of $259,157 and $79,810 7,512,464 6,191,089 Inventory 2,853,296 3,275,393 Due from officer 432,000 141,000 Due from affiliate companies 203,700 265,962 Current maturities of notes receivable - related party 35,382 21,139 Deferred tax asset 29,100 26,300 Prepaid and other current assets 632,479 157,691 Investments - securities 6,220 11,700 ------------ ------------ 11,719,529 10,104,880 Property and equipment, net of accumulated depreciation 345,541 402,069 Deposits 39,028 39,028 Deposits - related party 223,046 242,988 Intangible assets - net of accumulated amortization of $13,881 and $5,949 57,598 65,530 Deferred tax asset 103,900 105,700 Notes receivable-related party-net of current maturities 120,834 43,324 Other assets -- 86,564 ------------ ------------ $ 12,609,476 $ 11,090,083 ============ ============ Liabilities and Stockholders' Equity (Deficiency) Current liabilities Current maturities of long-term debt $ 8,604,730 $ 55,314 Current maturities of capital lease obligations 47,042 64,880 Accounts payable 3,105,158 2,165,251 Accrued expenses 141,554 212,901 ------------ ------------ 11,898,484 2,498,346 Long-term debt, net of current maturities 89,733 7,069,297 Capital lease obligations - net of current maturities 24,568 71,396 Subordinated note payable - officers 1,300,000 1,300,000 Stockholders' equity (deficiency) Common stock, no par value; authorized 2,500 shares, issued and outstanding 228 shares and 208 shares respectively 830 830 Additional paid-in capital 541,286 241,286 Retained earnings (accumulated deficiency) (1,093,321) 94,991 Other comprehensive loss (4,990) -- Notes receivable affiliate (147,114) (186,063) ------------ ------------ (703,309) 151,044 ------------ ------------ $ 12,609,476 $ 11,090,083 ============ ============
See accompanying notes. ROBYN MEREDITH, INC. Statement of Operations Unaudited For the Nine Months Ended September 30,
2003 2002 ---- ---- Net sales $ 22,249,022 $ 20,479,464 Cost of goods sold 18,186,871 15,518,429 ------------ ------------ Gross profit 4,062,151 4,961,035 ------------ ------------ Operating expenses Administrative expenses 1,444,299 1,213,657 Selling expenses 969,444 977,222 Sample and design expenses 1,093,929 1,409,526 Warehouse and distribution expenses 879,354 886,233 ------------ ------------ 4,387,026 4,486,638 ------------ ------------ Earnings (loss) from operations (324,875) 474,397 ------------ ------------ Other income (expense) Other income 34,793 58,663 Interest expense (316,021) (511,109) ------------ ------------ (281,228) (452,446) ------------ ------------ Earnings (loss) before provision for state income taxes (606,103) 21,951 Benefit for state income taxes 545 1,125 ------------ ------------ Net income (loss) $ (605,558) $ 23,076 ============ ============ Net earnings (loss) per share - basic $ (2,655.96) $ 110.94 ============ ============ Net earnings (loss) per share - diluted $ (2,655.96) $ 101.21 ============ ============ Shares used in per-share calculation - basic 228 208 ============ ============ Shares used in per-share calculation - diluted 228 228 ============ ============
See accompanying notes. ROBYN MEREDITH, INC. Statement of Stockholders' Equity (Deficiency) Unaudited For the Nine Months Ended September 30,
Common Stock Additional Other Notes ------------ Paid-In Accumulated Comprehensive Comprehensive Receivable Shares Amount Capital Deficiency Income (Loss) Income (Loss) Affiliate Total ------ ------ ------- ---------- ------------- ------------- --------- ----- Balance - December 31, 2002 208 $830 $241,286 $ (487,763) $ -- $ (4,990) $(176,580) $(427,217) Exercise of stock options 20 Net loss -- -- (605,558) (605,558) -- -- (605,558) --------- Comprehensive loss -- -- -- $(605,558) -- -- -- ========= Capital contributions -- 300,000 -- -- -- 300,000 Payments from notes receivable - affiliate -- -- -- -- 29,466 29,466 --- ---- -------- ----------- -------- --------- --------- Balance - September 30, 2003 228 $830 $541,286 $(1,093,321) $ (4,990) $(147,114) $(703,309) === ==== ======== =========== ======== ========= ========= Balance - December 31, 2001 208 $830 $241,286 $ 71,915 $ -- $(11,434) $(213,544) $ 89,053 Net income -- -- 23,076 23,076 -- -- 23,076 Other comprehensive income Unrealized gain on investment (inclusive of income tax benefit of $1,125) -- -- -- 11,434 11,434 -- 11,434 --------- -------- Comprehensive income -- -- -- $ 23,076 -- -- -- ========= Payment from notes receivable - affiliate -- -- -- -- 27,481 27,481 --- ---- -------- ----------- -------- --------- --------- Balance - September 30, 2002 208 $830 $241,286 $ 94,991 $ -- $(186,063) $ 151,044 === ==== ======== =========== ======== ========= =========
See accompanying notes. ROBYN MEREDITH, INC. Statement of Cash Flows Unaudited For the Nine Months Ended September 30,
2003 2002 ---- ---- Cash flows from operating activities Net (loss) income $ (605,558) $ 23,076 ------------ ------------ Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation and amortization 102,937 83,973 Bad debt expense 127,482 -- Gain on investment -- (21,589) Gain (loss) on disposition of equipment (1,166) 1,538 (Increase) decrease in Accounts receivable (2,236,146) 610,419 Inventories 1,185,704 (403,840) Prepaid and other current assets (374,182) 155,984 Deposits, related party -- (25,000) Other assets -- 7,999 Increase (decrease) in Accounts payable (54,855) (776,964) Accrued expenses 34,679 44,610 ------------ ------------ Total adjustments (1,215,547) (322,870) ------------ ------------ Net cash used in operating activities (1,821,105) (299,794) ------------ ------------ Cash flows from investing activities Payments for property and equipment (4,053) (32,919) Proceeds from the sale of investments, net -- 81,990 Payments from notes receivable 270,645 26,066 Due from officer (432,000) (141,000) Due from affiliated companies (203,700) (265,962) ------------ ------------ Net cash used in investing activities (369,108) (331,825) ------------ ------------ Cash flows from financing activities Proceeds from notes payable 24,473,144 23,033,000 Payments on notes payable (22,502,271) (22,329,923) Payments of capital lease obligations (47,459) (49,109) Payment of long-term debt (51,604) (41,533) Payment on notes receivable - against retained earnings 29,466 27,481 Capital contributions 300,000 -- ------------ ------------ Net cash provided by financing activities 2,201,276 639,916 ------------ ------------ Net change in cash 11,063 8,297 Cash - beginning of year 3,825 6,309 ------------ ------------ Cash - end of year $ 14,888 $ 14,606 ============ ============
See accompanying notes. ROBYN MEREDITH, INC. Notes to Financial Statements Unaudited September 30, 2003 Note 1- Basis of Presentation The accompanying unaudited, financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and note disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In the opinion of management, all adjustments consisting of normal, recurring adjustments necessary for a fair presentation of (a) the results of operations for the nine months ended September 30, 2003 and 2002, (b) the financial position at September 30, 2003 and 2002, and (c) cash flows for the nine months ended September 30, 2003 and 2002, have been made. The results of operations for the nine months ended September 30, 2003 and 2002 are not necessarily indicative of those to be expected for the entire year. The accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the year ended December 31, 2002. Any material facts that have changed from those footnotes are discussed herein, or are a normal result of transactions during the interim period. Note 2- Accounting Policies The summary of the Company's significant accounting policies in its audited financial statements for the year ended December 31, 2002 describes its accounting policies. Except as noted below, accounting policies are the same as the year ended December 31, 2002. Note 3- Recent Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that require companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment is effective for fiscal years beginning after May 15, 2002. Earlier application was encouraged. Adoption of SFAS No. 145 on January 1, 2003 did not have an impact, on the Company's Financial Statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003. This Statement did not have an impact on the Company's Financial Statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure amendments to Statement 123 contained in SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. This Statement did not have an impact on the Company's Financial Statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. This Statement did not have an impact on the Company's Financial Statements. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of SFAS 150 will not have an impact on the Company's reported financial position, results of operations or cash flows. Note 4- Net Income Per Share In accordance with SFAS No. 128. "Earnings Per Share, "basic and diluted income (loss) per common share has been computed using the weighted average-number of shares of common stock outstanding during the period. There were no potentially dilutive securities outstanding at September 30, 2003. Potentially dilutive securities outstanding at September 30, 2002 which convert to common share equivalents consist of common stock warrants to purchase 20 shares of the Company's common stock. Note 5- Inventory Inventory at September 30, 2003 and 2002 were as follows: 2003 2002 ---- ---- Raw materials $ 529,709 $ 390,730 Work in process 1,130,234 785,400 Finished goods 1,193,353 2,099,263 ---------- ---------- $2,853,296 $3,275,393 ========== ========== Note 6- Long-Term Debt On March 21, 2003 the Company amended its financing facility set to expire on September 30, 2004. The facility as amended provides for advances of the lessor of: $9,000,000 or an amount equal to the sum of 85% of eligible receivables, the lessor of 50% of eligible inventory or $4,500,000. The financing facility provides for monthly over advances ranging from $800,000 to $1,400,000 for the periods February 1, 2003, through December 31, 2003 (except in September and December, 2003, where no additional funds are available). The obligations bear interest at a revolving interest rate ranging between the bank's base rate plus .5% to 1.0% depending on the Company's fixed charge ratio as of the preceding quarter. The amended note is collateralized by substantially all of the assets of the Company, and personal guarantees of the stockholders. The note limits the Company's ability to incur additional debt and has a prepayment penalty of .5% of the sum of the Maximum Revolving Advance Amount, plus the outstanding principal balance of the Term Loan if the Company were to terminate the agreement prior to the expiration date. Note 6 Long-Term Debt - continued
September 30 ------------------------ 2003 2002 The amended note requires maintaining certain levels of $8,540,300 $6,948,008 net worth and a certain fixed charge ratio on a quarterly basis. At September 30, 2003 the Company was not in compliance with these loan covenants Notes payable to lenders ranging from $197 to $1,591 per $ 154,163 $ 176,603 month through February, 2007 to be repaid in equal ---------- ---------- monthly installments including interest at 5.9% - 7.25% over terms of four to five years, collateralized by the related equipment acquired Less current maturities $8,604,730 $ 55,314 ---------- ---------- Long-term debt $ 89,733 $7,069,297 ========== ==========
The approximate aggregate amount of all long-term maturities for the years ending December 31, is as follows: 2003 $8,556,820 2004 66,944 2005 36,240 2006 24,532 2007 8,697 Thereafter 1,230 ---------- $8,694,463 ========== The banks' base rate was 4.0% and 4.75% at September 30, 2003 and 2002 respectively. Note 7- Subsequent Event On October 1, 2003 the Company sold certain stated assets. The assets that were sold consisted of inventory of finished goods, raw materials and trim, certain trade names including the name "Robyn Meredith", open purchase orders and certain equipment that was subject to equipment lease agreements. The selling price paid by Donnkenny, Inc. was $4.6 million, of which $3.4 million was delivered at the closing of the transaction and $1.2 million was represented by the delivery of a Promissory Note providing for equal monthly payments over three years without interest. The purchase price was determined by valuing the inventory and through negotiations between the parties as to the balance of the purchase price. (a) Pro Forma Financial Information Unaudited Pro Forma Combined Financial Information The accompanying unaudited pro forma combined statement of operations for the year ended December 31, 2002 and for the nine months ended September 30, 2003 give effect to the following events as if each had occurred on January 1, 2002. The unaudited pro forma balance sheet gives effect to the following events as if each had occurred on September 30, 2003: o The acquisition of RMI assets; o Additional borrowing on the Company's revolver of $3.4 million necessary to consummate the acquisition of RMI assets; and o The issuance of a $1.2 Promissory Note to RMI The acquisition of RMI will be accounted for using the purchase method of accounting. The fair values of the assets acquired are based on preliminary estimates. Additional analysis will be required to determine the final fair value, primarily with respect to the inventory and intangible assets. RMI's assets acquired will change from amounts shown based on the valuations. The final allocation of the acquisition consideration may result in certain differences from the pro forma amounts reflected in the unaudited pro forma combined financial statements. The unaudited pro forma combined financial statements are based on assumptions that the Company believes are reasonable under the circumstances. They are not necessarily indicative of our future financial position or results of operations or of the financial positions or results of operations that would have actually occurred had the acquisition of RMI taken place as of the dates or for the periods presented. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 2002 (in thousands, except share and per share data)
Pro Forma Pro Forma Donnkenny RMI Adjustments Combined ----------- ----------- ----------- ----------- Net sales $ 107,102 $ 27,121 $ -- $ 134,223 Cost of sales 80,345 21,042 -- 101,387 ----------- ----------- ---------- ----------- Gross profit 26,757 6,079 -- 32,836 Operating Expenses: Selling, general and administrative expenses 22,339 6,206 -- 28,545 Write-down of assets held for sale 150 -- -- 150 Amortization of intangibles and other related acquisition costs -- -- 13 (1) 13 ----------- ----------- ---------- ----------- Total operating expenses 22,489 6,206 13 28,708 Operating income (loss) 4,268 (127) (13) 4,128 Other Expense (Income): Interest expense 2,039 515 50 (2) 2,604 Realized gain on investment -- (20) -- (20) Other income -- (57) -- (57) ----------- ----------- ---------- ----------- Total other expense 2,039 438 50 2,527 Income (loss) before income taxes 2,229 (565) (63) 1,601 Income tax expense (benefit) 36 (5) -- 31 ----------- ----------- ---------- ----------- Income (loss) before cumulative effect of change In accounting principle 2,193 (560) (63) 1,570 Cumulative effect of change in accounting principle (no tax benefit recognized) 28,744 -- -- 28,744 ----------- ----------- ---------- ----------- Net loss $ (26,551) $ (560) $ (63) $ (27,174) =========== =========== ========== =========== Basic income (loss) per common share: Income (loss) before accounting change $ 0.50 $ 0.36 Cumulative effect of accounting change (6.58) (6.58) ----------- ----------- Net (loss) $ (6.08) $ (6.22) =========== =========== Diluted income (loss) per common share: Income (loss) before accounting change $ 0.50 $ 0.36 Cumulative effect of accounting change (6.58) (6.58) ----------- ----------- Net (loss) $ (6.08) $ (6.22) =========== =========== Shares used in the calculation of income (loss per share): Basic 4,367,417 4,367,417 =========== =========== Diluted 4,417,796 4,417,796 =========== ===========
See accompanying notes to Unaudited Pro forma Combined Financial Statements UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Nine Months Ended September 30, 2003 (in thousands, except share and per share data)
Pro Forma Pro Forma Donnkenny RMI Adjustments Combined ----------- ----------- ----------- ----------- Net sales $ 60,235 $ 22,249 $ -- $ 82,484 Cost of sales 45,472 18,187 -- 63,659 ----------- ----------- ----------- ----------- Gross profit 14,763 4,062 -- 18,825 Operating Expenses: Selling, general and administrative expenses 15,542 4,387 -- 19,929 Amortization of intangibles and other related acquisition costs 32 -- 8 (3) 40 ----------- ----------- ----------- ----------- Total operating expenses 15,574 4,387 8 19,969 Operating loss (811) (325) (8) (1,144) Other Expense (Income): Interest expense 1,018 316 25 (4) 1,359 Other income -- (35) -- (35) ----------- ----------- ----------- ----------- Total other expense 1,018 281 25 1,324 Loss before income taxes (1,829) (606) (33) (2,468) Income tax expense (benefit) 58 (1) -- 57 ----------- ----------- ----------- ----------- Net loss $ (1,887) $ (605) $ (33) $ (2,525) =========== =========== =========== =========== Basic net loss per common share $ (0.43) $ (0.58) =========== =========== Diluted loss per common share $ (0.43) $ (0.58) =========== =========== Shares used in the calculation of loss per share: Basic 4,367,417 4,367,417 =========== =========== Diluted 4,367,417 4,367,417 =========== ===========
See accompanying notes to Unaudited Pro forma Combined Financial Statements UNAUDITED PRO FORMA COMBINED BALANCE SHEET September 30, 2003 (in thousands, except share and per share data)
Pro Forma Pro Forma Donnkenny RMI Adjustments Combined --------- -------- ----------- --------- Assets Current Assets: Cash $ 62 $ 15 $ (15) (5) $ 62 Accounts receivable, net 1,067 7,512 (7,512) (5) 1,067 Due from factor, net 16,841 -- -- 16,841 Inventories 17,722 2,853 -- 20,575 Prepaid expenses and other current assets 1,255 1,339 (1,339) (5) 1,255 Assets held for sale 280 -- -- 280 -------- -------- -------- -------- Total current assets 37,227 11,719 (8,866) 40,080 Property, plant and equipment, net 3,679 346 (346) (5) 3,679 Other assets 369 487 (487) (5) 369 Goodwill -- -- 1,884 (6) 1,884 Other intangible assets 1,301 57 (57) (5) 50 (6) 1,351 -------- -------- -------- -------- $ 42,576 $ 12,609 $ (7,822) $ 47,363 ======== ======== ======== ======== Liabilities and stockholders' equity Current liabilities: Current portion of long-term debt $ -- $ 8,652 $ (8,652) (5) $ -- Current portion of note payable -- -- 350 (6) 350 Accounts payable 6,507 3,105 (3,105) (5) 6,507 Accrued expenses and other current liabilities 1,971 141 (141) (5) 275 (6) 2,246 -------- -------- -------- -------- Total current liabilities 8,478 11,898 (11,273) 9,103 Long-term debt 28,839 114 (114) (5) 3,404 (6) 32,243 Note payable -- -- 758 (6) 758 Subordinated note payable - officers -- 1,300 (1,300) (5) -- Stockholders' equity (deficiency): Common stock 44 1 (1) (5) 44 Additional paid-in capital 50,449 541 (541) (5) 50,449 Accumulated deficit (45,234) (1,245) 1,245 (5) (45,234) -------- -------- -------- -------- Total stockholders' equity (deficiency) 5,259 (703) 703 5,259 -------- -------- -------- -------- $ 42,576 $ 12,609 $ (7,822) $ 47,363 ======== ======== ======== ========
See accompanying notes to Unaudited Pro forma Combined Financial Statements Notes to Unaudited Pro Forma Combined Financial Statements Year Ended December 31, 2002 Unaudited Pro Forma Combined Statement of Operations (1) Reflects the adjustment of amortization expense of intangible assets acquired. Intangible assets are being amortized on a straight-line method over the terms of the related agreement of four years. (2) Reflects the adjustment of interest expense to give effect to the issuance of the Promissory note to the stockholders of RMI with imputed interest at 5.25% (the Company's current borrowing rate). Nine Months Ended September 30, 2003 Unaudited Pro Forma Combined Statement of Operations (3) Reflects the adjustment of amortization expense of intangible assets acquired. Intangible assets are being amortized on a straight-line method over the terms of the related agreement of four years. (4) Reflects the adjustment of interest expense to give effect to the issuance of the Promissory note to the stockholders of RMI with imputed interest at 5.25% (the Company's current borrowing rate). Unaudited Pro Forma Combined Balance Sheet as of September 30, 2003 (5) To eliminate RMI assets not acquired and liabilities not assumed and to eliminate RMI's stockholders' deficiency , as follows: Cash $ 15 Accounts receivable, net 7,512 Prepaid expenses and other current assets 1,339 Property, plant and equipment, net 346 Other assets 487 Other intangible assets 57 Current portion of long-term debt 8,652 Accounts payable 3,105 Accrued expenses and other current liabilities 141 Long-term debt 114 Subordinated note payable - officers 1,300 Common stock 1 Additional paid-in capital 541 Accumulated deficit (1,245) (6) Donnkenny's acquisition of RMI will be accounted for by the purchase method of accounting, pursuant to which the acquisition consideration is allocated among the tangible and intangible assets in accordance with their estimated fair values on the date of acquisition. The acquisition consideration and estimated allocation of the acquisition consideration, which does not reflect any purchase price adjustments based on inventory valuations and subsequent performance thresholds, are as follows (in thousands): Acquisition consideration: Cash consideration paid (a) $3,404 Issuance of Promissory Note, discounted 1,108 Transaction related fees (b) 275 ------ Total acquisition consideration $4,787 ====== Allocation of acquisition consideration: Inventory based on RMI'S carrying value as of September 30, 2003 $2,853 Estimated increase in goodwill related to the acquisition 1,884 Other intangible assets 50 ------ $4,787 ====== (a) Additional borrowings of $3,404 under Donnkenny's revolving line of credit. (b) Accrued (c) Exhibits 99.1 Text of press release dated October 3, 2003 (Incorporated by reference to Exhibit 99.5 to Donnkenny's Form 8-K filed October 7, 2003). SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DONNKENNY, INC. By: /s/ Daniel H. Levy ------------------ Daniel H. Levy Chief Executive Officer Date: December __, 2003 -----END PRIVACY-ENHANCED MESSAGE-----