UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Sec. 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended 12/31/97 Commission File Number 0-774
DANIEL GREEN COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 15-0327010
(State or other jurisdiction or incorporation (IRS Employer
or organization Identification Number)
ONE MAIN ST., DOLGEVILLE, NEW YORK 13329
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315)-429-3131
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, $2.50 PAR VALUE PER SHARE
(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, 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or by
amendment to this Form 10-KSB ( ).
Revenues of the Registrant for the Fiscal Year Ended December 31, 1997:
Net Sales of $19,663,142
Aggregate market value of the voting stock held by non-affiliates of the
registrant:
$4,241,209 as of March 18, 1998
<PAGE>
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
CLASS OUTSTANDING AT MARCH 18, 1998
COMMON STOCK, $2.50 PAR VALUE 1,698,329 shares
List hereunder the following documents, if incorporated by reference, and the
part of the Form 10-KSB into which the document is incorporated:
Annual Report to Stockholders, December 31, 1997 Part II
Definitive Proxy Statement Dated March 3, 1998 Part I, Part III
PART I
Item 1. Description of Business
The registrant and its predecessors have been engaged in the
manufacture and sale of quality leisure footwear since 1882. The Daniel Green
slipper is one of the oldest and best known in the footwear industry. Materials
in Daniel Green slippers include satin, rayon, corduroy, nylon, brocade, felt,
polyurethane and several types of leather.
Women's slippers and leisure footwear, which normally account for over
80% of the registrant's annual sales, retail within a price range varying from
$19.00 to $76.00 a pair, while men's slippers are sold at prices ranging between
$20.00 to $48.00 a pair. Overall, the registrant produces about 65 to 75 styles
of slippers and leisure footwear, many of which change from year to year. The
registrant designs most of its own products, having for many years maintained a
style research department. Approximately 40 styles are imported and produced by
overseas manufacturers. The registrant owns the trademarks Comfy(R) and Dee
Gee(R) and sells its shoes under the label "Daniel Green Leisure Footwear".
Most of the slippers and leisure footwear sold by the registrant are
manufactured in its plants in Dolgeville, New York (more fully described in Item
2 - Property). During 1997, the registrant started to consolidate its
manufacturing operations and in 1998, the registrant will operate its entire
domestic manufacturing within one facility, excluding warehousing and importing
activity. The registrant has experienced no difficulty in obtaining the raw
materials needed to manufacture its products and does not have a practice of
entering into long-term purchase commitments.
The registrant's products are sold directly to retailers through its
own sales force which covers the entire United States. Approximately 4,600
stores carry Daniel Green Company slippers and leisure footwear, including most
of the major department stores in the country. Seven major customers represented
41% of the registrant's business in 1997. These same customers
2
<PAGE>
represented 46% of sales in 1996 and 42% in 1995. Due to the uncertain nature of
the retail industry, the loss of any one or more customer would have a material
adverse effect on the registrant's business.
The registrant advertises its products through a cooperative
advertising program and for many years has built its advertising campaigns
around the trademark Comfy(R). It avoids granting restricted or exclusive shoe
sales arrangements, believing that distribution of its products requires the
greatest number of outlets. However, the registrant has a contractual
arrangement with one of its major customers to provide selected footwear
products. Private label products are sold to a number of customers by internal
management and several companies account for a majority of this business.
The registrant's business is a seasonal one. By offering a June 10th
payment date to customers buying slippers for shipments between January 1st and
May 1st, the registrant has been able to encourage customers to replenish their
core stock programs on an earlier basis. Dating privileges are also given for
payment on May 10th for all Spring casuals shipped between November 25th and
March 24th, and a November 10th dating for Fall casuals shipped between June 1st
and September 1st. However, inclusive of this dating program, the majority of
the registrant's sales are generated during the latter half of the year. In an
effort to promote holiday sales, the registrant has offered a Christmas dating
which allows customers to pay on December 10th for orders of slippers shipped
between June 1st and October 1st.
The registrant experiences severe competition in the sale of its
slippers from other manufacturers of leisure footwear, particularly imports. It
maintains an active research and development staff which concentrate on the
introduction and release of new products into the market place. The registrant
is not aware of any patents held by others which might materially affect its
ability to compete.
The registrant believes that a definite competitive advantage attaches
to its ownership of the registered trademarks Comfy(R) and Dee Gee(R) which have
been used by the registrant for many years.
The registrant knows of no material effects that compliance with
federal, state and local provisions regulating the discharge of materials into
the environment may have upon the capital expenditures, earnings and competitive
position of the registrant.
The registrant has enjoyed a good relationship with approximately 275
employees, most of whom are full time. All of the registrant's employees, with
the exception of field salesmen, are employed in Dolgeville, New York.
3
<PAGE>
The amount of registrant's backlog orders believed to be firm as of
December 31, 1997 is approximately $643,000, compared with approximately
$1,389,000 and approximately $543,000 as of December 31, 1996 and 1995
respectively. All backlog orders are expected to be filled within the next
fiscal year. The backlog orders are a normal aspect of the registrant's business
due to its seasonal nature.
Item 2. Description of Properties.
The registrant's executive offices and manufacturing facilities are
located in Dolgeville, New York. This site consists of approximately 15 acres of
land on which there is a group of multi-story buildings containing approximately
337,000 square feet of floor space. These buildings are constructed principally
of wood and limestone. The principal buildings were built between 1882 and 1890.
The registrant's real property, equipment and other fixed assets are
maintained in good condition and actively utilized.
Registrant believes that its plants, which contain a variety of
machinery for the manufacture of leisure footwear, are adequate to maintain
present production output.
All registrant's buildings are owned by the registrant. The registrant
leases production and office equipment which expire at various dates through the
year 2001.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
This information is contained in the definitive proxy statement dated
March 3, 1998 which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
4
<PAGE>
This information is contained in the 1997 Annual Report to Stockholders
which was previously filed with the Commission, and is incorporated by reference
in this Form 10-KSB Annual Report as Exhibit 13.
Item 6. Management's Discussion and Analysis or Plan of Operations.
This information is contained in the 1997 Annual Report to Stockholders
which was previously filed with the Commission, and is incorporated by reference
in this Form 10-KSB Annual Report as Exhibit 13.
Item 7. Financial Statements.
The required financial statements together with the Report of Deloitte
& Touche LLP dated January 30, 1998, is contained in the 1997 Annual Report to
Stockholders which was previously filed with the Commission, and is incorporated
by reference in this Form 10-KSB Annual Report as Exhibit 13.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
This information is contained in the Definitive Proxy Statement dated
March 3, 1998, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Item 10. Executive Compensation.
This information is contained in the Definitive Proxy Statement dated
March 3, 1998, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
5
<PAGE>
This information is contained in the Definitive Proxy Statement dated
March 3, 1998, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Item 12. Certain Relationships and Related Transactions.
This information is contained in the Definitive Proxy Statement dated
March 3, 1998, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
PART IV
Item 13. Exhibits, List, and Reports on Form 8-K.
(a). Exhibits
(13) 1997 Annual Report to Stockholders
(21) Subsidiary of the registrant
(b). Reports on Form 8-K.
There were no reports filed on Form 8-K for the quarter ended
December 31, 1997.
6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DANIEL GREEN COMPANY
(Registrant)
DATE: March 31, 1998 By: /s/ James R. Riedman
James R. Riedman,
Chairman and Chief Executive
Officer
By: /s/ Stanley W. Kabot
Stanley W. Kabot,
Chief Financial Officer &
Treasurer
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
registrant and in capacities and on the date indicated.
DIRECTORS
/s/ Edward Bloomberg /s/ Steven DePerrior
Edward Bloomberg Steven DePerrior
/s/ David T. Griffith /s/ Gregory Harden
David T. Griffith Gregory Harden
/s/ Gary E. Pflugfelder /s/ James R. Riedman
Gary E. Pflugfelder James R. Riedman
DATE: March 31, 1998
7
To Our Stockholders:
It's the Annual Report season again, and I would like to take this opportunity
to provide you with some insights into your Company's performance.
We should start with a development that is not included in the statements,
namely our pending management change. This past November, Warren Reardon
resigned from his positions of Director and President. Warren and his family
have played an important role in the history and successes of the Daniel Green
Company. I want to personally thank Warren for his contributions and wish him
all the best in the coming years.
Since November, the Board has been engaged in an extensive search for Warren's
replacement. An interesting by-product of the search was the enthusiasm many in
the industry expressed regarding the franchise value the Daniel Green name
represents. It was a strong reinforcement of the potential for your Company.
The interview process resulted in a number of very qualified and interested
candidates. As I write this letter, I'm pleased to inform you that we are
finalizing the arrangements for our top "draft pick" to come on board and join
our management team. We plan on making an announcement during the mid-March time
frame. It is my belief that our management change was the most critical issue
facing the Company this fall, and this event is now behind us.
Now, let's turn to the financials. The company's balance sheets (on page 8) now
include an additional year for comparative purposes, which I think you'll find
beneficial. The first item of special note is cash, totaling $901,875. This is
just one of the by-products of the pension reversion we enacted last year. Since
these statements were prepared, this cash has been applied to our revolving line
of credit. Had it been applied at year end, our outstanding line of credit
balance would have been $1,324,906. This is an extraordinary improvement from
the $8.3 million balance twenty-four months ago.
It wasn't just the pension reversion alone that generated this improvement. Our
receivables have been very aggressively managed, resulting in a $860,650
reduction this year and an almost $1.5 million gain from 1995. It's costly
enough to finance your own inventory, much less someone else's. We've made
progress in this area and will continue to do so in 1998.
Our inventory showed similar improvement, although less apparent.
Simplistically, it remained equal to last year's level and went down
substantially from 1995. We are encouraged, however, that we reached last year's
$8.5 million inventory level in light of our disappointing year end sales. Our
expectations were that sales would have finished the year stronger and our
inventory levels would have been further reduced. As it was, we did not meet
those expectations, and we still have work to do. The good news is that we
believe that the bulk of our inventory consists of quality, salable items. We've
established inventory reserves against the remaining stock and recognize that,
in 1998, we need to aggressively move and sell-off these styles.
The next significant item in our balance sheet consumed a considerable amount of
time and energy in 1997, but, as referred to earlier, it also yielded some
dramatic benefits. It is the pension reversion, as seen in the "Other assets"
section of our balance sheet. Note 5 on page 11 provides an accounting
description of this transaction, but I'm going to try to provide some further
insight on its impact to your Company.
As a starting point, you should really review the 1995 statement. At that time,
Daniel Green was a debt-laden Company which was further constrained by the
operating losses it was generating. It became imperative that every asset be
used as effectively as possible if we were to survive. One of those assets which
wasn't pulling its weight was the pension plan. In 1997, we put excess pension
assets back to work, reverting, or terminating, and then replacing the pension
plan with a 401(k) savings plan. The governing factors behind the steps which we
took were driven by balancing tax, employee and stockholder considerations.
<PAGE>
Perhaps the best way to describe the reversion's impact is to recognize that it
accounts for all of the improvements in our balance sheet, except for the
reduction in our accounts receivable. As an integral part of this transaction,
we issued 186,437 shares (11% of the Company) to our employees. This issue,
combined with the straight reversion, generated cash of approximately $3 million
net of costs and excise tax. Its benefits include:
o A reduction in our line of credit from $4.5 million in 1996 to
$2.2 million in 1997.
o A current ratio of 3.83.
o An improvement in our total debt-to-equity ratio from 76.8% in
1996 to 48.9% in 1997.
o An increase in our equity to over $12 million.
As a final note, the stock provided to employees is recognized in accounting
terms as compensation. What this means is that, as it is allocated over the next
three years, we, in turn, will take a non-cash charge to pre-tax earnings of
approximately $300,000 each year. While this charge does generate a tax benefit
for us, it will have a negative impact on our book earnings.
Let's turn our attention to the more critical issue, long-term, namely our
statement of operations. We're pleased to report an operating income of
$1,000,000. It comes, however, with a level of sales which is not acceptable.
While our margins improved considerably last year, you can't shrink your way to
prosperity.
We have undertaken a number of initiatives that should produce better results in
future years. First, under the leadership of Lee Bynon, our sales force has been
restructured and is more focused to ensure that we produce better results both
in terms of sales and gross profit.
Our product offering continues to evolve. Imports account for an increasing
percentage of our sales. Much of the gross profit improvement you see this year
is attributable to the growing importance of this segment. As different import
styles take hold, we anticipate our overall sales numbers will improve.
One of our more formidable tasks is to reduce the overhead costs associated with
our operations in Dolgeville and to develop a cost structure that reduces our
break-even point. To this end, we engaged a consultant to work with an internal
team to identify and implement significant cost savings. Led by our Chief
Financial Officer, Stan Kabot, this group has made considerable progress.
While we're not reporting the kind of results that we had hoped for in 1997, we
obviously have made some significant gains. The Company continues to be in a
"rebuilding" mode, reorganizing and repositioning ourselves within the shoe
industry. With our improved financial footings, new management shortly in place,
and the aggressive cost reductions we are making, we're enthusiastic about our
long-term outlook.
Nonetheless, we are cautious about 1998. We expect to revive our sales numbers.
However, earnings most likely will be impacted by the restructuring costs
incurred with the future changes that will be necessary.
I personally would like to thank all our employees for their contribution in
1997. As we improve our overall financial stability, I am confident that the
future for your Company looks brighter than ever.
By the way, let's not forget to encourage everyone we know to buy more Daniel
Green slippers.
James R. Riedman
Chairman & Chief Executive Officer
2
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sales
Net sales declined 15% in 1997, to $19.7 million, from $23.1 million in 1996.
Compared to 1995, net sales for 1997 are down by 16.5%. A significant part of
this decrease can be related to lower shipments of footwear to our major
customers in 1997, compared to 1996. It was also attributable to difficult
retail conditions during the third and fourth quarters of 1997, and a greater
emphasis placed by our customers to maintain minimum stocking levels. Seven
major customers represented 41% of the Company's business in 1997. These same
customers represented 46% of sales in 1996 and 42% in 1995.
From a sales mix standpoint, slippers represented 55% of our sales, while casual
and private label footwear accounted for 29% and 16%, respectively, during the
year. In 1996, 59% of our sales were slippers, 26% casual footwear, and 15%
private label.
Imported footwear continues to influence our sales numbers. In 1997, imports
accounted for approximately $4.1 million or 20.8% of sales, compared to $1.4
million or 6.1% in 1996.
Expenses
Cost of goods sold in total as a percentage of net sales was 74.7% in 1997,
compared to 79.8% in 1996 and 79.6% in 1995. Cost of goods sold reflects the
direct costs of footwear sold, manufacturing variances from pre-determined cost
standards, adjustments to the value of inventory on hand and the amount of
material purchased and labor spent to make the Company's products. In 1997, the
Company produced 11% fewer shoes, approximately 120,000 pairs less than last
year. Driven by lower production volumes, our purchases of raw material went
down by 19% and production labor decreased by 15%, while manufacturing overhead
expenses were 12% lower than last year. A lower sales volume and associated
direct costs of labor, material and overhead also contributed to a lower cost of
goods sold aggregate dollar amount in 1997.
Current levels of production have fallen below available capacity. During 1997,
the Company reviewed its approach towards manufacturing and started to
consolidate its operations in Dolgeville. In 1998, all domestic production will
be performed in one manufacturing building, while imports will be handled in a
separate facility.
As a result of selling more higher-margined products, the gross profit margin
for 1997 was 25.3%, compared to 20.2% in 1996 and 20.4% in 1995.
Selling, general and administrative expenses for 1997 decreased 6.3% to
approximately $4.2 million from approximately $4.4 million in 1996. Compared to
1995, selling, general and administrative expenses are approximately $538,000
lower. This decrease in 1997 reflects significantly lower retail selling
expenses, due to the closure of all but one retail outlet in 1996 and greatly
reduced advertising costs, offset by higher spending levels in a number of
administrative categories. Several notable items that increased administrative
expenses in 1997 over 1996 include: Company contributions to the new 401(K)
plan, computer training and network services, and outside professional fees.
Despite the decrease experienced in 1997, selling, general and administrative
expenses as a percentage of net sales, increased to 21.2% in 1997 from 19.3% in
1996. In 1995, selling, general and administrative expenses represented 20.0% of
net sales. During the third quarter of 1997, management retained the services of
an independent consultant to identify opportunities for cost reduction within
all administrative areas of the Company. The findings and recommendations from
this project will be reviewed during the first quarter of 1998 and the Company
will then start to implement the approved recommendations. The results of this
project are geared towards significantly reducing our administrative costs in
1998.
3
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In the second quarter of 1997, the Company began to reorganize its field sales
force. This action resulted in the separation of five salespeople and charges of
approximately $198,000 in 1997. Likewise, in 1996, the Company identified and
reported items of approximately $497,000 that were non-recurring in nature. In
1995, the Company recorded an expense of approximately $512,000 for a write-off
of raw material inventory associated with discontinuing the production of
certain styles of footwear. In 1998, additional payments of approximately
$125,000 will be recorded as they relate to the former Chief Operating Officer.
During 1997, the Company terminated its defined benefit pension plan. This
transaction resulted in a gain totaling approximately $380,000, and this amount
is reflected as income in the 1997 statement of operations. Prior to
termination, the Company recorded income from this plan of approximately
$204,000 in 1997, which will not recur in 1998.
The termination of the defined benefit plan also provided additional funds to
the new 401(k) plan, over and above employee benefit obligations and plan
expenses. These funds were used to purchase 186,437 shares of common stock in
the Company, totaling $894,896, or $4.80 per share. The $4.80 share value was
established by an independent stock valuation consultant, retained by the
Company. The stock purchased by the 401(k) plan will be allocated to
participating employees beginning in the 1998 plan year and will continue over a
three-year period. Once the allocation is made to plan participants, the Company
will reduce the prepaid pension asset currently carried on the Company's balance
sheet under "Other assets" and will recognize a pre-tax expense of approximately
$300,000 each year.
Operating Income
Operating income changed significantly in 1997, compared to 1996 and 1995, and
is directly related to the items discussed above.
Interest Expense
Interest expense is down by approximately $281,000 in 1997 and is 34.2% lower
than in 1996 and 44.5% than in 1995. This decrease is due to lower borrowing
levels and lower financing rates. On April 14, 1997, the Company entered into a
new credit arrangement with KeyBank National Association, which provides the
Company with a three-year credit facility bearing interest at LIBOR plus 2.25%.
Income Tax Provision
The Company's income tax provision increased significantly, to approximately
$225,000 in 1997, from a tax benefit of approximately $417,000 in 1996 and a tax
benefit of approximately $535,000 in 1995. The increase in taxes in 1997
principally relates to the reportable gain after terminating the defined pension
plan and in part from the income realized from operations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities, for financial reporting
purposes, and the amounts used for income tax purposes.
In computing the tax provision for 1997, the Company has applied and used all of
its federal net operating loss carryforwards. At the end of 1997, the Company
still has approximately $454,000 left in net operating loss carryforwards that
can be used for New York state tax reporting purposes. From a historical
perspective, a limited amount of the Company's sales are in New York state,
thereby impacting the utilization of New York state loss carryforwards.
Net Earnings
Net earnings for 1997 were approximately $235,000, or $.16 per share, compared
with last year's performance of an after-tax loss of approximately $690,000, or
$.54 per share. The Company had a net loss of approximately $854,000, or $.82
per share in 1995.
4
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Financial Condition
The Company's financial condition continues to significantly improve. Once again
in 1997 (as in 1996), total debt has been drastically reduced from 1995. Total
debt consists of notes payable, the line of credit and capital lease
obligations. At December 31, 1997, total debt was approximately $4.1 million,
compared with approximately $6.9 million at December 31, 1996, for an overall
decrease of 40.1%. At December 31, 1995, the Company's total debt was
approximately $11.2 million. Total debt in 1997 has been reduced by the proceeds
from terminating the Company's defined benefit plan, by cash generated from
operating activities, and by regular repayments of the debt.
Inventory levels are unchanged from 1996 to 1997 and, in comparison to 1995, are
approximately $2.4 million lower. Finished goods, however, increased
significantly in 1997 to approximately $6.2 million, as compared to
approximately $5.1 million in 1996. This increase is related to a high level of
imported footwear received during the last two months of 1997 and a major
reduction in our work-in-process inventory. In 1995, the finished goods
inventory amounted to approximately $7.5 million, or approximately $1.3 million
higher than in 1997. Accounts receivable decreased by approximately $861,000 or
13.1% from last year and decreased 21.7% in comparison to 1995.
During 1997 and 1996, the Company generated approximately $3.0 million in cash
flow from operating activities. In 1995, cash flow was not sufficient, and cash
of approximately $2.1 million was used in operating the Company. The principal
components of cash flow from operations were net income, a decrease in accounts
receivable and other assets, offset by decreases in accounts payable and accrued
liabilities. Working capital at the end of 1997 was approximately $11.4 million,
which was approximately $2.7 million higher than at the end of 1996. This
working capital number is impacted by the cash amount of $894,896, related to
the sale of Company stock to the 401(k) plan. Subsequently, in 1998, the cash
was applied against the Company's revolving line of credit with Key Bank
National Association. As a result, the Company's current ratio, the relationship
of current assets to current liabilities, increased to 3.83:1 from 2.34:1 at the
end of 1996.
Capital expenditures in 1997 totaled approximately $251,000 and were principally
used for the purchase of new computer systems and software, and major repairs
made to the Company's buildings. Capital expenditures in 1996 totaled
approximately $201,000, utilized primarily for computer systems and software,
furniture and fixtures, and lasts for new footwear styles. Capital expenditures
in 1995 amounted to approximately $459,000 and were used to purchase a computer
system and for production equipment.
The Company's revolving and term loan credit agreements contain covenants which,
among other things, require the Company to maintain a certain number of
financial ratios. As of December 31, 1997, the Company was in violation of a
bank covenant related to the maintenance of an established debt-service coverage
ratio. The Company has obtained a waiver from the bank on this financial
covenant.
Except for the historical information contained herein, the matters discussed in
this annual report are forward-looking statements which involve risks and
uncertainties, including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
services and prices, and other factors discussed in the Company's filings with
the Securities and Exchange Commission.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. Management
has not yet assessed the year 2000 compliance expense and related potential
affect on the Company's earnings.
5
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DANIEL GREEN COMPANY
Financial Statements as of December 31, 1997, 1996 and 1995, for Each of the
Three Years in the Period Ended December 31, 1997 and Independent Auditors'
Report
DANIEL GREEN COMPANY
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, 1996 AND 1995
AND FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Daniel Green Company
Dolgeville, New York
We have audited the accompanying balance sheets of Daniel Green Company as of
December 31, 1997, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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 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 financial statements present fairly, in all material
respects, the financial position of Daniel Green Company as of December 31,
1997, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Deloitte & Touche LLP Rochester, New
York January 30, 1998
/s/ Deloitte & Touche LLP
Rochester, New York
January 30, 1998
(February 23, 1998 as to Note 7)
<PAGE>
<TABLE>
<CAPTION>
DANIEL GREEN COMPANY
BALANCE SHEETS
DECEMBER 31, 1997, 1996 AND 1995
ASSETS 1997 1996 1995
- ------ ---- ---- ----
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 901,875 $ 13,213 $ 29,762
Accounts receivable (less allowances of $231,000
in 1997, $200,000 in 1996 and $275,000 in 1995) 5,721,431 6,582,081 7,210,427
Inventories 8,469,375 8,453,703 10,900,243
Deferred income tax asset 287,306 -- 320,977
Other current assets 65,656 69,479 149,585
Income taxes receivable -- 157,704 458,887
----------- ----------- -----------
Total current assets 15,445,643 15,276,180 19,069,881
PROPERTY - Net 1,707,647 1,798,315 2,076,396
OTHER ASSETS:
Prepaid benefit plan contribution 894,896 -- --
Other assets 114,687 114,963 144,447
Prepaid pension expense -- 2,375,369 2,281,237
----------- ----------- -----------
Total other assets 1,009,583 2,490,332 2,425,684
----------- ----------- -----------
TOTAL ASSETS $18,162,873 $19,564,827 $23,571,961
=========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 1995
- ------------------------------------ ---- ---- ----
<S> <C> <C> <C>
CURRENT LIABILITIES:
Note payable - line of credit $ 2,219,802 $ 4,537,856 $ 8,301,730
Accounts payable 303,492 480,130 311,982
Accrued salaries and commissions 240,065 209,427 211,808
Accrued expenses 283,261 427,032 465,794
Notes payable - current 562,030 591,979 591,129
Income tax payable 421,389 -- --
Capital lease obligation - current -- 23,480 17,115
Deferred income tax liability - current -- 258,193 --
----------- ----------- -----------
Total current liabilities 4,030,039 6,528,097 9,899,558
CAPITAL LEASE OBLIGATION - noncurrent -- -- 10,916
NOTES PAYABLE - noncurrent 1,325,104 1,708,240 2,295,177
DEFERRED INCOME TAX LIABILITY - noncurrent 611,726 262,716 1,110,351
----------- ----------- -----------
Total liabilities 5,966,869 8,499,053 13,316,002
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value; authorized
4,000,000 shares; issued and outstanding in
1997: 1,698,329 shares; 1996: 1,511,892 shares;
1995: 1,036,892 shares 4,245,823 3,779,730 2,592,230
Additional paid-in-capital 741,303 312,500 --
Retained earnings 7,208,878 6,973,544 7,663,729
----------- ----------- -----------
Total stockholders' equity 12,196,004 11,065,774 10,255,959
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $18,162,873 $19,564,827 $23,571,961
=========== =========== ===========
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
DANIEL GREEN COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 19,663,142 $ 23,060,724 $ 23,560,772
------------ ------------ ------------
OPERATING EXPENSES:
Cost of goods sold 14,679,388 18,404,790 18,762,134
Selling and administrative expenses 4,165,379 4,445,901 4,703,479
Other (income) expense (181,732) 497,230 511,686
------------ ------------ ------------
Total operating expenses 18,663,035 23,347,921 23,977,299
------------ ------------ ------------
OPERATING INCOME (LOSS) 1,000,107 (287,197) (416,527)
INTEREST EXPENSE 539,486 820,090 972,460
------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES 460,621 (1,107,287) (1,388,987)
INCOME TAX PROVISION (BENEFIT) 225,287 (417,102) (535,226)
------------ ------------ ------------
NET EARNINGS (LOSS) $ 235,334 $ (690,185) $ (853,761)
============ ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ .16 $ (.54) $ (.82)
============ ============ ============
Diluted $ .16 $ (.54) $ (.82)
============ ============ ============
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
DANIEL GREEN COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock Additional
Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 1,036,892 $ 2,592,230 $ -- $ 8,517,490 $ 11,109,720
Net loss, 1995 -- -- -- (853,761) (853,761)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 1,036,892 2,592,230 -- 7,663,729 10,255,959
Issuance of common stock 475,000 1,187,500 312,500 -- 1,500,000
Net loss, 1996 -- -- -- (690,185) (690,185)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 1,511,892 3,779,730 312,500 6,973,544 11,065,774
Issuance of common stock 186,437 466,093 428,803 -- 894,896
Net earnings, 1997 -- -- -- 235,334 235,334
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 1,698,329 $ 4,245,823 $ 741,303 $ 7,208,878 $ 12,196,004
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
DANIEL GREEN COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 235,334 $ (690,185) $ (853,761)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 344,345 398,653 356,345
Net pension credit (204,496) (94,132) (101,340)
Loss (gain) on sale of property and equipment (2,950) 89,819 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 860,650 628,346 (577,370)
Inventories (15,672) 2,446,540 70,437
Other current assets 161,527 381,289 (519,272)
Other noncurrent assets 276 4,948 (53,459)
Prepaid pension expense 2,579,865 -- --
Prepaid benefit plan contribution (894,896) -- --
Increase (decrease) in:
Accounts payable (176,638) 168,148 (120,904)
Accrued salaries and commissions 30,638 (2,381) 25,199
Accrued expenses (143,771) (38,762) 138,154
Income taxes payable 421,389 -- (402,947)
Net deferred tax liability (196,489) (268,465) (96,369)
----------- ----------- -----------
Net cash provided (used) by operating activities 2,999,112 3,023,818 (2,135,287)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (254,077) (201,355) (459,406)
Proceeds from disposal of property and equipment 3,350 15,500 --
----------- ----------- -----------
Net cash used by investing activities (250,727) (185,855) (459,406)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings from line of credit (2,318,054) (3,763,874) 3,194,468
Issuance of common stock 894,896 1,500,000 --
Proceeds from notes payable 200,000 -- --
Repayments of notes payable (613,085) (586,087) (590,078)
Principal payments under capital lease obligation (23,480) (4,551) (3,486)
----------- ----------- -----------
Net cash (used) provided by financing activities (1,859,723) (2,854,512) 2,600,904
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 888,662 (16,549) 6,211
CASH, BEGINNING OF YEAR 13,213 29,762 23,551
----------- ----------- -----------
CASH, END OF YEAR $ 901,875 $ 13,213 $ 29,762
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 502,354 $ 847,649 $ 954,646
=========== =========== ===========
Income taxes $ 2,153 $ -- $ 40,993
=========== =========== ===========
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
DANIEL GREEN COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is engaged exclusively in the manufacture
and sale of leisure footwear. Sales are made principally to retailers in the
United States.
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 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.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property and Accumulated Depreciation - Property is stated at cost, less
accumulated depreciation. Expenditures for maintenance, repairs, and minor
renewals and betterments are charged to earnings as incurred. Replacements of
significant items and major renewals and betterments are capitalized.
Depreciation is computed using the straight-line method with useful lives as
follows: Buildings and water plant - 10-67 years; machinery and equipment - 5-15
years. The Company regularly assesses its fixed assets for indications of
impairment.
Income Taxes - Income taxes are provided on the earnings (losses) in the
financial statements. Deferred income taxes are provided to reflect the impact
of "temporary differences" between the amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations. Tax credits are recognized as a reduction to income taxes in the
year the credits are earned. Concentration of Credit Risk - Financial
instruments that potentially subject the Company to credit risk consist of
accounts receivable. Companies in the retail industry comprise a significant
portion of the accounts receivable balance; collateral is not required. The risk
associated with the concentration is limited due to the large number of
retailers and their geographic dispersion.
New Accounting Pronouncements - The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share during the fourth
quarter of 1997. This Statement requires dual presentation of basic and diluted
earnings per share (EPS). 1996 and 1995 amounts have been restated to reflect
this new Statement. The calculations for both basic and diluted EPS were based
on income (loss) available to common stockholders of $235,334, $(690,185) and
$(853,761) and a weighted average number of common shares outstanding of
1,512,570, 1,280,978 and 1,036,892 for December 31, 1997, 1996 and 1995,
respectively. Options to purchase shares of common stock were outstanding but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares.
- 6 -
<PAGE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and disclosure of comprehensive income and its components in financial statement
format. Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Items considered comprehensive income including foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. SFAS No. 130 is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company is currently evaluating what impact this statement will have
on its disclosure.
Reclassifications - Certain 1996 and 1995 amounts have been reclassified to
conform with 1997 presentations.
2. INVENTORIES
Inventories as of December 31 consisted of the following:
1997 1996 1995
---- ---- ----
Finished goods $ 6,153,858 $ 5,075,618 $ 7,477,851
Work-in-process 374,484 1,351,945 782,291
Raw materials 1,941,033 2,026,140 2,640,101
----------- ----------- -----------
Total $ 8,469,375 $ 8,453,703 $10,900,243
=========== =========== ===========
3. PROPERTY
Property as of December 31 consisted of the following:
1997 1996 1995
---- ---- ----
Land $ 18,655 $ 19,055 $ 19,555
Buildings and water plant 3,356,209 3,251,913 3,251,913
Machinery and equipment 5,565,199 5,427,711 5,415,774
---------- ---------- ----------
8,940,063 8,698,679 8,687,242
Less accumulated depreciation 7,232,416 6,900,364 6,610,846
---------- ---------- ----------
Property - net $1,707,647 $1,798,315 $2,076,396
========== ========== ==========
4. LEASES
The Company leases machinery, equipment, office space and retail outlet space
generally under cancelable lease agreements which are classified as operating
leases for financial reporting purposes. Rental expense was $115,641 in 1997,
$296,399 in 1996, and $219,950 in 1995. The leases expire at various dates
through 2001 and provide for the following minimum rentals:
1998 $ 95,000
1999 70,000
2000 59,000
2001 14,000
--------
Total $238,000
========
- 7 -
<PAGE>
5. BENEFIT PLANS
Deferred Benefit Pension Plan
During 1997, the Company terminated it's defined benefit pension plan. On the
date of the termination, the Company received cash totalling $3,579,585 which
exceeded the carrying value of the prepaid pension expense of $2,579,865
resulting in a gain of $999,720. This gain was reduced by certain administrative
expenses and an excise tax totalling $82,550 and $536,939, respectively, which
resulted in a net gain on this transaction totalling $380,231. This amount is
included in other (income) expense in the 1997 statement of operations. (See
Note 9).
The Company's defined benefit pension plan covered all regular employees and
benefits were earned based on years of service and the employee's annual
compensation over the entire service time. It had been the Company's policy to
fund the maximum amount which can be deducted for federal income tax purposes.
For 1997, 1996 and 1995 no contribution was allowed due to the full funding
limitation of the Internal Revenue Code. The net pension credit included the
following components:
1997 1996 1995
---- ---- ----
Service cost $ 187,277 $ 285,204 $ 201,635
Interest cost 573,952 570,251 560,720
Actual return on plan assets (835,865) (1,003,253) (1,271,440)
Net amortization and deferral (129,860) 53,666 407,745
----------- ----------- -----------
Net pension credit $ (204,496) $ (94,132) $ (101,340)
=========== =========== ===========
A reconciliation of the pension plan's funded status, determined as of the
plan's year end, September 30, 1996 and 1995, with amounts recognized in the
Company's balance sheet as of December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of accumulated benefit obligation
(including vested benefits of 1996, $7,232,953;
1995, $7,250,866) $ 7,388,486 $ 7,348,094
============ ============
Plan assets at fair value, primarily listed stocks and bonds,
and guaranteed investment contract $ 11,123,411 $ 10,662,651
Actuarial present value of projected benefit obligation (8,595,110) (8,779,025)
------------ ------------
Plan assets in excess of projected benefit obligation 2,528,301 1,883,626
Unrecognized net (gain) loss from past experience
different from that assumed (173,434) 232,219
Prior service cost not yet recognized
in net periodic pension cost 650,715 921,647
Unrecognized net asset as of October 1, 1985
being recognized over 16 years (630,213) (756,255)
------------ ------------
Prepaid pension expense $ 2,375,369 $ 2,281,237
============ ============
</TABLE>
- 8 -
<PAGE>
The following assumptions were used in determining the actuarial present value
of the projected benefit obligation:
1996 1995
---- ----
Discount rate 7.0 % 7.0 %
Rate of increase in future compensation levels 3.5 % 3.5 %
The expected long-term rate of return on plan assets 8.5 % 8.5 %
Defined Contribution Plan
During 1997, the Company established a defined contribution 401(k) savings plan
("the Plan") covering substantially all employees of the Company. The Company
contributed $894,896 to the Plan during 1997 but had not allocated any of this
amount to the Plan participants during the year ended December 31, 1997. This
amount will be expensed as it is allocated to the participants, which is
expected to occur over a three year period commencing in 1998.
6. INCOME TAXES
The provision (benefit) for income taxes consists of:
1997 1996 1995
---- ---- ----
Current:
Federal $ 415,574 $(156,500) $(421,335)
State 6,202 3,112 (17,522)
--------- --------- ---------
421,776 (153,388) (438,857)
--------- --------- ---------
Deferred:
Federal (247,762) (211,581) (34,603)
State 51,273 (52,133) (61,766)
--------- --------- ---------
(196,489) (263,714) (96,369)
--------- --------- ---------
Total $ 225,287 $(417,102) $(535,226)
========= ========= =========
The difference between tax computed at the statutory U.S. federal income tax
rate and the Company's effective tax rate is as follows:
1997 1996 1995
---- ---- ----
Provision (benefit) at statutory rate $ 156,600 $(376,500) $(472,300)
State and other taxes, net of federal
tax benefit 2,400 (29,700) (71,600)
Reduction of NYS NOL carryforward 13,200 -- --
Deferred tax rate rollout adjustment 32,800 -- --
Other 20,287 (10,902) 8,674
--------- --------- ---------
Provision (benefit) for income taxes $ 225,287 $(417,102) $(535,226)
========= ========= =========
At December 31, 1997 the Company has approximately $454,000 of net operating
loss carryforwards available for New York State tax purposes, which expire in
2011.
- 9 -
<PAGE>
Components of the Company's deferred tax asset and liability as of
December 31, 1997, 1996 and 1995 are as follows:
1997
---------------------------
Current Noncurrent
------- ----------
Assets
Non-deductible bad debt reserves $ 60,785 $ --
Uniform capitalization of inventory 104,660 --
Non-deductible sales allowances 29,250 --
Non-deductible inventory reserves 72,341 --
State net operating loss carryforward 20,270 --
Liabilities
Prepaid pension expense -- (349,010)
Depreciation -- (262,716)
----------- -----------
Deferred tax asset (liability) $ 287,306 $ (611,726)
=========== ===========
1996
---------------------------
Current Noncurrent
------- ----------
Assets
Contributions carryover $ 18,256 $ --
Non-deductible bad debt reserves 48,750 --
Uniform capitalization of inventory 159,352 --
Non-deductible sales allowances 29,250 --
State net operating loss carryforward 110,173 --
Federal net operating loss carryforward 260,916
Federal credit carryforwards 13,100 --
Liabilities
Prepaid pension expense (897,990) --
Depreciation -- (262,716)
----------- -----------
Deferred tax liability $ (258,193) $ (262,716)
=========== ===========
- 10 -
<PAGE>
1995
---------------------------
Current Noncurrent
------- ----------
Assets
Contributions carryover $ 8,055 $ --
Non-deductible bad debt reserves 78,000 --
Uniform capitalization of inventory 122,283 --
Non-deductible sales allowances 29,250 --
Non-deductible inventory reserves 83,389 --
State net operating loss carryforward -- 56,677
Liabilities
Prepaid pension expense -- (889,682)
Depreciation -- (277,346)
----------- -----------
Deferred tax asset (liability) $ 320,977 $(1,110,351)
=========== ===========
A valuation allowance has not been provided against the Company's deferred tax
assets as of December 31, 1997, 1996 and 1995 since the Company believes it is
more likely than not that the deferred tax assets will be realized in future
years.
7. NOTES PAYABLE
In 1997, the Company entered into a debt agreement from a new lender for a
revolving line of credit ("revolver") and a mortgage/term loan.
Under the terms of the agreement, the borrowing base for the revolver is based
on certain balances of accounts receivable and inventory, as defined in the
agreement. The maximum credit amount under the revolver is $8,000,000, the
interest rate is LIBOR plus 2.25% and the revolver will expire on April 30,
2000. The revolver is secured by accounts receivable, inventory, equipment and
cash. The mortgage/term loan approximated $2,250,000, which represented the
total amount owed by the Company under two notes payable to its previous lender
as of December 31, 1996. The mortgage/term loan is secured by the Company's
manufacturing facilities and totalled $1,676,192 as of December 31, 1997.
The balance owed under the Company's revolving line of credit as of December 31,
1997, 1996 and 1995 totalled $2,219,802, $4,537,856 and $8,301,730,
respectively.
- 11 -
<PAGE>
Long-term debt as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Note payable to bank in monthly principal
installments of $41,905 through April 2001;
interest is due monthly at LIBOR plus 2.25% $1,676,192 $1,819,058 $1,961,906
Other notes payable 210,942 52,602 67,258
Note payable to bank in monthly principal
installments of $35,714, plus interest at LIBOR
plus 2.25% -- 428,559 857,142
---------- ---------- ----------
1,887,134 2,300,219 2,886,306
Less: Current portion 562,030 591,979 591,129
---------- ---------- ----------
Noncurrent portion $1,325,104 $1,708,240 $2,295,177
========== ========== ==========
</TABLE>
The aggregate principal payments of notes payable are as follows:
1998 $ 562,030
1999 550,690
2000 543,835
2001 210,483
2002 20,096
---- ----------
Total $1,887,134
==========
The carrying value of the long-term notes payable to bank approximate fair
value.
The line of credit and the notes payable contain certain financial covenants
relative to working capital, tangible net worth, total debt to tangible net
worth, and debt service coverage. In addition, the payment or declaration of
dividends and distributions is prohibited unless a written consent from the
lender is received. The Company was not in compliance with the debt service
coverage covenant as of December 31, 1997. On February 23, 1998, the Company
obtained a waiver from the lender as of December 31, 1997.
Subject to the Company's lender's acceptance of the Company's 1998 business
plan, the Company's lender has agreed to review, with the intent of revising,
the debt service coverage covenant of 1998 which if achieved, should allow for
the Company to be in compliance during 1998.
8. STOCKHOLDERS' EQUITY
Stock Option Plan - The Company has reserved 100,000 shares of its common stock
for issuance under the Company's Stock Incentive Plan which was adopted in 1995.
The price at which options can be exercised shall be at least $1 more than 100%
of the fair market value of the Company's stock on the date of grant; for an
optionee who at the time of grant owns more than 10% of the Company's stock, the
price at which options can be exercised shall be at least $1 more than 110% of
the fair market value of the Company's stock on the date of grant.
- 12 -
<PAGE>
The stock option activity for the years ended December 31, 1997, 1996 and 1995
is as follows:
1997 1996 1995
---- ---- ----
Options outstanding, beginning of year 22,500 17,500 --
Options granted 2,000 10,000 17,500
Options cancelled (2,500) (5,000) --
------- ------- -------
Options outstanding, end of year 22,000 22,500 17,500
======= ======= =======
Options exercisable, end of year 14,500 12,500 17,500
======= ======= =======
The Company also granted 25,000 stock options in 1997, separate from the
Company's Stock Incentive Plan, to a majority stockholder. These options are all
outstanding and exercisable at December 31, 1997. The Company adopted Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, effective January 1, 1996. As permitted by that standard, the
Company has elected to continue to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for employee stock-based compensation. Pro forma information
regarding net income (loss) and related per share amounts as required by SFAS
No. 123 is not material.
Issuance of Common Stock - The Company issued 186,437 shares of common stock to
the Company's newly formed 401(k) plan in the fourth quarter of 1997. The sales
price per common stock was $4.80, which was based on an independent appraisal,
resulting in cash proceeds of approximately $900,000 to the Company.
9. OTHER (INCOME) EXPENSE
Other (income) expense in 1997 consisted of the following:
Gain on termination of pension plan (see Note 5) $(380,231)
Severance expense 198,499
---------
$(181,732)
=========
During 1997, the Company terminated five salespeople as a result of changes the
Company made in its sales department and related compensation structure. The
severance amount related to these individuals totalled $198,499.
During 1996, the Company recorded other expenses of approximately $497,000 in
the statement of operations for items considered by management to be of a
nonrecurring nature. These expenses included legal fees and a settlement cost
relative to a patent infringement lawsuit $(53,000), costs associated with the
closing of a sales office and two outlet stores $(191,000), costs incurred to
eliminate nontraditional footwear styles from the Company's product line
$(118,000), professional fees associated with financial advisory and investment
banking services $(114,000) and various other costs $(21,000).
In the fourth quarter of 1995, the Company recorded an expense of $511,686 for a
write-off of certain raw materials inventory associated with a decision to
discontinue the production of certain styles of footwear.
- 13 -
<PAGE>
<TABLE>
<CAPTION>
Quarterly Financial & Market Data
Summarized quarterly financial data for 1997 and 1996 (Unaudited)
1997 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 3,819,009 $ 3,850,881 $ 5,610,869 $ 6,382,383
Gross profit
on sales 871,760 1,300,041 1,544,624 1,267,329
Net income
(loss) (348,737) (114,653) 45,135 653,589
Net income
(loss) per
common share (0.23) (0.07) 0.03 0.43
NASDAQ high bid 4 1/4 3 7/8 3 7/8 4 3/4
NASDAQ low bid 3 5/8 3 7/8 3 1/2 2 3/4
<CAPTION>
1996 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 3,763,545 $ 4,020,072 $ 7,341,607 $ 7,935,500
Gross profit
on sales 898,738 968,951 1,974,810 813,435
Net income
(loss) (399,075) (315,066) 196,508 (172,552)
Net income
(loss) per
common share (0.38) (0.30) 0.13 (0.11)
NASDAQ high bid 4 1/8 3 1/2 3 3/4 3 3/4
NASDAQ low bid 3 5/8 2 1/2 3 1/8 2 7/8
Based on records maintained by the Transfer Agent, BankBoston, Boston Equiserve,
the number of shareholders of record was 584 at year end.
</TABLE>
<TABLE>
<CAPTION>
Selected Financial Data
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 19,663,142 $ 23,060,724 $ 23,560,772 $ 23,214,609 $ 24,125,228
Income (loss)
from continuing
operations 235,334 (690,185) (853,761) 635,328 293,423
Total assets 18,162,873 19,564,827 23,571,961 22,205,778 20,414,652
Long-term debt 1,325,104 1,708,240 2,306,093 2,894,413 1,317,232
Income (loss)
from continuing
operations
per common share .16 (.54) (.82) .61 .28
</TABLE>
Daniel Green Company's common stock is traded in the over-the-counter market and
is listed on the National Association of Security Dealers Automated Quotation
system (NASDAQ) under the ticker symbol DAGR.
Copies of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission are available and will be furnished upon written request
directed to the Company's main office, Dolgeville, New York 13329.
<PAGE>
Officers
- --------
James R. Riedman
Chairman & Chief Executive Officer
W. Lee Bynon
Vice President of Sales
Stanley W. Kabot
Chief Financial Officer & Treasurer
John B. French, Esq.
Clerk
Directors
- ---------
Edward Bloomberg
Independent Investment Advisor
Steven DePerrior
Principal
Burke Group
William L. Fay
President
Faytex Corp.
John B. French, Esq.
Partner
Sullivan & Worcester
David T. Griffith
President
M. Griffith, Inc.
Gregory Harden
President
Harden Furniture
Gary E. Pflugfelder
Sales Consultant
James R. Riedman
President
Riedman Corporation
Exhibit 21
Subsidiary of the Registrant
Jurisdiction of
Name Incorporation
---- -------------
Dee Gee Footwear, Inc. Massachusetts
(This subsidiary was incorporated in 1991 and was inactive from 1991 through
1997.)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 901,875
<SECURITIES> 0
<RECEIVABLES> 5,952,431
<ALLOWANCES> 231,000
<INVENTORY> 8,469,375
<CURRENT-ASSETS> 15,445,643
<PP&E> 8,940,063
<DEPRECIATION> 7,232,416
<TOTAL-ASSETS> 18,162,873
<CURRENT-LIABILITIES> 4,030,039
<BONDS> 0
0
0
<COMMON> 12,196,004
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,162,873
<SALES> 19,663,142
<TOTAL-REVENUES> 19,663,142
<CGS> 14,679,388
<TOTAL-COSTS> 4,165,379
<OTHER-EXPENSES> (181,732)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 539,486
<INCOME-PRETAX> 460,621
<INCOME-TAX> 225,287
<INCOME-CONTINUING> 235,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235,334
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
