<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
Amendment No. 1
Annual Report Pursuant to Sec. 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended 12/31/99 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)
incorporation or organization)
ONE MAIN STREET, 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 $14,867,332
Aggregate market value of the voting stock held by non-affiliates of the
registrant:
$6,420,969 as of March 2, 2000
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 2,2000
COMMON STOCK, $2.50 PAR VALUE 1,566,090 SHARES
List hereunder the following documents, if incorporated by reference, and the
part of the Form 10-KSB into which the document is incorporated.
<PAGE> 2
Annual Report to Stockholders, December 31, 1999 Part II
Definitive Proxy Statement Dated March 1, 2000 Part III
Transitional Small Business Disclosure Format (check one): YES ( ) NO (X)
Part IV
Item 13 Exhibits, List and Reports on Form 8-K.
(a). Exhibits
The following exhibits are incorporated by reference:
(13) 1999 Annual Report to Stockholders
Filed with the Commission on March 3, 2000
(b). Reports on Form 8-K.
There were no reports filed on Form 8-K for the quarter ended
December 31, 1999.
2
<PAGE> 3
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: April 6, 2000 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/ Gregory Harden /s/ Gary E. Pflugfelder
- -------------------- -----------------------
Gregory Harden Gary E. Pflugfelder
/s/ James R. Riedman /s/ Greg A. Tunney
- -------------------- ----------------------
James R. Riedman Greg A. Tunney
DATE: April 6, 2000
<PAGE> 1
[DANIEL GREEN LOGO]
1999
ANNUAL REPORT
<PAGE> 2
To Our Stockholders:
1999 represented the year of "Significant Change" for the Daniel Green Company.
In many respects, the significant changes that occurred during the year
impacted us negatively for 1999. However, we have made great strides in
positioning and structuring the Company for long-term growth and earnings. I
would like to focus my remarks towards these two key areas. First, I would like
to address the operating results for 1999 and how these changes affected us.
Secondly, I would like to share with you the great opportunities that await our
Company in the future.
1999 RESULTS AND CHANGES
Unfortunately, toward the end of 1998, and for all of 1999, Daniel Green faced
several challenging external and internal conditions that combined made 1999
one of the most difficult in my 12 years in the footwear business:
- The meltdown in footwear retailing was nationwide as the slipper segment
of the business declined and produced record losses not only for our
Company but for many of our competitors also.
- The second consecutive unseasonably warm U.S. winter limited Daniel
Green's ability to capitalize on its strength during the critical fourth
quarter retailing season.
- The major changeover of moving our Company from being a domestically
manufactured company to being a fully imported sourced company was a
major challenge for our Company during 1999 and definitely affected our
deliveries during the third quarter.
No excuses! Just as we benefit when the business and weather climates are
favorable, we must assume responsibility when the snow doesn't fall and markets
experience turmoil. Despite the difficulties faced in 1999, we remain
optimistic about Daniel Green's future growth and business prospects.
Sales
In 1999, total sales were $14.9 million which was a 1.8% increase over 1998.
The number of pairs shipped increased 6.2% for 1999, however, the average
selling price decreased 4.9% to $14.98 for the year. The lower price points of
closeout inventory written down the prior year and the introduction of lower
priced specialty footwear drove down the average selling price.
Manufacturing
We completed our full divestiture of our manufacturing facility on June 30,
1999. Total related expenses for this project, including severance payments to
terminated employees, write-offs of raw materials and establishing reserves for
slow moving/obsolete/defective inventory, totaled $1.6 million for 1999.
SG&A
Selling, general and administrative expenses decreased $1.3 million or 22% for
1999. This was accomplished in a year where we increased our total advertising
expenditures by over 22% in order to invest back into our brand imaging and
positioning for the future.
Inventories
Inventory levels were reduced by $1.9 million from 1998 to 1999 and, in
comparison to 1997, are approximately $4.9 million lower. Finished goods ended
for the year at approximately $3.5 million for 1999. Raw materials and work-in
process inventories were eliminated in 1999 with the cessation of our
manufacturing facility.
In 1999, we were able to successfully complete "Phase II" of our "Rebuilding
and Turnaround" plan for the Company that was initiated in 1998. Phase II
included the completion of the Company's move from a domestic manufacturing
base to a fully sourced import-driven operation.
<PAGE> 3
REBUILDING FOR THE FUTURE
As we move into the new millennium, Daniel Green will begin "Phase III" of our
"Rebuilding and Turnaround" plan. Phase III includes returning to profitability
within our own operations and pursuing an aggressive acquisition strategy for
the future.
Towards the end of 1999, we had already started our acquisition process. This
activity resulted in acquiring certain assets of one of our largest
competitors, L.B. Evans and Son on Feb. 3, 2000. Since 1804, L.B. Evans has
been recognized as the industry leader for marketing quality men's slippers.
L.B. Evans provides a complement for the Daniel Green business. Currently, over
90% of all Daniel Green's business is women's whereas over 90% of L.B. Evans'
current business is men's. This acquisition will position us as the dominant
leader in the market place for both men's and women's branded slippers.
On February 10, 2000, the Company entered into a definitive purchase agreement
to purchase all of the outstanding shares of the Penobscot Shoe Company.
Penobscot has been making women's footwear for over 60 years and is based in Old
Town, Maine. Over the years, they have developed the brand "Trotters" that is
positioned to sell quality footwear, at moderate price points, to women ages 35
and older. Most recently, they have introduced a new brand called "Softwalk"
that appeals to women who are seeking the ultimate in comfort and fit. Upon the
acquisition of Penobscot, our Company expects to benefit from the experience and
expertise that Penobscot has acquired during the past five years, as they have
transitioned successfully from a domestic manufacturing company to a fully
sourced imported one. We look forward to the infusion of talent that our Company
will receive from Penobscot in the areas of sourcing and operations.
During the first half of the year 2000, we will focus on how to get the optimal
level of synergies from the three businesses. We are currently assessing the
operations of the companies, and have put a steering committee in place to
evaluate and develop a plan for consolidating the various operations in order
to achieve a maximum operating model for our business.
The merging of these businesses is expected to bring our total sales levels in
excess of $40.0 million during the year 2000. Change will continue to alter the
business landscape as we move into the year 2000. We are confident those
changes can be turned into growth opportunities. We have made significant
progress in Design, Marketing, Sourcing and Balance Sheet Management over the
past year, and we look forward to continued improvement in the year ahead.
Finally, I would like to thank all of the dedicated employees at Daniel Green
for their efforts in executing our "significant changes" over the past year and
for 2000.
Sincerely,
/s/ Greg Alan Tunney
- ------------------------
Greg Alan Tunney
President & Chief Operating Officer
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
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 weather 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, as well as risks associated with the
Company's recent multiple acquisitions, including integration, increased debt
and interest expense, and overseas sourcing (with attendant risks as to quality
delivery and foreign exchange).
2
<PAGE> 4
Management's Discussion and Analysis of Financial Condition and Results of
Operations
SALES
1999 net sales of $14.9 million increased $256,500 or 1.8% over the prior year's
net sales of $14.6 million. Compared to 1997, net sales for 1999 are down by
24.4%. The number of pairs shipped increased 6.2% from 948,632 in 1998 to
1,007,241 in 1999. However, the comparable 1999 average selling price per pair
of $14.98 is 4.9% less than the $15.76 average selling price per pair for the
same period in 1998. The lower price points of slow moving/closeout inventory
written down in the prior year and the introduction of lower priced specialty
footwear drove the lower average selling price per pair. The 1998 net sales
decrease was the result of lower shipments of footwear to two major customers
that market consigned low margin items with rather high levels of returned
merchandise. Sales to one customer in 1999 totaled approximately $1,790,000 or
12% of the Company's net sales in 1999. During 1999, ten major customers
represented 52% of the Company's business. Ten major customers represented 45%
of the Company's business in 1998. Most of these same customers represented 40%
of sales in 1997.
From a sales mix standpoint, slippers represented 74% of our sales, while
casual and private label footwear accounted for 15% and 11%, respectively,
during the year. In 1998, 66% of our sales were slippers, 23% casual footwear,
and 11% private label. The sales content in 1997 was 55% slippers, 29% casual
footwear, and 16% private label.
During the first half of 1999, the Company completed the scheduled
restructuring plan, converting from domestically produced footwear and closing
the Dolgeville manufacturing facility to presently outsourcing all footwear
products from China, Mexico and Spain. In 1999, imports accounted for
approximately $9.4 million or 63.4% of sales. In 1998, imports accounted for
approximately $4.1 million or 28% of sales, compared to approximately $4.1
million or 20.8% in 1997.
EXPENSES
Cost of goods sold, as a percentage of net sales, was 81% in 1999, compared to
83% in 1998 and 75% in 1997. Cost of goods sold reflects the direct costs of
footwear sold, manufacturing and sourced variances from pre-determined cost
standards, adjustments to the value of inventory on hand and the amount of
direct material and labor consumed to manufacture or import the Company's
products. While domestic manufacturing ceased on June 30, 1999, cost of goods
sold improved slightly from 1998. Significant 1999 inventory reductions,
including the final write-off of residual raw material formerly used in
domestic manufacturing, contributed negatively to the 1999 cost of goods sold
level. Other cost of goods sold factors to consider during this conversion year
were underabsorbed overhead due to sub-normal production levels during the
first half of 1999, severance payments to terminated production employees of
approximately $244,000, start-up freight costs to expedite product delivery
from foreign vendors, additional start-up costs to assist Mexican vendors in
achieving adequate production levels to meet customers' demands and
establishing alternate sources of product supply. In 1998, the Company produced
35% fewer shoes, approximately 326,000 pairs less than 1997. 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 1997. Lower sales volume and associated lower direct costs of material,
labor and overhead also contributed to the lower cost of goods sold aggregate
dollar amount in 1998.
The gross profit margin for 1999 was 19.5% compared to 17.0% in 1998 and 25% in
1997. The gross profit margin improvement resulted from the higher volume of
imports in 1999 compared to 1998. The $2.5 million gross profit decline from
1997 to 1998 was primarily due to the $1.3 million lower gross profit related
to the lower sales volume, reserving an incremental $1.0 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 1999 decreased approximately
$1.3 million or 22% to approximately $4.7 million from approximately $6.1
million in 1998. Compared to 1997, selling, general and administrative expenses
are approximately $548,000 higher. The decrease in 1999 to 1998 reflects
significant reductions in benefit plan expenses and payroll taxes due to
decreased employment levels. The new 1999 commission based sales force
compensation plan more appropriately responded to the sales performance.
Foreign travel by management was reduced during 1999. The increase in 1998
reflects donations of defective/discontinued merchandise amounting to $640,000.
This served to eliminate dated inventory without deep discounting 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
1998 increases. Other significant items contributing to 1998 increases over
1997 include: $480,000 paid to a cost reduction services consultant, $337,000
of 401(k) contribution expenses related to 1998 amortization of the prepaid
401(k) contribution related to 1998, and payments of approximately $102,000 to
the former President and Chief Operating Officer.
Several notable items that increased selling, general, and administrative
expenses in 1999 compared to 1997 included: contracted warehouse labor,
advertising and sales promotion expenses, and additional bad debt expense.
In the second quarter of 1997, the Company began to reorganize the sales force.
This action resulted in the separation of five salespeople and charges of
approximately $198,000 in 1997.
During 1997, the Company terminated its defined pension plan. This transaction
resulted in a 1997 gain totaling approximately $380,000, and was recognized 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 did not
recur in 1998.
3
<PAGE> 5
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 through the 2000 plan year. 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
amounts allocated to participants during the year ended December 31, 1999 and
December 31, 1998 were $278,965 (58,118 shares) and $336,965 (70,201 shares),
respectively. In addition, the Company's matching contribution to the Plan
totaled $45,429, $74,178 and $75,811 in 1999, 1998 and 1997, respectively.
Prior to 1998, the Company rationalized its manufacturing operations and ceased
production in two separate facilities. The third and final facility ceased
production on June 30, 1999. In 1998, the Company 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. At December 31, 1999, this liability had a zero balance. Imports
are handled in a separate facility. Also in 1998, 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 in compliance with year 2000
requirements.
OPERATING (LOSS) INCOME
Operating loss income changed significantly in 1999, compared to 1998 and
1997, and is directly related to the items discussed above.
INTEREST EXPENSE
Interest expense is down by approximately $98,400 in 1999 and is 33.8% lower
than in 1998 and 64.2% lower than in 1997. This decrease is due to lower
borrowing levels and lower financing rates. On August 11, 1999, the Company
entered into a new credit arrangement with Manufacturers and Traders Trust
Company (M&T Bank), which provides the Company with a revolving line of credit
and a mortgage/term loan. The revolving line of credit is a three-year credit
facility bearing interest at prime plus 1%. The mortgage/term loan has level
monthly principal and interest payments based on a ten-year amortization with a
balloon payment on April 1, 2001, and bears interest at LIBOR plus 2.25%. The
mortgage/term loan is 80% guaranteed by FMHA. Additionally, the new facility is
guaranteed by a major stockholder of the Company. In consideration for this
guarantee, the Company issued an option to purchase 50,000 shares of common
stock options to the major stockholder valued at $74,637.
INCOME TAX PROVISION
The Company's income tax benefit decreased significantly, to approximately
$482,000 in 1999, from a tax benefit of approximately $1.1 million in 1998
compared to a tax provision of approximately $225,000 in 1997. 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 both 1999 and 1998. In 1997, the effective tax
rate was 49%. The low tax rate in 1999 and 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, 1999, the Company has approximately $3,475,000 of federal net
operating loss carryforwards which expire in 2018 and 2019. The Company has an
AMT credit carryforward of approximately $49,000 which will never expire. The
Company has approximately $5,194,000 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 increased the valuation allowance against these carryforward benefits by
approximately $287,000 in 1999.
As of December 31, 1998, the Company had approximately $700,000 of federal net
operating loss carryforwards which expire in 2018. The Company had
approximately $2.4 million of net operating loss carryforwards available for
New York State tax purposes, which will begin to expire in 2011.
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 1999 was approximately $1.5 million, or $0.97 per share,
compared with last year's net loss of approximately $3.7 million, or $2.39 per
share. The Company had after-tax earnings of approximately $235,000 or $0.16
per share in 1997.
4
<PAGE> 6
FINANCIAL CONDITION
The Company's indebtedness increased approximately $300,000 during 1999. Total
debt consists of notes payable, the line of credit and capital lease
obligations. At December 31, 1999, total debt was approximately $2.8 million,
compared with approximately $2.5 million at December 31, 1998, for an overall
increase of 15.2%. At December 31, 1997, the Company's total debt was
approximately $4.1 million. Refinancing and acquisition activities contributed
to the 1999 debt increase. The repurchase of approximately 66,000 shares of
Company stock from existing 401(k) participants and accelerated payment terms
with Mexican vendors also contributed to the 1999 debt. 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 $1.9 million from 1998 to 1999 and, in comparison to
1997, are approximately $4.9 million lower. Once again in 1999, as in 1998,
finished goods inventory experienced a significant decrease. At December 31,
1999, finished goods inventory was approximately $3.5 million, a reduction of
$860,000 from 1998 levels. Raw materials and work-in-process were eliminated
during 1999 with the cessation of domestic production. 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 $946,000 to $996,000. Work-in-process for 1998 also decreased
significantly from approximately $371,000 to $83,000. On a six month moving
average basis, operating cycle days (accounts receivable days plus inventory
days were reduced approximately 19.2% from 205 to 172 from December 1998 to
December 1999. The operating cycle days at December 31, 1997 were 249. Accounts
receivable decreased $38,000 from 1998 and $1.6 million from 1997. Accounts
receivable days decreased from 80 days at December 31, 1998 to 77 days at
December 31, 1999. There were 111 days of accounts receivable at December 31,
1997. Inventory decreased from 125 at December 31, 1998 to 95 at December 31,
1999. There were 167 inventory days at December 31, 1997.
During 1999, the Company generated approximately $712,000 in cash flow from
operating activities. In 1998 and 1997, the Company generated approximately
$1.1 million and $3.0 million, respectively. The principal components of cash
flow from operations were decreases in accounts receivable and inventory,
increases in accounts payable, partially offset by the adjusted net loss,
income taxes receivable, accrued liabilities, income taxes payable, and
deferred tax asset liability. Working capital at the end of 1999 was
approximately $4.4 million, which was approximately $2.4 million lower than at
the end of 1998 and $7.0 million less compared to working capital at the end of
1997 of approximately $11.4 million. 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 its lender. The Company's current
ratio, the relationship of current assets to current liabilities, decreased to
2.19:1 from 2.93:1 at the end of 1998, and decreased from 3.83:1 at the end of
1997.
Y2K compliant computer software and telephone equipment along with a new
conveyor system for the warehouse were the major portion of the $169,000
capital expenditures for 1999. 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.
The Company's revolving and term loan credit agreements contain covenants
relative to average borrowed funds to earnings ratio, net income, current
ratio, and cash flow coverage. In addition, the payment or declaration of
dividends and distributions is prohibited unless a written consent from the
lender is received. As of December 31, 1999, the Company was in violation of
two bank covenants related to the maintenance of an established average
borrowed funds to earnings ratio and cash flow coverage ratio. 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,
1999. In 2000, 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. The Company is currently negotiating a new financing
arrangement with its current lender.
SUBSEQUENT EVENTS
On February 3, 2000, the Company acquired certain assets from another shoe
company. The purchase price for the assets, which consisted primarily of
inventory and trademarks, totaled approximately $781,000, plus future payments
based on a royalty arrangement.
On February 10, 2000, the Company entered into a definitive stock purchase
agreement to acquire all of the outstanding shares of a shoe company owned by a
related party. The related party is a major stockholder of the Company and one
of its owners is the Company's Chairman and Chief Executive Office. The pending
acquisition is subject to regulatory approval and other matters and is expected
to close in the first quarter of 2000.
5
<PAGE> 7
Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Net sales $ 14,867,332 $ 14,610,867 $ 19,663,142
------------ ------------ ------------
Operating expenses:
Cost of goods sold 11,971,909 12,172,075 14,679,388
Selling and administrative expenses 4,713,074 6,043,475 4,165,379
Other expense (income) -- 937,830 (181,732)
------------ ------------ ------------
Total operating expenses 16,684,983 19,153,380 18,663,035
------------ ------------ ------------
Operating (loss) income (1,817,651) (4,542,513) 1,000,107
Interest expense 193,116 291,544 539,486
------------ ------------ ------------
(Loss) earnings before income taxes (2,010,767) (4,834,057) 460,621
Income tax (benefit) provision (482,570) (1,141,368) 225,287
------------ ------------ ------------
Net (loss) earnings $ (1,528,197) $ (3,692,689) $ 235,334
------------ ------------ ------------
Net (loss) earnings per common share:
Basic $ (.97) $ (2.39) $ .16
------------ ------------ ------------
Diluted $ (.97) $ (2.39) $ .16
------------ ------------ ------------
</TABLE>
See notes to financial statements.
Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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, 1997 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
Purchases of treasury stock -- -- -- -- (7,165) (34,392) (34,392)
Allocation of shares in Company
sponsored defined
contribution plan -- -- -- -- 70,201 336,965 336,965
Net loss, 1998 -- -- -- (3,692,689) -- -- (3,692,689)
--------- ------------ --------- ------------ -------- ------------ -----------
Balance, December 31, 1998 1,698,329 4,245,823 741,303 3,516,189 (123,401) (592,323) 7,910,992
Purchases of treasury stock -- -- -- -- (65,704) (259,854) (259,854)
Allocation of shares in Company
sponsored defined
contribution plan -- -- -- -- 58,118 278,965 278,965
Issuance of common stock
options in consideration for
a debt guarantee -- -- 74,637 -- -- -- 74,637
Net loss, 1999 -- -- -- (1,528,197) -- -- (1,528,197)
--------- ------------ --------- ------------ -------- ------------ -----------
Balance, December 31, 1999 1,698,329 $ 4,245,823 $ 815,940 $ 1,987,992 (130,987) $ (573,212) $ 6,476,543
--------- ------------ --------- ------------ -------- ------------ -----------
</TABLE>
See notes to financial statements.
6
<PAGE> 8
Balance Sheets
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- ------------------ ---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 225,079 $ 7,300
Accounts receivable (less allowances of $321,000 in 1999
and $250,000 in 1998) 4,167,612 4,205,979
Inventories, net 3,542,255 5,480,899
Other current assets 71,725 50,275
Deferred income tax asset 101,629 164,124
Income taxes receivable -- 387,142
------------ ------------
Total current assets 8,108,300 10,295,719
Property - net 821,650 907,067
Other assets:
Other assets 506,535 69,399
Deferred income tax asset 815,176 267,905
------------ ------------
Total other assets 1,321,711 337,304
------------ ------------
Total assets $ 10,251,661 $ 11,540,090
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - line of credit $ 1,903,078 $ 1,144,092
Accounts payable 548,816 833,177
Accrued salaries and commissions 170,935 21,242
Accrued expenses 206,448 301,802
Notes payable - current 864,754 1,212,424
------------ ------------
Total current liabilities 3,694,031 3,512,737
Notes payable - noncurrent 81,087 116,361
------------ ------------
Total liabilities 3,775,118 3,629,098
Stockholders' equity:
Common stock - $2.50 par value; authorized 4,000,000 shares;
1999: 1,698,329 shares issued,1,567,342 shares outstanding;
1998: 1,698,329 shares issued, 1,574,928 shares outstanding; 4,245,823 4,245,823
Additional paid-in-capital 815,940 741,303
Retained earnings 1,987,992 3,516,189
------------ ------------
7,049,755 8,503,315
Less: Treasury stock at cost, 130,987 shares in 1999
and 123,401 in 1998 (573,212) (592,323)
------------ ------------
Total stockholders' equity 6,476,543 7,910,992
------------ ------------
Total liabilities and stockholders' equity $ 10,251,661 $ 11,540,090
------------ ------------
</TABLE>
See notes to financial statements.
7
<PAGE> 9
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $(1,528,197) $(3,692,689) $ 235,334
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 297,086 355,016 344,345
Allocation of shares in defined contribution plan 278,965 336,965 --
Net pension credit -- -- (204,496)
Loss on impairment of assets -- 784,581 --
Gain on sale of property and equipment -- (11,515) (2,950)
Contribution to defined contribution plan -- -- (894,896)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable, net 38,367 1,515,452 860,650
Inventories, net 1,938,644 2,988,476 (15,672)
Other current assets (21,450) 15,381 3,823
Income taxes receivable 387,142 (387,142) 157,704
Other noncurrent assets 36,084 45,288 276
Deferred income tax asset (484,776) (756,449) (196,489)
Prepaid pension expense -- -- 2,579,865
Increase (decrease) in:
Accounts payable (284,361) 529,685 (176,638)
Accrued salaries and commissions 149,693 (218,823) 30,638
Accrued expenses (95,354) 18,541 (143,771)
Income taxes payable -- (421,389) 421,389
----------- ----------- -----------
Net cash provided by operating activities 711,843 1,101,378 2,999,112
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (169,588) (341,191) (254,077)
Proceeds from disposal of property and equipment 22,475 13,689 3,350
----------- ----------- -----------
Net cash used by investing activities (147,113) (327,502) (250,727)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (payments) on line of credit 758,986 (1,075,710) (2,318,054)
Proceeds from notes payable 7,950 -- 200,000
Repayments of notes payable (390,894) (558,349) (636,565)
Debt issuance and other costs (463,139) -- --
Purchases of treasury stock (259,854) (34,392) --
Issuance of common stock -- -- 894,896
----------- ----------- -----------
Net cash used by financing activities (346,951) (1,668,451) (1,859,723)
----------- ----------- -----------
Net increase (decrease) in cash 217,779 (894,575) 888,662
Cash, beginning of year 7,300 901,875 13,213
----------- ----------- -----------
Cash, end of year $ 225,079 $ 7,300 $ 901,875
----------- ----------- -----------
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 191,726 $ 369,214 $ 502,354
----------- ----------- -----------
Income taxes $ 2,742 $ 436,628 $ 2,153
----------- ----------- -----------
</TABLE>
Supplemental disclosure of noncash financing activity:
During 1999, the Company issued common stock options valued at $74,637 in
consideration for a debt guarantee.
See notes to financial statements.
8
<PAGE> 10
Notes to Financial Statements Years ended December 31, 1999, 1998 and 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is engaged primarily in the import
and sale of leisure footwear. Sales are made principally to retailers in
the United States (see Note 8).
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 risks consists 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 $(1,528,197),
$(3,692,689) and $235,334 and a weighted average number of common shares
outstanding of 1,569,086, 1,547,764 and 1,511,892 for the years ended
December 31, 1999, 1998 and 1997, respectively. Options to purchase shares
of common stock were outstanding but were not included in the computation
of diluted earnings per share in 1999 and 1998 because the effect would be
antidilutive due to the net loss in those years. Such options were not
included in the computation of diluted earnings per share in 1997 because
the options' exercise prices were greater than the average market price of
the common shares.
Comprehensive Income - 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 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 (loss) earnings.
Segments - 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. Sales to one customer in 1999 totalled approximately
$1,790,000, or 12 percent of the Company's net sales in 1999. Sales to any
customer in 1998 or 1997 did not exceed 10% of the Company's net sales in
those years.
New Accounting Pronouncement - Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in 1998 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 2001. Currently, since the
Company does not use derivative instruments, management has determined
that this Statement will have no effect on its financial statements.
9
<PAGE> 11
2. INVENTORIES
Inventories, net of reserves, as of December 31 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Finished goods $3,542,255 $4,402,186
Work-in-process -- 82,795
Raw materials -- 995,918
---------- ----------
Total $3,542,255 $5,480,899
---------- ----------
</TABLE>
3. PROPERTY
Property as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 18,655 $ 18,655
Buildings and water plant 2,541,849 2,541,849
Machinery and equipment 116,666 38,594
Computers 420,010 378,776
Vehicles 74,011 74,011
Furniture and fixtures 984,159 1,035,361
---------- ----------
4,155,350 4,087,246
Less accumulated depreciation 3,333,700 3,180,179
---------- ----------
Property - net $ 821,650 $ 907,067
---------- ----------
</TABLE>
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 and contributed
cash of $894,896 to the Plan. 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. The unallocated
shares in the Plan as of December 31, 1999 and 1998 are recorded as
treasury stock in stockholders' equity. Compensation expense is 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 years ended December 31, 1999 and 1998 was
$278,965 (58,118 shares) and $336,965 (70,201 shares), respectively. In
addition, the Company's matching contribution to the Plan totaled
$45,429, $74,178 and $75,811 in 1999, 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, no contribution was required due to
the full funding limitation of the Internal Revenue Code.
The net pension credit for 1997 included the following components:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Service cost $ 187,277
Interest cost 573,952
Actual return on plan assets (835,865)
Net amortization and deferral (129,860)
---------
Net pension credit $(204,496)
---------
</TABLE>
5. INCOME TAXES
The (benefit) provision for income taxes consists of:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ (387,142) $ 415,574
State 2,206 2,223 6,202
----------- ----------- -----------
2,206 (384,919) 421,776
----------- ----------- -----------
Deferred:
Federal (673,042) (1,095,235) (247,762)
State (98,977) (161,214) 51,273
Valuation allowance 287,243 500,000 --
----------- ----------- -----------
(484,776) (756,449) (196,489)
----------- ----------- -----------
Total $ (482,570) $(1,141,368) $ 225,287
----------- ----------- -----------
</TABLE>
10
<PAGE> 12
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(Benefit) provision at statutory rate $ (683,657) $(1,643,580) $ 156,600
State and other taxes, net of federal
tax benefit 1,456 1,467 2,400
Reduction of state net operating loss carryforward -- -- 13,200
Deferred tax rate rollout adjustment -- -- 32,800
Valuation allowance 287,243 500,000 --
Other (87,612) 745 20,287
----------- ----------- -----------
(Benefit) provision for income taxes $ (482,570) $(1,141,368) $ 225,287
----------- ----------- -----------
</TABLE>
At December 31, 1999, the Company has approximately $3,475,000 of federal
net operating loss carryforwards which begin to expire in 2018 and 2019.
The Company has an alternative minimum tax (AMT) credit carryforward of
$49,074 which will never expire. The Company has approximately $5,194,000
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 increased their
valuation allowance against these carryforward benefits by $287,243 in
1999.
Components of the Company's deferred income tax asset and liability as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
--------------------------------
Current Noncurrent
<S> <C> <C>
ASSETS
Non-deductible bad debt reserves $ 78,482 $ --
Uniform capitalization of inventory 63,618 --
Non-deductible sales allowances 46,796 --
Net operating loss carryforward -- 1,409,616
Fixed assets -- 129,978
AMT credit carryforward -- 49,074
Charitable contribution -- 262,435
LIABILITIES
Prepaid pension expense -- (108,797)
Depreciation -- (227,154)
Valuation allowance (87,267) (699,976)
----------- -----------
Deferred income tax asset $ 101,629 $ 815,176
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------
Current Noncurrent
<S> <C> <C>
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 credit carryforward -- 49,074
Charitable contribution -- 261,986
LIABILITIES
Prepaid pension expense -- (217,593)
Depreciation -- (244,919)
Valuation allowance (219,755) (280,245)
--------- ---------
Deferred income tax asset $ 164,124 $ 267,905
--------- ---------
</TABLE>
6. DEBT
Notes Payable - During 1999, the Company refinanced their bank debt with a
new bank resulting in a new revolving line of credit ("revolver") and a
mortgage/term loan. Under the terms of the new 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 $5,500,000, the interest rate is prime rate plus 1%
and the revolver is due to expire on July 30, 2002. The revolver is
secured by accounts receivable, inventory and equipment. The mortgage/term
loan is payable through April 2001 and is secured by the Company's
manufacturing facilities. The facility is guaranteed by a major
stockholder of the Company. In consideration for this guarantee, the
Company issued common stock options to the major stockholder valued at
$74,637.
The balance owed under the Company's revolving line of credit as of
December 31, 1999 and 1998 totalled $1,903,078 and $1,144,092,
respectively.
11
<PAGE> 13
Long-term debt as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable to bank in monthly principal installments of approximately $4,900
through April 2001 at which time a balloon payment of approximately $751,000 is
due; interest is due monthly at LIBOR plus 2.25% $ 824,132 $ -
Other notes payable in monthly principal installments of $1,556 - $1,887
through September 2003 plus interest at 4-5%. 116,361 155,450
Note payable to bank in monthly principal installments of $41,905 through April
2001; interest was due monthly at LIBOR plus 2.25%. This note was refinanced in
1999. - 1,173,335
Other 5,348 -
--------- ---------
945,841 1,328,785
Less: Current portion 864,754 1,212,424
--------- ---------
Noncurrent portion $ 81,087 $ 116,361
--------- ---------
</TABLE>
The aggregate principal payments of notes payable are as follows:
<TABLE>
<S> <C>
2000 $864,754
2001 40,265
2002 27,051
2003 13,771
--------
Total $945,841
--------
</TABLE>
The carrying value of the long-term notes payable to bank approximate fair
value.
The line of credit and the note payable to bank contain certain financial
covenants relative to average borrowed funds to earnings ratio, net
income, current ratio, and cash flow coverage. In addition, the payment or
declaration of dividends and distributions is prohibited unless a written
consent from the lender is received. As of December 31, 1999, the Company
was not in compliance with the covenants related to average borrowed funds
to earnings ratio and cash flow coverage. The Company has not obtained a
waiver from the lender and accordingly, has reclassified $765,609 of the
note payable to bank from a long-term liability to a current liability as
of December 31, 1999. As of December 31, 1998, the Company was not in
compliance with certain covenants resulting in $670,475 of the note
payable to bank being classified as a current liability at that time. The
Company is currently negotiating a new financing arrangement with its
current lender.
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, 1999, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Options outstanding, beginning of year 87,000 22,000 22,500
Options granted - 75,000 2,000
Options cancelled (12,000) (10,000) (2,500)
------ ------ -----
Options outstanding, end of year 75,000 87,000 22,000
------ ------ -----
Options exercisable, end of year - 12,000 14,500
------ ------ -----
</TABLE>
The outstanding options have an exercise price ranging from $3.88 to $4.50
per share and expire at various dates through October 2008.
The Company granted 25,000 stock options in 1997, separate from the
Company's Stock Incentive Plan, to a major stockholder in consideration
for a short-term loan made to the Company from the major stockholder. In
addition, the Company granted 50,000 stock options in 1999, separate from
the Company's Stock Incentive Plan, to a major stockholder in
consideration for a guarantee of the Company's revolver and mortgage/term
note. These options are all outstanding and exercisable at December 31,
1999.
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 earnings (loss) and related per share
amounts as required by SFAS No. 123 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net (loss) earnings:
As reported $ (1,528,197) $ (3,692,689) $ 235,334
Pro forma (1,514,583) (3,806,387) 233,147
Basic and diluted earnings per share:
As reported $ (.97) $ (2.39) $ .16
Pro forma $ (.97) $ (2.46) $ .15
</TABLE>
12
<PAGE> 14
Notes to Financial Statements continued
The weighted average fair value of the options during 1999, 1998 and 1997
is estimated as $1.33, $1.52 and $1.09, respectively, using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expected life 5.5 years 6.5 years 10 years
Volatility 30.63 % 33.18 % 34.77 %
Risk-free interest rate 6.50 % 6.15 % 6.12 %
Dividend yield 0 % 0 % 0 %
</TABLE>
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 ceased its manufacturing operations completely during 1999. As
a result, the Company's primary business activity, subsequent to closing
manufacturing operations, has been 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. As part of the restructuring,
the Company incurred severance costs of $311,153 in 1999, of which $67,248
are included in selling and administrative expenses and $243,905 are
included in cost of goods sold. Raw material inventory write-offs of
$589,177 are also included in cost of goods sold as part of the
restructuring.
In 1998, the Company ceased production in two separate facilities and
substantially vacated these two facilities. A third facility ceased
production and was vacated during 1999. Accordingly, the Company has
recognized an expense in 1998 for impaired assets totaling $572,352 and a
liability totaling $153,249 related to lease commitments for equipment
used in these facilities that expire at various dates subsequent to their
closure dates. As of December 31, 1999, this liability had a zero balance.
In addition, in the fourth quarter of 1998 the Company determined that
certain software that it used would not be year 2000 compliant.
Accordingly, the Company determined that an impairment loss was required
in 1998 for the software totaling $212,229 based on management's estimate
of the fair value of the software.
The impaired facilities 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 facilities.
Other income in 1997 consisted of the following:
<TABLE>
<S> <C>
Gain on termination of pension plan (see Note 4) $ 380,231
Separation expense (198,499)
--------
Total other income $ 181,732
--------
</TABLE>
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.
9. COMMITMENTS
Leases - The Company leases machinery and equipment under noncancelable
lease agreements which are classified as operating leases for financial
reporting purposes. Rental expense was $30,497 in 1999, $121,819 in 1998
and $115,641 in 1997. The leases expire in 2000 and provide for minimum
rentals of $30,497.
Purchase Commitments - The Company has agreements with certain vendors to
purchase minimum quantities of raw materials. At December 31, 1999, these
commitments totaled $308,919.
Letter of Credit - The Company routinely uses letters of credit when
entering into inventory purchase transactions with foreign vendors. At
December 31, 1999, these outstanding letters of credit totaled $75,765.
10. SUBSEQUENT EVENTS
On February 3, 2000, the Company acquired certain assets from another shoe
company. The purchase price for the assets, which consisted primarily of
inventory and trademarks, totaled approximately $781,000 plus future
payments based on a royalty arrangement.
On February 10, 2000, the Company entered into a definitive stock purchase
agreement to acquire all of the outstanding shares of a shoe company owned
by a related party. The related party is a major stockholder of the
Company and one of its owners is the Company's Chairman and Chief
Executive Officer. The pending acquisition is subject to regulatory
approval and other matters and is expected to close in the first quarter
of 2000.
13
<PAGE> 15
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, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/S/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
January 26, 2000 (February 10, 2000 as to Note 10)
<PAGE> 16
Selected Financial Data
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 14,867,332 $ 14,610,867 $ 19,663,142 $ 23,060,724 $ 23,560,772
Income (loss) from continuing operations (1,528,197) (3,692,689) 235,334 (690,185) (853,761)
EPS (loss) from continuing operations (.97) (2.39) .16 (.54) (.82)
Total assets 10,251,661 11,540,090 17,267,977 19,564,827 23,571,961
Long-term debt 81,087 116,361 1,325,104 1,708,240 2,306,093
- ----------------------------------------------------------------------------------------------------------------------------------
</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
481 registered shareholders as of the February 11, 2000 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.
<PAGE> 17
Officers
James R. Riedman
Chairman &
Chief Executive Officer
Greg A. Tunney
President &
Chief Operating Officer
John E. Brigham
Chief Financial Officer &
Treasurer
Gary E. Pflugfelder
Clerk
Directors
Edward Bloomberg
Independent Investment Advisor
Steven DePerrior
Principal
Burke Group
Gregory Harden
President
Harden Furniture
Gary E. Pflugfelder
Sales Consultant
James R. Riedman
President
Riedman Corporation
Greg A. Tunney
President &
Chief Operating Officer
Daniel Green Company
OUR COMPANY PROFILE
One of the oldest and best-known names in the footwear industry, the Daniel
Green Company has designed and marketed men's and women's slippers plus related
slipper-designed styles since 1882. A dedicated sales force sells and services
independent shoe stores, upscale department stores and mail order catalogue
companies predominately located in the United States. Consumers readily
associate the "Daniel Green" and "Comfy" brand names with a tradition of high
quality, good fit and lasting durability in slipper-designed footwear.
[DANIEL GREEN LOGO]
DANIEL GREEN
THE ORIGINAL COMFY COMPANY SINCE 1882
