UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 12/31/98 Commission File Number 0-774
DANIEL GREEN COMPANY
(Name of Small Business Issuer in Its Charter)
MASSACHUSETTS 15-0327010
(State or other jurisdiction of (IRS Employer Identification Number)
incorporationor organization)
ONE MAIN ST, DOLGEVILLE NEW YORK 13329
(Address of principal executive offices) (Zip Code)
(315) 429-3131
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $2.50 PAR VALUE PER SHARE
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES (X) NO( )
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB ( ).
State issuer's revenues for its most recent fiscal year.
Net Sales of $14,610,867
Aggregate market value of the voting stock held by non-affiliates of the
registrant:
$4,955,977 as of March 16, 1998
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
CLASS ISSUED & OUTSTANDING AT MARCH 16, 1999
COMMON STOCK, $2.50 PAR VALUE 1,570,335 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, 1998 Part II
Definitive Proxy Statement Dated March 12, 1999 Part III
Transitional Small Business Disclosure Format (check one): YES ( ) NO(X)
<PAGE>
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 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 Company's annual sales, retail within a price range varying from
$19.00 to $79.00 while men's slippers are sold at prices ranging between $20.50
to $48.00 a pair. Overall, the registrant produces about 120 to 140 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 70 styles are imported and produced by
overseas manufacturers. The Company owns the trademarks Comfy and Daniel Green
and sells its shoes under the label "Daniel Green Leisure Footwear".
A portion of the slippers and leisure footwear sold by the registrant
was manufactured in its plants in Dolgeville, New York (more fully described in
Item 2 - Property). During 1997, the Company started to consolidate its
manufacturing operations and in 1998, the Company operated its entire domestic
manufacturing within one facility; excluding warehousing and importing activity.
In the fourth quarter of 1998, the Company's Board of Directors, President and
the new management team completed and began the implementation of a formal
restructuring plan. Based on the restructuring plan, the Company will cease its
manufacturing operations completely by June 30, 1999. As a result, the Company's
primary business activity will be to outsource entirely the production of its
footwear and to distribute the footwear to its customers under the Company's
label and certain private labels. 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. Ten major customers represent 45%
of the Company's business in 1998. These same customers represent 40% of the
sales in 1997 and 39% in 1996. 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 Company'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. It avoids granting restricted or exclusive shoe sale
arrangements, believing that distribution of its products requires the greatest
number of outlets. However, the Company 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 Jan 1st and April
25th, and a November 10th dating for Fall casuals shipping between June 25th 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, for orders of boots shipped by August 15th and
for orders of children's slippers shipped by June 1st.
The registrant experiences severe competition in the sale of its
slippers from other manufactures of leisure footwear particularly imports. It
maintains as active research and development staff, which concentrates on the
introduction and release of new products into the market place. The registrant
is not aware of any patent 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 and Daniel Green, which have
been used by the Company for many years.
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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 225
employees, most of who are full time. All of the registrant's employees, with
the exception of field sales representatives, are employed in Dolgeville, New
York.
The amount of the registrant's backlog orders believed to be firm as of
December 31, 1998 is approximately $1,610,000, compared with approximately
$643,000 and approximately $1,389,000 as of December 31, 1997 and 1996
respectively. All backlog orders are expected to be filled within the next
fiscal year. The backlog orders are 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 areas of
land on which there is a group of multi-stored 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 Company. The Company leases
production and office equipment, which expire at various dates through the year
2002.
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 12, 1999, 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 Sock and Related Stockholder Matters.
This Information is contained in the 1998 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.
Page 3
<PAGE>
Item 6 Management's Discussion and Analysis or Plan of Operations.
This Information is contained in the 1998 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 29, 1999, is contained in the 1998 Annual Report to
the 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 12, 1999, 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 12, 1999, 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.
This information is contained in the Definitive Proxy Statement dated
March 12, 1999, 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 12, 1999, 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
The following exhibits are incorporated by reference:
Exhibit 13 1998 Annual Report to Stockholders
Filed with the Commission on March 12, 1999
(b). Reports on Form 8-K.
There were no reports filed on Form 8-K for the quarter ended
December 31, 1998.
Page 4
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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, 1999 By: /s/ Greg A. Tunney
Greg A. Tunney,
President and Chief Operating Officer
By: /s/ John E. Brigham
John E. Brigham,
Chief Financial Officer and Treasurer
By: /s/ Janet S. Cool
Janet S. Cool,
Corporate Controller
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
/s/ Greg A. Tunney
Greg A. Tunney
DATE: March 31, 1999
Page 5
EXHIBIT 13
To Our Stockholders:
1998 marked the beginning of the "Rebuilding and Turnaround" of the Daniel Green
Company. I would like to break my remarks into two key areas. First, I would
like to specifically address the operating results for 1998 and where we
currently are as a company. Secondly, I would like to share with you the
rebuilding and turnaround process that we have begun to implement for the future
of a strong and successful Daniel Green Company.
Current Position and Results
In 1998, sales declined 26% to $14.6 million. A significant part of the decrease
is the result of lower shipments of footwear to a couple of key customers that
market consigned, low margin items with rather high levels of returned
merchandise. Decisions were made to eliminate this type of unprofitable
business.
Selling and administrative expenses increased approximately $1.9 million or 45%
during the year. This increase reflects donations of defective/discontinued
merchandise amounting to $640,000 and investments of $410,000 to update the
Company image and establish a new corporate identity. Other significant items
contributing to the increase included $480,000 for a cost reduction services
consultant and $337,000 of 401(k) contributions. Also included in expenses are
severance payments supporting the reorganization.
The divestiture of manufacturing operations commenced during 1998, as the
Company ceased operations in two separate facilities. In addition, $212,000 was
expensed in 1998 for obsolete computer software. Total related expenses
represented charges of $938,000 in 1998.
Inventories were evaluated, defective, discontinued, and old age inventories of
raw and finished goods were marked down, and a charge of $2.7 million was
realized during the year. Inventory levels decreased $3.0 million in 1998. This
was due, in part, to the shut down of production during the year.
Our cash management efforts were aggressively intensified during the year. Total
debt was paid down significantly during the year. Total debt at the end of the
year was approximately $2.5 million, compared to $4.1 million at the end of
1997, for an overall decrease of 39%.
All in all, 1998 was the beginning of a major clean up of our Company from top
to bottom in order to position ourselves for profitable future growth.
Rebuilding for the Future
People
To begin with, key personnel changes were made at all levels of the Company
during 1998. I believe the single most important ingredient for the success of
turning around a business such as ours will be our ability to attract and
recruit those qualified individuals who will become key contributors on our
team. A new Senior Management team was established during the year and is ready
to begin the process of rebuilding the Daniel Green Company to its once dominant
position within the marketplace.
Strategic Direction
The first matter of business was to establish what the Company's strategic
profile would be in the future. As a result of hours of formalized strategic
meetings, and soul searching, our team developed the strategic profile for the
Company.
o Our Business Concept: Daniel Green's strategy is to market and develop
slipper-designed footwear. We will strive to offer value-added,
distinctive products that are tailored to the needs of the end users
of high potential and growing mid to top tier channels where we can
leverage our slipper technologies.
o Driving Force: "Product Concept" (Shift away from Manufacturing)
o Areas of Excellence: Product Development, Marketing Awareness, and
Sales Relationship Building
<PAGE>
Design/Development
We established a new design and development team in 1998. In past years, Daniel
Green has carried over up to 90% of prior year product vs. the industry average
of 30%. This reinforces the importance of constantly filling the new product
pipeline with footwear that will incite fresh interest and strong demand each
and every selling season. Steps were taken during the year to focus all Company
efforts on Slipper Designed Footwear to build a defensible market position.
These early investments in product design should become more evident in the
financial statements starting in the second half of 1999.
Marketing
Our next Company priority was a substantial shift in marketing strategy. While
retaining the positive associations inherent in our fine brand name, we set out
to completely update our overall image. We have repositioned the brand for the
21st century. We reached out to consumers, launching a full e-commerce site:
www.DanielGreenCo.com. On this site, visitors can check out our products by
selling season and either order on-line or locate the nearest retail outlets
stocking their favorite styles. All data from our on-line site is warehoused,
which will allow us to gain new marketing insights into our end user customer
base.
Sales
In order to rebuild and grow our business for the long-term, several sales
management appointments were announced in late 1998. These appointments ensure
our ability to focus our Company efforts and resources into key channels of
distribution. In addition to restructuring our sales force, we established an
aggressive commission system to energize sales activities. I am confident that
our revamped sales team will perform very well for the Daniel Green Company in
the years ahead.
Operations
Key personnel have been brought in for a transitional task force that will move
the company from a manufacturing based operation to a fully sourced operation.
These individuals bring with them a wealth of experience and expertise in
turnaround situations such as ours.
The Road Ahead
Our long-term turnaround plan is essentially divided into three phases, each
lasting about 12 months. The first phase occurred this year by getting our
organizational and operational issues in place. The second phase focuses on the
full transformation of becoming a completely sourced organization competitive in
the world marketplace vs. a domestic manufacturer. The final phase will
represent a full return to profitability when we began to deliver quality goods
and services that are recognized as a value in the marketplace. We have made
significant progress in design, marketing, sales, and balance sheet management,
and have a good running start at improving operations for the future.
Finally, I would like to thank all the dedicated employees at Daniel Green for
assisting with the numerous changes we made in 1998 as we started the turnaround
process.
Sincerely,
Greg Alan Tunney
President & Chief Operating Officer
2
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sales
Net sales declined 26% in 1998, to $14.6 million, from $19.7 million in 1997.
Compared to 1996, net sales for 1998 are down by 37%. A significant part of this
decrease is the result of lower shipments of footwear to two major customers
that market consigned, low margin items with rather high levels of returned
merchandise. Ten major customers represented 45% of the Company's business in
1998. These same customers represented 40% of sales in 1997 and 39% in 1996.
From a sales mix standpoint, slippers represented 66% of our sales, while casual
and private label footwear accounted for 23% and 11%, respectively, during the
year. In 1997, 55% of our sales were slippers, 29% casual footwear, and 16%
private label. The sales content in 1996 was 59% slippers, 26% casual footwear,
and 15% private label.
Sourced footwear continues to influence our sales numbers. In 1998, these
products accounted for approximately $4.1 million or 28% of sales, compared to
$4.1 million or 20.8% in 1997. In 1996, these products accounted for
approximately $1.4 million or 6.1% of sales.
Expenses
Cost of goods sold, as a percentage of net sales, was 83% in 1998, compared to
75% in 1997 and 80% in 1996. 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 1998, the Company
produced 35% fewer shoes, approximately 326,000 pairs less than last year.
Driven by lower production volumes, purchases of raw material were down by 55%,
and production labor decreased by 46%, while manufacturing overhead expenses
were 9% 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 1998.
The gross profit margin for 1998 was 17%, compared to 25% in 1997 and 20% in
1996. The $2.5 million gross profit decline in 1998 from 1997 was primarily due
to the $1.3 million lower gross profit related to the lower sales volume,
reserving an incremental $.9 million for slow moving/obsolete/defective
inventory, and writing-off $357,000 of raw material inventory associated with
discontinuing the production of certain styles of footwear.
Selling, general and administrative expenses for 1998 increased approximately
$1.9 million or 45% to approximately $6.1 million, from approximately $4.2
million in 1997. Compared to 1996, selling, general and administrative expenses
are approximately $1.6 million higher. This increase in 1998 reflects donations
of defective/discontinued merchandise amounting to $640,000. This served to
eliminate dated inventory without having it deep discounted in the United
States. Investments amounting to $410,000 to update the Company image and
establish a new corporate identity with a new logo, updated packaging, artwork
for a new display booth, a full e-commerce site, enhanced advertising and public
relations, and senior level visits to foreign suppliers also contributed to the
increase over 1997. Other significant items contributing to the increase over
1997 include: $480,000 paid to a cost reduction services consultant, $337,000 of
401(k) contribution expenses related to 1998, and payments of approximately
$102,000 to the former President and Chief Operating Officer. To a large extent,
the benefits associated with the aforementioned investments will be incurred
starting in 1999.
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. 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 nonrecurring in nature.
During 1997, the Company terminated its defined benefit pension plan. This
transaction resulted in a 1997 gain totaling approximately $380,000, and this
amount is reflected as other income in the 1997 statement of operations. Prior
to termination, the Company recorded income from this plan of approximately
$204,000 in 1997, which did not recur in 1998.
The Company contributed cash to the new 401(k) plan in 1997. 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 was allocated to participating employees beginning
in the 1998 plan year and will continue over the next two years. Compensation
expense will be recognized as the shares are allocated to the participants,
which is expected to occur over a three year period which began in 1998. The
amount allocated to participants during the year ended December 31, 1998 was
$337,000 (69,993 shares).
3
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Current levels of production have fallen below available capacity. Prior to
1998, the Company rationalized its manufacturing operations and ceased
production in two separate facilities. A third facility will cease production
and be vacated by June 30, 1999. Accordingly, the Company has recognized a
$572,000 expense for impaired assets and a $153,000 liability related to lease
commitments for equipment used in these facilities that expire at various dates
subsequent to June 30, 1999. Imports are handled in a separate facility.
Additionally, the Company recognized a $212,000 expense for impaired computer
information system assets resulting from the decision to replace major
components of the current computer information system by the end of the third
quarter 1999 with the intent to comply with year 2000 requirements.
Operating (Loss) Income
Operating (loss) income changed significantly in 1998, compared to 1997 and
1996, and is directly related to the items discussed above.
Interest Expense
Interest expense is down by approximately $248,000 in 1998 and is 46% lower than
in 1997 and 64% than in 1996. 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 Key Bank 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 benefit was approximately $1.1 million in 1998, from a
tax provision of approximately $225,000 in 1997 and a tax benefit of
approximately $417,000 in 1996. 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.
The effective tax rate was 24% in 1998. In 1997, the effective tax rate was 49%
versus a tax benefit rate in 1996 (due to the loss that year) of 38%. The low
tax rate in 1998 reflects a valuation allowance, and the high tax rate for 1997
reflects the tax accounting for permanent book to tax differences and
adjustments to deferred taxes. 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.
At December 31, 1998, the Company has approximately $700,000 of federal net
operating loss carryforwards which expire in 2018. The Company has an AMT credit
carryforward of approximately $49,000, which will never expire. The Company has
approximately $2.4 million of net operating loss carryforwards available for New
York State tax purposes, which begin to expire in 2011. Due to the uncertainty
of the realization of certain tax carryforwards, the Company has established a
valuation allowance against these carryforward benefits in the amount of
$500,000.
In computing the tax provision for 1997, the Company applied and used all of its
federal net operating loss carryforwards. At the end of 1997, the Company still
had approximately $454,000 left in net operating loss carryforwards that could
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 (Loss) Earnings
The net loss for 1998 was approximately $3.7 million, or $2.39 per share,
compared with last year's performance of after-tax earnings of approximately
$235,000, or $.16 per share. The Company had a net loss of approximately
$690,000, or $.54 per share, in 1996.
Financial Condition
Once again in 1998 (as in 1997 and 1996), total debt has been drastically
reduced. Total debt consists of notes payable, the line of credit and capital
lease obligations. At December 31, 1998, total debt was approximately $2.5
million, compared with approximately $4.1 million at December 31, 1997, for an
overall decrease of 39%. At December 31, 1996, the Company's total debt was
approximately $6.9 million. The 1998 total debt was reduced by cash generated
from operating activities, and by regular repayments of the debt. Total debt in
1997 was 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 decreased $3.0 million from 1997 to 1998 and, in comparison to
1996, are approximately $2.4 million lower. Finished goods decreased
significantly in 1998 to approximately $4.4 million, as compared to
approximately $6.2 million in 1997. In 1998, raw materials decreased
approximately $945,000 to $996,000. Work-in-process for 1998 also decreased
significantly from approximately $374,000 to $83,000. In 1996, the finished
goods inventory amounted to approximately $5.1 million or approximately $700,000
higher than in 1998. The number of days of
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inventory declined from 208 days at December 31, 1997 to 162 days at December
31, 1998, due, in part, to the increase in the inventory reserves and a shut
down of production that occurred during the year. There were 165 days of
inventory at December 31, 1996. Accounts receivable decreased by approximately
$1.5 million or 27% from 1997 and decreased 36% or $2.4 million in comparison to
1996. Accounts receivable days decreased from 105 days at December 31, 1997 to
104 days at December 31, 1998. There were 103 days of accounts receivable at
December 31, 1996.
During 1998, the Company generated approximately $1.1 million in cash flow from
operating activities. In 1997 and 1996, the Company generated approximately $3.0
million. The principal components of cash flow from operations were decreases in
accounts receivable and inventory, increases in accounts payable, partially
offset by the net loss, income taxes receivable, accrued liabilities, income
taxes payable, and deferred tax asset/liability. Working capital at the end of
1998 was approximately $6.8 million, which was approximately $4.6 million lower
than at the end of 1997. In 1997, this working capital number was 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. The Company's
current ratio, the relationship of current assets to current liabilities,
decreased to 2.93:1 at the end of 1998, from 3.83:1 at the end of 1997, and
increased from 2.34:1 at the end of 1996.
Capital expenditures in 1998 totaled approximately $341,000 and were principally
used for the purchase of a new show booth, a new CAD system, and other computer
systems and software. In 1997, capital expenditures totaled approximately
$254,000 and were principally used for the purchase of new computer systems and
software, and repairs made to the Company's buildings. Capital expenditures in
1996 totaled approximately $201,000 and were utilized primarily for computer
systems and software, furniture and fixtures, and lasts for new footwear styles.
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, 1998, the Company was in violation of three
bank covenants related to the maintenance of an established debt-service
coverage ratio, a minimum tangible net worth level and a minimum working capital
level. The Company has not obtained waivers from the bank on these financial
covenants which resulted in classifying all the related debt as a current
liability at December 31, 1998. In 1999, the Company is exposed to a higher
interest rate with financial penalty at least until the Company obtains waivers,
cures the violations, or establishes new financing.
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.
Year 2000
The Company currently uses software and related computerized information systems
that will be affected by the date change in the year 2000. The Company believes
it does not have any significant non-information technology systems that will be
affected by the change in the year 2000. Based on its assessment, the Company
has determined that it will replace or upgrade major portions of its computer
hardware and software so that its computer systems will properly use and
recognize dates beyond December 31, 1999. Based on information compiled by the
Company, the Company believes that the costs of addressing the year 2000 issue
will be between $850,000 and $1.0 million. The Company is in the process of
establishing long-term financing for these costs. Other factors that may affect
the Company's costs in addressing the year 2000 issue include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. The Company expects to complete all year 2000 programming changes
prior to the fourth quarter of 1999. The estimated costs of, and time frame
related to, this project are based on estimates of the Company's management, and
there can be no assurance that actual costs will not differ materially from the
current expectations. In addition, the Company's ability to interface with its
customers, particularly with respect to EDI programs, may be impacted by the
failure of its customers to make the appropriate upgrades or modifications to
their programs to address the year 2000 issue. The Company relies on third-party
suppliers for products and services. If these suppliers do not adequately
address the impact of the year 2000 on their own systems and products in a
timely manner, it may be necessary for the Company to secure alternate vendors
to supply these required products and services. The Company believes that its
most significant risk regarding the year 2000 issue is that its customers,
suppliers or service providers may not be year 2000 compliant. Currently, the
Company does not have a contingency plan in place to address this risk.
Nevertheless, the Company does not expect that the costs of addressing potential
problems relating to the year 2000 issue will have a material adverse impact on
the Company's financial position, results of operations or cash flows in future
periods. While the Company plans to devote the necessary resources to resolve
all significant year 2000 issues in a timely manner, which includes developing a
contingency plan by the end of the second quarter of 1999, if such processing
issues are not resolved in a timely manner, the year 2000 issue could have a
material impact on the operations and financial condition of the Company.
5
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations
Years ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Net sales $ 14,610,867 $ 19,663,142 $ 23,060,724
- ----------------------------------------------------------------------------------------------
Operating expenses:
Cost of goods sold 12,172,075 14,679,388 18,404,790
Selling and administrative expenses 6,043,475 4,165,379 4,445,901
Other expense (income) 937,830 (181,732) 497,230
- ----------------------------------------------------------------------------------------------
Total operating expenses 19,153,380 18,663,035 23,347,921
- ----------------------------------------------------------------------------------------------
Operating (loss) income (4,542,513) 1,000,107 (287,197)
Interest expense 291,544 539,486 820,090
- ----------------------------------------------------------------------------------------------
(Loss) earnings before income taxes (4,834,057) 460,621 (1,107,287)
Income tax (benefit) provision (1,141,368) 225,287 (417,102)
- ----------------------------------------------------------------------------------------------
Net (loss) earnings $ (3,692,689) $ 235,334 $ (690,185)
==============================================================================================
Net (loss) earnings per common share:
Basic $ (2.39) $ .16 $ (.54)
==============================================================================================
Diluted $ (2.39) $ .16 $ (.54)
==============================================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
Common Stock Additional Treasury Stock
--------------------- Paid-In Retained --------------------
Shares Amount Capital Earnings Shares Amount Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 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
Purchase of shares for Company
sponsored defined
contribution plan -- -- -- -- (186,437) (894,896) (894,896)
Net earnings, 1997 -- -- -- 235,334 -- -- 235,334
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,698,329 4,245,823 741,303 7,208,878 (186,437) (894,896) 11,301,108
Purchase of treasury stock -- -- -- -- (7,165) (34,392) (34,392)
Allocation of shares in Company
sponsored definedcontribution plan -- -- -- -- 69,993 336,965 336,965
Net loss, 1998 -- -- -- (3,692,689) -- -- (3,692,689)
-------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,698,329 $4,245,823 $741,303 $ 3,516,189 (123,609) $ (592,323) $ 7,910,992
===========================================================================================
See notes to financial statements.
</TABLE>
6
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
As of December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 7,300 $ 901,875
Accounts receivable (less allowances of $250,000a
in 1998 and $231,000 in 1997) 4,205,979 5,721,431
Inventories, net 5,480,899 8,469,375
Deferred income tax asset 164,124 287,306
Other current assets 50,275 65,656
Income taxes receivable 387,142 --
- -------------------------------------------------------------------------------------------------------
Total current assets 10,295,719 15,445,643
Property - net 907,067 1,707,647
Other assets:
Other assets 69,399 114,687
Deferred income tax asset 267,905 --
- -------------------------------------------------------------------------------------------------------
Total other assets 337,304 114,687
- -------------------------------------------------------------------------------------------------------
Total assets $ 11,540,090 $ 17,267,977
=======================================================================================================
Liabilities and stockholders' equity
Current liabilities:
Note payable - line of credit $ 1,144,092 $ 2,219,802
Accounts payable 833,177 303,492
Accrued salaries and commissions 21,242 240,065
Accrued expenses 301,802 283,261
Notes payable - current 1,212,424 562,030
Income tax payable -- 421,389
- -------------------------------------------------------------------------------------------------------
Total current liabilities 3,512,737 4,030,039
Notes payable - noncurrent 116,361 1,325,104
Deferred income tax liability - noncurrent -- 611,726
- -------------------------------------------------------------------------------------------------------
Total liabilities 3,629,098 5,966,869
Stockholders' equity:
Common stock - $2.50 par value: authorized 4,000,000 shares;
1998: 1,698,329 shares issued, 1,574,720 shares outstanding;
1997: 1,698,329 shares issued, 1,511,892 shares outstanding 4,245,823 4,245,823
Additional paid-in-capital 741,303 741,303
Retained earnings 3,516,189 7,208,878
- -------------------------------------------------------------------------------------------------------
8,503,315 12,196,004
Less: Treasury stock at cost, 123,609 shares in 1998
and 186,437 in 1997 (592,323) (894,896)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,910,992 11,301,108
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 11,540,090 $ 17,267,977
=======================================================================================================
See notes to financial statements.
</TABLE>
7
<PAGE>
Statements of Cash Flow
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $(3,692,689) $ 235,334 $ (690,185)
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 355,016 344,345 398,653
Net pension credit -- (204,496) (94,132)
Loss on impairment of assets 784,581 -- --
(Gain) loss on sale of property and equipment (11,515) (2,950) 89,819
Contribution to defined contribution plan -- (894,896) --
Allocation of shares in defined contribution plan 336,965 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,515,452 860,650 628,346
Inventories 2,988,476 (15,672) 2,446,540
Other current assets 15,381 3,823 80,106
Income taxes receivable (387,142) 157,704 301,183
Other noncurrent assets 45,288 276 4,948
Prepaid pension expense -- 2,579,865 --
Increase (decrease) in:
Accounts payable 529,685 (176,638) 168,148
Accrued salaries and commissions (218,823) 30,638 (2,381)
Accrued expenses 18,541 (143,771) (38,762)
Income taxes payable (421,389) 421,389 --
Deferred tax asset/liability (756,449) (196,489) (268,465)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,101,378 2,999,112 3,023,818
==============================================================================================================
Cash flows from investing activities:
Purchases of property and equipment (341,191) (254,077) (201,355)
Proceeds from disposal of property and equipment 13,689 3,350 15,500
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (327,502) (250,727) (185,855)
==============================================================================================================
Cash flows from financing activities:
Net payments on line of credit (1,075,710) (2,318,054) (3,763,874)
Issuance of common stock -- 894,896 1,500,000
Purchase of treasury stock (34,392) -- --
Proceeds from notes payable -- 200,000 --
Repayments of notes payable (558,349) (613,085) (586,087)
Principal payments under capital lease obligation -- (23,480) (4,551)
- --------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (1,668,451) (1,859,723) (2,854,512)
==============================================================================================================
Net (decrease) increase in cash (894,575) 888,662 (16,549)
Cash, beginning of year 901,875 13,213 29,762
- --------------------------------------------------------------------------------------------------------------
Cash, end of year $ 7,300 $ 901,875 $ 13,213
==============================================================================================================
Supplemental cash flow information: Cash paid during the year for:
Interest $ 369,214 $ 502,354 $ 847,649
- --------------------------------------------------------------------------------------------------------------
Income taxes $ 436,628 $ 2,153 $ --
==============================================================================================================
See notes to financial statements.
</TABLE>
8
<PAGE>
Notes to Financial Statements Years ended December 31, 1998, 1997 and 1996
1. Description Of Business And Summary Of Significant Accounting Policies
Description of Business - The Company is engaged in the manufacture, import 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 estimated useful lives under the straight-line
method. The Company regularly assesses its fixed assets for indications of
impairment. (See Note 8.)
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.
Earnings Per Share - The calculations for both basic and diluted EPS were based
on (loss) earnings available to common stockholders of $(3,692,689), $235,334
and $(690,185) and a weighted average number of common shares outstanding of
1,547,608, 1,511,892 and 1,280,978 for December 31, 1998, 1997 and 1996,
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.
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, which became effective for the Company in 1998.
SFAS No. 130 establishes standards for reporting and disclosure of comprehensive
income and its components in financial statement format. Compre-hensive 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 include foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. The Company has no components of comprehensive
income other than net income.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which is effective for the Company in 1998.
The Statement requires enterprises to report certain financial information on
operating segments, products and services, geographic areas in which they
operate and their major customers that would be determined based on the
Company's internal reporting. The Company operates in only one business segment.
In addition, the Company's internal reporting does not make it practicable to
provide information on net sales earned from different styles of footwear or
from different geographic locations. Long-lived assets are entirely located in
the United States. There is no single customer that accounts for 10 percent or
more of the Company's net sales.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of derivatives depends on the intended
use of the derivatives. SFAS No. 133 is effective for the Company in the year
2000. Currently, since the Company does not use derivative instruments,
management has determined that this Statement will have no effect on its
financial statements.
Reclassifications - The value of unallocated shares in the Company sponsored
defined contribution plan totaling $894,896 as of December 31, 1997, which was
previously included in long-term assets, has been classified as a separate
component within stockholders' equity. (See Note 4.)
<PAGE>
2. Inventories
Inventories, net of reserves, as of December 31 consisted of the following:
1997 1998
- -----------------------------------------------------------------------
Finished goods $4,402,186 $6,153,858
Work-in-process 82,795 374,484
Raw materials 995,918 1,941,033
- -----------------------------------------------------------------------
Total $5,480,899 $8,469,375
=======================================================================
3. Property
Property as of December 31 consisted of the following:
1998 1997
Land $ 18,655 $ 18,655
Buildings and water plant 2,541,849 3,356,209
Machinery and equipment 38,594 3,964,228
Computers 378,776 632,324
Vehicles 74,011 107,070
Furniture and fixtures 1,035,361 861,577
- -----------------------------------------------------------------------
4,087,246 8,940,063
Less accumulated depreciation 3,180,179 7,232,416
- -----------------------------------------------------------------------
Property - net $ 907,067 $1,707,647
=======================================================================
During 1998, the Company recorded an asset impairment. (See Note 8.)
4. Benefit Plans
Defined Contribution Plan
During 1997, following the termination of its defined benefit plan, the Company
established a defined contribution 401(k) savings plan ("the Plan") covering
substantially all employees of the Company. In 1997, the Company contributed
cash of $894,896 to the Plan which was recorded as a long-term asset.
Subsequently, in December 1997, the Plan acquired 186,437 shares of the
Company's common stock at a price per share of $4.80, which was based on an
independent appraisal. There were no allocated shares as of December 31, 1997.
The unallocated shares in the Plan have been reclassified from long-term assets
and are now recorded as treasury stock in stockholders' equity. Compensation
expense will be recognized as the shares are allocated to the participants,
which is expected to occur over a three year period which began in 1998. The
amount allocated to participants during the year ended December 31, 1998 was
$336,965 (69,993 shares). In addition, the Company's matching contribution to
the Plan totaled $74,178 and $75,811 in 1998 and 1997, respectively.
Defined Benefit Pension Plan
During 1997, the Company terminated its defined benefit pension plan.
Immediately prior to the termination, the projected benefit obligation and plan
assets totaled $7,937,856 and $11,517,441, respectively. On the date of the
termination, the Company received cash totaling $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 totaling $619,489, which resulted in a net gain on this transaction
totaling $380,231. This amount is included in other (income) expense in the 1997
statement of operations. (See Note 8.)
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 could be deducted for federal income tax purposes.
For 1997 and 1996, no contribution was required due to the full funding
limitation of the Internal Revenue Code.
The net pension credit for 1997 and 1996 included the following components:
1997 1996
Service cost $ 187,277 $ 285,204
Interest cost 573,952 570,251
Actual return on plan assets (835,865) (1,003,253)
Net amortization and deferral (129,860) 53,666
- ------------------------------------------------------------------------
Net pension credit $ (204,496) $ (94,132)
========================================================================
5. Income Taxes
The provision (benefit) for income taxes consists of:
1998 1997 1998
Current:
Federal $ (387,142) $ 415,574 $ (156,500)
State 2,223 6,202 3,112
- ------------------------------------------------------------------------
(384,919) 421,776 (153,388
- ------------------------------------------------------------------------
Deferred:
Federal (1,095,235) (247,762) (211,581)
State (161,214) 51,273 (52,133)
Valuation allowance 500,000 -- --
- ------------------------------------------------------------------------
(756,449) (196,489) (263,714)
- ------------------------------------------------------------------------
Total $(1,141,368) $ 225,287 $ (417,102)
========================================================================
<PAGE>
Notes to Financial Statements continued
The difference between tax computed at the statutory U.S. federal income tax
rate and the Company's effective tax rate is as follows:
1998 1997 1996
Provisions (benefit) at
statutory rate $(1,643,580) $ 156,600 $ (376,500)
State and other taxes,
net of federal tax benefit 1,467 2,400 (29,700)
Reduction of NYS NOL
carryforward -- 13,200 --
Deferred tax rate rollout
adjustment -- 32,800 --
Valuation allowance 500,000 -- --
Other 745 20,287 (10,902)
- ------------------------------------------------------------------------
Provision (benefit)
for income taxes $(1,141,368) $ 225,287 $ (417,102)
========================================================================
At December 31, 1998, the Company has approximately $700,000 of federal net
operating loss carryforwards which expire in 2018. The Company has an AMT credit
carryforward of $49,074, which will never expire. The Company has approximately
$2,438,800 of net operating loss carryforwards available for New York State tax
purposes, which begin to expire in 2011. Due to the uncertainty of the
realization of certain tax carryforwards, the Company has established a
valuation allowance against these carryforward benefits in the amount of
$500,000. Components of the Company's deferred tax asset and liability as of
December 31, 1998 and 1997 are as follows:
1998
----------------------------
Current Noncurrent
Assets
Non-deductible bad debt reserves $ 68,250 $ --
Uniform capitalization of inventory 75,577 --
Non-deductible sales allowances 29,250 --
Non-deductible inventory reserves 210,802 --
Net operating loss carryforward -- 344,460
Fixed assets -- 355,142
AMT carryforward -- 49,074
Charitable contribution -- 261,986
Liabilities
Prepaid pension expense -- (217,593)
Depreciation -- (244,919)
Valuation allowance (219,755) (280,245)
- ---------------------------------------------------------------------------
Deferred tax asset $ 164,124 $ 267,905
===========================================================================
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)
===========================================================================
6. Notes Payable
The Company has a debt agreement 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 is due to
expire on April 30, 2000. The revolver is secured by accounts receivable,
inventory, equipment and is due to cash. The mortgage/term loan is payable
through April 2001 and is secured by the Company's manufacturing facilities. The
balance owed under the Company's revolving line of credit as of December 31,
1998 and 1997 totalled $1,144,092 and $2,219,802, respectively. Long-term debt
as of December 31 consisted of the following:
1998 1997
Note payable to bank in monthly
principal installments of $41,905
through April 2001; interest is
due monthly at LIBOR plus 2.25%. $ 1,173,335 $1,676,192
Other notes payable in monthly
principal installments of
$967-$1,887 through September
2003 plus interest at 4-6%. 155,450 210,942
1,328,785 1,887,134
- ------------------------------------------------------------------------------
Less: Current portion 1,212,424 562,030
- ------------------------------------------------------------------------------
Noncurrent portion $ 116,361 $1,325,104
==============================================================================
<PAGE>
The aggregate principal payments of notes payable are as follows:
1999 $1,212,424
2000 36,910
2001 38,628
2002 27,051
2003 13,772
- ---------------------------------------------------------------
Total $1,328,785
===============================================================
The carrying value of the long-term notes payable to bank approximate fair
value.
The line of credit and the notes payable to bank contain certain financial
covenants relative to working capital, current ratio, 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
covenants related to tangible net worth, working capital and debt service
coverage as of December 31, 1998. The Company has not obtained a waiver from the
lender and, accordingly, has reclassified $670,475 of notes payable to bank from
a long-term liability to a current liability as of December 31, 1998.
7. Stockholders' Equity
Stock Option Plan - The Company has reserved 100,000 shares of its common stock
for issuance under its Stock Incentive Plan. 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. The stock option activity for the years
ended December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996
Options outstanding,
beginning of year 22,000 22,500 17,500
Options granted 75,000 2,000 10,000
Options cancelled (10,000) (2,500) (5,000)
- -------------------------------------------------------------------------
Options outstanding,
end of year 87,000 22,000 22,500
=========================================================================
Options exercisable,
end of year 12,000 14,500 12,500
=========================================================================
The outstanding options have an exercise price ranging from $3.88 to $5.88 per
share and expire at various dates from February 1999 through October 2008.
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, 1998.
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, 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 are as follows:
1998 1997 1996
Net (loss) earnings:
As reported $ (3,692,689) $ 235,334 $ (690,185)
Pro forma (3,806,387) 233,147 (699,317)
Basic earnings per share:
As reported $ (2.39) $ .16 $ (.54)
Pro forma $ (2.46) $ .15 $ (.55)
Diluted earnings per share:
As reported $ (2.39) $ .16 $ (.54)
Pro forma $ (2.46) $ .15 $ (.55)
The weighted average fair value of the options granted during 1998, 1997 and
1996 is estimated as $1.52, $1.09 and $.91, respectively, using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1998 1997 1996
Expected life 6.5 years 10 years 6.25 years
Volatility 33.18% 34.77% 38.23%
Risk-free interest rate 6.15% 6.12% 6.35%
Dividend yield 0% 0% 0%
8. Other (Income) Expense
In the first quarter of 1998, the Company hired a new President, who, among
other things, began to assemble a substantially new management team for the
Company. In the fourth quarter of 1998, the Company's Board of Directors,
President and the new management team completed and began to implement a formal
restructuring plan. Based on the restructuring plan, the Company will cease its
manufacturing operations completely by June 30, 1999. As a result, the Company's
primary business activity will be to outsource entirely the production of its
footwear and to distribute the footwear to its customers under the Company's
label and certain private labels.
Prior to December 31, 1998, the Company ceased production in two separate
facilities and substantially vacated these two facilities. A third facility is
expected to cease production and be vacated by June 30, 1999. Accordingly, the
Company has recognized an expense for impaired assets and a liability related to
lease commitments for equipment used in these facilities that expire at various
dates subsequent to June 30, 1999.
<PAGE>
In the fourth quarter of 1998, the Company determined that certain software that
it currently uses will not be year 2000 compliant and that it will be disposed
of by the end of the third quarter of 1999. Accordingly, the Company determined
that an impairment loss was required for the software totaling $212,229 based on
management's estimate of the fair value of the software.
A summary of these expenses is as follows:
Two vacated facilities held for disposal at
December 31, 1998:
Fair value (carrying amount) $ --
Net book value (214,803)
- --------------------------------------------------------------------
Asset impairment (214,803)
- --------------------------------------------------------------------
Facility and related equipment to be held
and used until June 30, 1999:
Fair value (carrying amount) --
Net book value of equipment (236,503)
Net book value of facility (121,046)
- --------------------------------------------------------------------
Asset impairment (357,549)
- --------------------------------------------------------------------
Liability for equipment lease commitments which
expire at various dates subsequent to June 30, 1999 (153,249)
Impairment of computer software (212,229)
- --------------------------------------------------------------------
Total other expense $ (937,830)
====================================================================
The two impaired facilities held for disposal are greater than fifty years old
and have been used exclusively for footwear production by the Company. In
addition, these facilities are located in a depressed, rural region of New York
State, where the economy has been contracting in recent years. The prospect of a
business expanding or relocating to this region, given the current economic
climate, is remote. These factors, among others, were considered by management
in estimating the fair values of these two facilities.
The Company determined that an impairment loss was required for the facility and
related equipment to be held and used until June 30, 1999, because the estimated
future cash flows expected to result from the use of the applicable assets were
less than the carrying amount of those assets. The fair value of these assets
was determined based on the same factors considered by management in developing
the fair value of the two facilities held for disposal, as described in the
preceding paragraph.
Other income in 1997 consisted of the following:
Gain on termination of pension plan (see Note 4) $ 380,231
Separation expense (198,499)
- ----------------------------------------------------------------
Total other income $ 181,732
================================================================
During 1997, the Company separated five salespeople as a result of changes the
Company made in its sales department and related compensation structure. The
separation expense related to these individuals totaled $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).
9. Commitments
The Company leases machinery and equipment under noncancelable lease agreements
which are classified as operating leases for financial reporting purposes.
Rental expense was $121,819 in 1998, $115,641 in 1997 and $296,399 in 1996. The
leases expire at various dates through 2002 and provide for the following
minimum rentals:
1999 $ 85,000
2000 72,000
2001 27,000
2002 12,000
Total $ 196,000
Purchase Commitments - The Company has agreements with certain vendors to
purchase minimum quantities of raw materials. At December 31, 1998, these
commitments totaled approximately $345,000.
<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, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Rochester, New York
January 29, 1999
Selected Financial Data
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 14,610,867 $ 19,663,142 $ 23,060,724 $ 23,560,772 $ 23,214,609
Income (loss) from continuing operations (3,692,689) 235,334 (690,185) (853,761) 635,328
EPS (loss) from continuing operations (2.39) .16 (.54) (.82) .61
Total assets 11,540,090 17,267,977 19,564,827 23,571,961 22,205,778
Long-term debt 116,361 1,325,104 1,708,240 2,306,093 2,894,413
</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.
Based on records maintained by the Transfer Agent, Boston Equiserve, there were
536 registered shareholders as of the February 12, 1999 record date. Copies of
the Company's Annual Report on Form 10-KSB 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,300
<SECURITIES> 0
<RECEIVABLES> 4,455,979
<ALLOWANCES> 250,000
<INVENTORY> 5,480,899
<CURRENT-ASSETS> 10,295,719
<PP&E> 4,087,246
<DEPRECIATION> 3,180,179
<TOTAL-ASSETS> 11,540,090
<CURRENT-LIABILITIES> 3,512,737
<BONDS> 0
7,910,992
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,540,090
<SALES> 14,610,867
<TOTAL-REVENUES> 14,610,867
<CGS> 12,172,075
<TOTAL-COSTS> 6,043,475
<OTHER-EXPENSES> 937,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291,544
<INCOME-PRETAX> (4,834,057)
<INCOME-TAX> (1,141,368)
<INCOME-CONTINUING> (3,692,689)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,692,689)
<EPS-PRIMARY> (2.39)
<EPS-DILUTED> (2.39)
</TABLE>
