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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 0-21940
DONNKENNY, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 51-022889
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1411 BROADWAY
NEW YORK, NEW YORK 10018
(Address of principal executive offices) (Zip Code)
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(212) 730-7770
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, based on a closing sale price of the Common
Stock on the Nasdaq National Market on March 31, 1997 of $2.75 per share, was
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approximately $38,409,635 (1). As of March 31, 1997, 14,069,940 shares of
Common Stock of Registrant were outstanding.
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For purposes of this Report, the number of shares held by non-affiliates was
determined by aggregating the number of shares held by Officers and
Directors of Registrant, and by others who, to Registrant's knowledge, own
more than 10% of Registrant's Common Stock, and subtracting those shares
from the total number of shares outstanding.
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PART I
ITEM 1. BUSINESS
Donnkenny, Inc. (together with its subsidiaries, "Registrant" or the
"Company") was incorporated in Delaware in 1978 and is a holding company with
four subsidiaries, three of which are operating subsidiaries, Donnkenny
Apparel, Inc. ("Donnkenny Apparel"), Beldoch Industries Corporation
("Beldoch") and MegaKnits, Inc. ("MegaKnits"). The Company designs,
manufactures, imports and markets a broad line of moderately priced women's
sportswear and sleepwear. In addition, the Company manufactures, imports and
markets men's, women's and children's sportswear and intimate apparel
featuring various licensed cartoon character images.
The fiscal year of the Company ended December 31, 1996 ("Fiscal 1996")
covers the fifty-two weeks then ended.
SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS
Regulatory Reviews and Investigations
SEC
By letter dated August 15, 1996, the Company was notified by the
Securities and Exchange Commission (the "SEC") that it was the subject of an
informal investigation concerning alleged inaccuracies in the reporting of
revenues and expenses by the Company for certain reporting periods. On or
about November 10, 1996, the Company learned that the SEC had entered a
formal order of investigation in the matter. The Company is cooperating fully
with the SEC's ongoing investigation.
The Nasdaq Stock Market, Inc.
On December 6, 1996, the Company received notification that the Nasdaq
Stock Market, Inc. (the "NASD") was commencing a review of the Company's
eligibility for continued listing on the Nasdaq Stock Market. On February 13,
1997, a hearing was held by a Nasdaq Listing Qualifications Panel (the
"Panel"). By letter dated February 28, 1997, the Company was notified that
the Panel determined to allow the Company to remain listed on the Nasdaq
Stock Market pending the completion of (i) audits of the Company's financial
statements for the 1994 through 1996 fiscal years by the Company's auditors
and (ii) an internal investigation which had been commenced by the Audit
Committee of the Company's Board of Directors. See "Certain Company
Activities" infra. The Company was directed to provide the NASD with
additional information, including information concerning the results of the
above-mentioned audits as well as restated financial statements for certain
reporting periods, on or before March 31, 1997. The Panel recommended that in
the event the Company fails to provide such information, the Company be
delisted.
On March 31, 1997, the Company supplied the NASD with a report containing
certain information which the NASD had requested. The report stated, among
other things, that the audits had not yet been completed and that the
restated financial statements would be contained in the Company's Annual
Report on Form 10-K, a copy of which would be provided to the NASD on or
before April 15, 1997. On April 1, 1997, the NASD notified the Company that
due to the Company's failure to provide certain requested information,
including the results of the audits, the common stock of the Company would be
removed from the Nasdaq Stock Market on April 8, 1997. On April 2, 1997, the
Company requested that the NASD hold an oral hearing with respect to its
decision to delist the Company. That hearing will be held on April 23, 1997.
The common stock of the Company will remain listed on the Nasdaq National
Market pending the outcome of the hearing.
On April 10, 1997, the Company was notified that the Nasdaq Hearing Review
Committee (the "Review Committee") has called for review of the Panel's
February 28, 1997 decision. The Review Committee's decision will be made on
the basis of the written record. No oral hearing will be held with respect
thereto. The Review Committee has indicated that its decision will be issued
subsequent to the next general meeting of the NASD Board of Governors, which
is currently scheduled for June 26, 1997.
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Certain Company Activities
On August 20, 1996, the Company's Board of Directors authorized its Audit
Committee to commence an investigation into the issues raised by the SEC's
informal investigation. The Board also authorized the Audit Committee to
retain independent legal counsel and a financial adviser in connection with
the investigation.
In September, 1996, the Company announced that it was changing its fiscal
year from one ending on the first Saturday of each year on or after November
30 to a fiscal year ending on December 31 of each year.
In September, 1996, the Company announced that it would be restating its
quarterly reports for the first, second and third quarters of fiscal 1995 and
the first and second quarters of fiscal 1996 to correct the recording of
revenues and income for those periods.
In October, 1996, the Company announced that previously issued financial
statements covering its 1994 and 1995 fiscal years should no longer be relied
on and that the Company would be amending its Annual Report on Form 10-K for
those years.
On or about November 4, 1996, based on preliminary findings and
recommendations of the Audit Committee, the Company relieved Edward Creevy,
Ronald Hollandsworth and Kym Kulis, who were Chief Financial Officer,
Corporate Controller and Assistant Corporate Controller, respectively, of
their financial duties for the Company. On that same date, Stuart S. Levy was
appointed the new Chief Financial Officer of the Company.
On November 4, 1996, the Company's then auditors, KPMG Peat Marwick LLP
("KPMG"), informed the Company that they were resigning. They informed the
Company that they would no longer be able to rely on representations of
financial management and that they did not have access to sufficient,
credible information from others within the Company to enable them to
continue as auditors. The Company thereafter engaged Deloitte & Touche LLP to
serve as its new auditors.
On December 17, 1996, the Company's Audit Committee reported its final
findings and recommendations to the Company's Board of Directors. Based on
these findings and recommendations, the Board concluded that Messrs. Creevy
and Hollandsworth and Ms. Kulis should no longer be employees of the Company.
The Board also requested Mr. Richard Rubin's resignation from the Board of
Directors and as an officer of the Company.
On December 18, 1996, at a continuation of the December 17 Board of
Directors meeting, Mr. Rubin's resignation was tendered and was accepted by
the Board. Harvey Appelle was then appointed Chairman of the Board and Chief
Executive Officer of the Company.
On December 18, 1996, the Company and Mr. Rubin entered into a Settlement
Agreement in settlement of any claims which Mr. Rubin may have had in
connection with his employment agreement. Such employment agreement was
scheduled to run through December 1, 1998. Pursuant to the Settlement
Agreement, the Company agreed to make payments to Mr. Rubin, for the period
of time from January 1, 1997 through December 31, 1997, totalling $660,000,
plus a $15,000 non-accountable expense allowance. The Company also agreed,
for a limited period of time, to provide to Mr. Rubin certain benefits,
including certain life, health, dental, medical, hospitalization and
disability insurance benefits. In consideration for such payments and
benefits, Mr. Rubin agreed to provide consulting services to the Company
during the aforementioned period.
On April 14, 1997, Lynn Siemers-Cross was elected as a director and as
President and Chief Operating Officer of the Company.
New Credit Facility
The Facility
On April 15, 1997, the Company received a signed commitment letter (the
"Commitment Letter") for a new credit facility (the "Facility") to amend its
existing credit facility. The Facility would be extended
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to Donnkenny Apparel, Beldoch and MegaKnits, as borrowers, and would consist
of a term loan (the "Term Loan"), a revolving credit (the "Revolving
Credit"), and a factoring facility (the "Factoring Facility"). The purpose of
the Facility would be to continue to finance the acquisition of the stock of
Beldoch and the purchase of certain assets of Oak Hill Sportswear Corp. and
for general working capital purposes including the issuance of letters of
credit. The Facility would expire on March 31, 1999. Under the Facility, The
Chase Manhattan Bank would serve as agent (and would hold a 35.0762%
interest), The CIT Group/Commercial Services Inc. would serve as collateral
agent (and hold a 14.8148% interest), and each of Fleet Bank, N.A. and The
Bank of New York would be co-lenders (each holding a 25.0545% interest). The
definitive agreements relating to the Facility have not yet been finalized.
The Term Loan
The Term Loan would be continued at its current balance at April 1, 1997
of $16,250,000. The interest rate would be equal to the prime rate plus 1
1/2% per annum. The amortization schedule calls for quarterly payments of
$1,250,000. A balloon payment of $7,500,000 would be due on March 31, 1999.
An excess cash flow recapture would be payable annually within 15 days after
receipt of the Company's audited fiscal year-end financial statements. In
addition, any tax refunds received in excess of $2,000,000 applicable to
Fiscal 1996 or prior fiscal years would be applied to reduce the balloon
payment. The default interest rate would be equal to 2% above the otherwise
applicable rate. The Term Loan would not carry any prepayment penalty.
The Revolving Credit
The commitment under the Revolving Credit would be $85,000,000, with
sublimits of $70,000,000 for direct debt and $35,000,000 for letters of
credit. The interest rate would be equal to the prime rate plus 1 1/2% per
annum. Borrowings in excess of an allowable overadvance would bear interest
at the prime rate plus 3 1/2% per annum. Advances and letters of credit (in
the aggregate) would be limited to (i) up to 85% of eligible accounts
receivable of the borrowers plus (ii) up to 60% of eligible inventory of the
borrowers, plus (iii) an allowable overadvance. The default interest rate
would be equal to 2% above the otherwise applicable rate.
The Factoring Facility
The factoring commission would be equal to 0.45% of the gross amount of
sales, plus certain customary surcharges and 0.20% on takeover accounts
receivable. One collection day would be charged at a per annum rate equal to
the prime rate plus 1 1/2% on all factored transactions.
Collateral; General Covenants and Conditions
Collateral for the Facility includes (i) a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles, inventory
and factor credit balances, (ii) a first mortgage on all real property, (iii)
a pledge of the Company's stock in Beldoch, and (iv) a pledge of the
Company's stock in Donnkenny Apparel and MegaKnits. The Facility would be
guaranteed by the Company and each of its subsidiaries. The Facility would
(i) require the Company to make usual and customary representations and
warranties, (ii) provide for certain standard events of default, (iii)
provide certain affirmative covenants, and (iv) provide certain negative
covenants, including limitations on debt, liens, restricted payments,
dividends, mergers, acquisitions, consolidations, asset sales, and other
usual and customary negative covenants.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and note 8 to the Consolidated Financial Statements of
the Company and its Subsidiaries.
PRODUCTS
The Company designs, manufactures, imports and markets a broad line of
moderately priced sportswear and sleepwear for women under the Victoria
Jones, Casey & Max(Registered Trademark), Beldoch Popper(Registered
Trademark), Pierre Cardin(Registered Trademark), Donnkenny Classics, Mickey &
Co.(Registered Trademark), and Lewis Frimel(Registered Trademark) brand
names. The Company also manufactures, or contracts for the manufacture of,
and markets certain items of women's, men's and children's sportswear and
women's and girls' sleepwear featuring various licensed cartoon character
images.
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Oak Hill Sportswear Division
The Company acquired its Oak Hill Sportswear product line in 1995. Oak
Hill Sportswear manufactures and imports novelty woven shirts, sweaters,
cotton knits and sportswear under the brand names Casey & Max and Victoria
Jones. The Casey & Max label represents novelty woven tops and sportswear.
The Victoria Jones label represents novelty sweaters, cotton knits and
sportswear as well as all special size product. These moderate-priced
products are sold to department stores, specialty stores and chains including
Belk, Mercantile, Kohl's, Dillard's, Federated, Profitt's, Stage Stores,
Catherine's, J.C. Penney and Sears. The division's products are marketed for
missy, large sizes and petites. Approximately 90% of these products are
imported, predominately from Hong Kong, China and India.
Beldoch Industries
The Beldoch division of the Company manufactures and imports knitwear
selling to moderately priced department and specialty stores across the
nation. The Beldoch Popper division, within the Beldoch division, sells
sweaters and cut and sewn women's sportswear to stores such as J.C. Penney,
Belk, Macy's, Mercantile, Dillards, Frederick Atkins and Carson Pirie Scott.
The Knitmaker's division, within the Beldoch division, is a private label
division selling exclusive private label products to QVC, J.C. Penney and
Spiegel. A vast majority of the Knitmaker's products are manufactured in the
Company's facility located in West Hempstead, New York. The Beldoch division
also manufactures women's wear under the Pierre Cardin label pursuant to a
license. The Pierre Cardin product is sold to the better knitwear departments
of department stores and specialty stores. Its major accounts include
Federated Stores, Macy's, Belk, Mercantile, Yonkers and Frederick Atkins
stores and the Spiegel and Chadwick's Catalogs.
Donnkenny Classics
Donnkenny Classics are fabricated predominantly from synthetic/natural
fiber blends and 100% synthetic materials and are manufactured in petite,
missy and large sizes. The market for these products is primarily women over
the age of 35. Donnkenny has been an established brand name for over 60
years.
The Donnkenny Classics label represents all of the Company's core products
for career and casual coordinated merchandise as well as fashion products
including (i) pull-on stretch gabardine pants and skirts and coordinated
gabardine jackets, which are manufactured year round in both basic and
fashion colors with coordinated blouses, and which except for color
selection, remain substantially unchanged from season to season, and (ii)
tops, blouses, pants, skirts and jackets in styles which vary from season to
season.
Mickey & Co.(Registered Trademark)
Pursuant to non-exclusive licenses granted the Company by Disney
Enterprises, Inc. ("Disney"), the Company manufactures, produces and sells a
Mickey & Co.(Registered Trademark) line of sportswear collections for women,
men and children and other product classifications including sweat shirts,
tee shirts, jackets, activewear, novelty bottoms and tops, sweaters and bras
and underpants. The products produced under these Disney licenses are both
domestically manufactured and imported and are imprinted, embroidered or
appliqued with the standard Disney characters, including Mickey
Mouse(Registered Trademark), Minnie Mouse(Registered Trademark), Donald
Duck(Registered Trademark), Daisy Duck(Registered Trademark),
Pluto(Registered Trademark) and Goofy(Registered Trademark) and the Mickey &
Co.(Registered Trademark) trademark. In 1996, The Walt Disney Company Asia
Pacific Ltd granted the Company a non-exclusive license, which the Company
has sublicensed to a third party, to manufacture a product line and
distribute the product in the Peoples' Republic of China. Pursuant to the
terms of the Company's sublicense agreement, the Company will not realize any
income from sales activities until the sublicensee recoups initial
expenditures. The Company does not anticipate it will receive income under
this arrangement through the end of the term of the license which is
scheduled to expire in August, 1997. The Company does not intend to seek
renewal of the China license.
Lewis Frimel/Flirts
The Company acquired its Lewis Frimel/Flirts product line in 1977. During
1996, the product line consisted of women's intimate apparel products,
including sleepwear, dorm shirts, boxer shorts, pajamas, panties and bras
with various character images licensed to the Company. Sales of the Lewis
Frimel/Flirts
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product line was primarily to the mass merchant market. Licensed images used
on this product line included characters in the Garfield comic strip, Peanuts
characters, classic muppet characters and various Looney Tunes characters.
Gross sales for this product line in 1996 were $16,256,500. Most of the
licenses for the characters mentioned above expire during 1997. The Company
is in the process of seeking additional licenses to add to its product line.
Custom and Private Label Products
The Company also manufactures products on a contract basis utilizing the
Company's manufacturing facilities. The customers include, among others,
Cross Creek, Basset Walker and Tultex.
MANUFACTURING AND IMPORTING
Approximately 46% of the Company's products sold in Fiscal 1996 were
manufactured in the United States, as compared with 51% in the Company's
fiscal year ended December 2, 1995 ("Fiscal 1995"). The Company's
domestically produced products are manufactured at the Company's production
facilities in Virginia and West Hempstead, New York and at other facilities
by several outside contractors.
The Company's Electronic Data Interchange computer system ("EDI") connects
the Company to approximately 33 of its large customers and, in Fiscal 1996,
was used to place approximately 34% of the Company's orders. Through EDI, the
Company has established a "quick response" program to shorten its lead and
response times for production and delivery of its domestically manufactured
women's sportswear lines. The Company is also linked by EDI to several of its
major suppliers, which allows the Company to review purchase orders for
fabric on a weekly basis.
The remaining 54% of the Company's products sold in Fiscal 1996 were
produced abroad and imported into the United States, principally from China,
India, Guatemala, Turkey and Bangladesh. Such products include some or all of
the Company's products sold under the brand names Victoria Jones, Casey &
Max, Beldoch Popper, Lewis Frimel/Flirts, panties and boxer shorts featuring
Looney Tunes characters, underpants and underpant sets featuring Disney
characters, and certain of the Company's products which have ornamental
design requirements. The percentage of the Company's products which are
manufactured in the United States is expected to decrease further during the
Company's 1997 fiscal year ("Fiscal 1997").
The Company's purchases from its foreign suppliers are effected through
individual purchase orders specifying the price and quantity of the items to
be produced. Generally, the Company does not have any long-term, formal
arrangements with any of the suppliers which manufacture its products. The
Company continually seeks additional suppliers throughout the world for its
sourcing needs. No one domestic or foreign contractor manufactured more than
10% of the Company's products in Fiscal 1996.
Virtually all of the Company's merchandise imported into the United States
is subject to United States duties. In addition, bilateral agreements between
the major exporting countries and the United States impose quotas that limit
the amount of certain categories of merchandise that may be imported into the
United States. Because the United States may, from time to time, impose new
quotas, duties, tariffs or other import controls or restrictions, the Company
monitors import and quota-related developments.
Attendant with the Company's increased reliance on foreign manufacturing
is a risk of excess inventory. The Company must commit to its foreign
manufacturers and suppliers up to six months in advance of its selling
season, usually before the Company has received its orders from its
customers. Thus, there exists the risk that the purchase orders by the
Company's customers will be less than the amount manufactured. The Company
believes that this risk is outweighed by the cost savings to the Company by
manufacturing such products abroad. Conversely, in the event there exists
excess demand for the Company's products, the lengthy production time for
imported goods makes it impossible for the Company to return to the market to
purchase additional goods for the same selling season. The Company's
arrangements with foreign suppliers are also subject to the additional risks
of doing business abroad, including currency fluctuations and revaluations,
restrictions on the transfer of funds and in certain parts of the world,
political instability. The Company's operations have not been materially
affected by any of such factors to date. However, due to the large portion of
the Company's products
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which are produced abroad, any substantial disruption of its relationships
with its foreign suppliers could have a material adverse effect on the
Company's operations and financial condition.
CUSTOMERS
In Fiscal 1996, the Company shipped orders to approximately 23,500 stores
in the United States. This customer base represents approximately 8,300
accounts. Of the Company's net sales for Fiscal 1996, chain stores accounted
for approximately 26.3%, specialty retailers for approximately 32.7%,
department stores for approximately 20.4%, mass merchants for approximately
11.2%, catalogue customers for approximately 3.8%, and other customers for
approximately 5.6%.
The Company markets its Oak Hill Sportswear division products to major
department stores, including Dillard's, Federated Stores, May Company, J. C.
Penney and Sears and to specialty retailers. Beldoch Popper products are sold
to department stores, chain stores and specialty retailers, including J. C.
Penney, Belk and Frederick Atkins. Knitmaker's, Beldoch's private label
division, sells exclusive products to catalog and specialty retailers
including QVC and Spiegel. Pierre Cardin products are sold to department and
specialty stores and catalogs, including Federated Stores, Macy's, Frederick
Atkins, Mercantile Stores, Spiegel and Chadwick's of Boston. Donnkenny
Classics markets its moderately priced related separates to departments
stores, specialty stores and a variety of catalog retailers, including J. C.
Penney, Sears, Stage Stores, Frederick Atkins, Catherines, Lane Bryant Direct
and Roamans. In addition, the Company manufactures products exclusively for
J. C. Penney under its D.K. Gold label. The Lewis Frimel/Flirts products are
marketed to mass merchant retailers including Wal-Mart, K-mart and Target
Stores. The Mickey & Co.(Registered Trademark) product line is distributed to
J. C. Penney, selected specialty retailers including Mercantile Stores,
department stores including Dillard's, Dayton-Hudson and May Department
Stores, novelty stores and Disney theme parks.
In Fiscal 1996, consolidated net sales to J.C. Penney accounted for 19.4%
of the Company's net sales. The loss of, or significantly decreased sales to,
this customer could have a material adverse effect on the Company's
consolidated financial condition.
In Fiscal 1996, the Company experienced a seasonal sales peak during the
third and fourth quarters of Fiscal 1996. The Company expects the bulk of its
business during Fiscal 1997 also to be during the third and fourth quarters.
SALES AND MARKETING
At March 15, 1997, the Company had a 91 person sales force, of whom 32
were Company employees and 60 were independent commissioned sales
representatives. These sales representatives are located in 43 cities and
provide nationwide coverage to retailers ranging from individual specialty
shops to national chain stores and catalogues.
The Company's principal showrooms are in New York City. In addition, the
Company's sales representatives operate showrooms in Atlanta, Charlotte,
Dallas, Denver, Elmont (NY), Chicago, Los Angeles, Miami, Minneapolis and
Seattle.
RAW MATERIALS SUPPLIERS
The Company's sources of fabric and trim supply are well established. As a
result of the large, steady purchases each year by the Company of fabrics and
trim for its production of certain styles, the Company is a major customer of
several of the larger synthetic textile producers. The Company typically
experiences little difficulty in obtaining raw materials and believes that
the current and potential sources of fabric and trim supply are sufficient to
meet its needs for the foreseeable future.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company owns and has registered in the United States, and in certain
foreign jurisdictions, the following trademarks under which a variety of the
Company's products are sold: Donnkenny(Registered Trademark), Victoria
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Jones(Registered Trademark), Victoria Sport(Registered Trademark), Casey &
Max(Registered Trademark), Beldoch Popper(Registered Trademark), Lewis
Frimel(Registered Trademark), Flirts(Registered Trademark),
Knitmaker's(Registered Trademark), Private Stock(Registered Trademark) and
Alberoy(Registered Trademark). Upon compliance with the trademark statutes of
the United States and the relevant foreign jurisdictions, these trademark
registrations may be renewed.
The Company holds licensing rights to manufacture, import and sell women's
sportswear in the United States and the U.S. Virgin Islands with the Pierre
Cardin trademark, including sweaters, pants, skirts, knitwear, jeans,
swimwear and activewear. Such license currently is automatically continued
from year to year at the Company's option provided net sales equal specified
minimums. The Company's sales during Fiscal 1996 surpassed the minimum
requirements of this license, and the Company intends to renew this license
for an additional one year period.
The Company holds license rights to manufacture and market products with
recognizable character images. The Company has rights to use the Mickey &
Co.(Registered Trademark) trademark and certain Walt Disney characters
including Mickey Mouse(Registered Trademark), Minnie Mouse(Registered
Trademark), Donald Duck(Registered Trademark), Daisy Duck(Registered
Trademark), Pluto(Registered Trademark) and Goofy(Registered Trademark) on
certain products. The Company also has license rights to manufacture and
market certain products using fictional character images and trade names,
including, but not limited to, various Looney Tunes characters, Garfield, the
Peanuts characters and the Muppets.
Under the current term of the material licenses, such licenses will expire
during 1997 and 1998. The Company has the option to renew certain of its
licenses, while other licenses do not have renewal options as explicit
contractual provisions. The Company believes it has satisfied the
requirements of its licenses; however, no assurance can be given that the
Company will be able to renew any of the licenses on commercially acceptable
terms. The Company is in the process of seeking additional licenses.
The licenses generally require the Company to make minimum annual royalty
payments and provide for maintenance of quality control. Furthermore, the
licenses give the licensor the right to approve products offered by the
Company using its characters and to terminate the license if the Company does
not satisfy its contractual obligations in any material respect. Pursuant to
the licenses, royalties range up to 16% of net sales of products sold.
BACKLOG
At March 15, 1997, the Company had unfilled, confirmed customer orders of
approximately $64 million, compared to approximately $42 million of such
orders at March 15, 1996, with such orders generally scheduled for delivery
within three to six months of confirmation, although some extend until the
end of the fiscal year. The amount of unfilled orders at a particular time is
affected by a number of factors, including the scheduling of the production
and shipment of garments, which in some instances may be delayed or
accelerated at the customer's request. Accordingly, a comparison of unfilled
orders from period to period is not necessarily meaningful and may not be
indicative of eventual actual shipments. There can be no assurance that
cancellations, rejections and returns will not reduce the amount of sales
realized from the backlog of orders.
COMPETITION
The women's apparel business is highly competitive and consists of many
manufacturers and distributors, none of which accounts for a significant
percentage of total sales in the overall market, but many of which are larger
and have substantially greater resources than the Company. The Company
competes with both domestic manufacturers and importers, primarily on an
item-by-item basis, with respect to brand name recognition, price, quality
and availability.
EMPLOYEES
As of March 15, 1997, the Company had 1,566 full-time employees, of whom
242 were salaried and 1,324 were paid on an hourly basis. As of March 15,
1997, the Company had 37 part time employees, all of whom work on an hourly
basis.
The Company's hourly labor force is non-union. The Company believes
relations with its employees are good.
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ENVIRONMENTAL MATTERS
The Company believes that it is in material compliance with all applicable
federal, state and local environmental laws. The Company does not currently
anticipate the need to make material capital expenditures to remain in
compliance with applicable federal, state and local environmental laws.
ITEM 2. PROPERTIES
The Company currently operates ten facilities in Virginia, one in
Charleston, South Carolina, two in New York state and one in Hong Kong.
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APPROXIMATE OWNED OR
LOCATION SQUARE FOOTAGE FUNCTION LEASED
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Christiansburg, Virginia ...... 109,000 Finishing Owned
Dryden, Virginia ............... 28,850 Sewing Owned
Floyd, Virginia ................ 79,600 Fabric warehouse, cutting Owned
Floyd, Virginia ................ 12,200 Sewing Owned
Haysi, Virginia(1) ............. 30,200 Sewing Leased
Christiansburg, Virginia(1) ... 66,000 Imperial warehouse Leased
Independence Grayson, Virginia 70,350 Sewing, warehouse Owned
Independence Kendon, Virginia . 37,550 Warehouse, distribution Owned
Rural Retreat, Virginia ........ 61,230 Sewing, distribution Owned
Wytheville, Virginia ........... 161,800 Distribution, administration Owned
Charleston, South Carolina(2) . 200,000 Distribution center Leased
West Hempstead, New York ...... 150,000 Distribution, knitting and sewing Leased
New York, New York(3) .......... 62,500 Offices and principal showrooms Leased
Medallion Heights, Hong Kong .. 1,000 Administration and sourcing Leased
--------------
TOTAL........................... 1,070,280
==============
</TABLE>
- ------------
(1) The Company owns all of its facilities in Virginia other than the Haysi
and Christianburg facilities. With respect to the Haysi facility, the
Company has entered into a lease purchase agreement with the Industrial
Development Authority of Dickenson County, Virginia and The County of
Dickenson, Virginia pursuant to which the Company is making monthly
payments of $4,241.75 until September 1, 2012, at which time the
Company will be entitled to purchase the Haysi facility for a nominal
purchase price. With respect to the Christianburg facility, the annual
rental payments are $44,400, and the lease expires in August 1997.
(2) This facility is leased, with annual rental payments totaling $450,000,
and is subject to a 3% annual rental escalation, until March 19, 2006,
at which time the lease expires.
(3) Annual rental payments for the New York office/showroom space are
approximately $2,200,000 in the aggregate. The leases for the New York
office/showrooms expire in 2000, 2006 and 2008.
Management believes that its current facilities are sufficient to meet its
needs for the foreseeable future.
RETAIL OUTLETS
The Company operates 12 outlet stores in which it markets out-of-season
and irregular merchandise in order to reduce its exposure to excess inventory
and limit brand name deterioration as a result of sales to off-price
retailers. The outlet stores are located primarily in Virginia, with
additional locations in Alabama, Florida, North Carolina and Tennessee. Five
of these stores are adjacent to the Company's manufacturing facilities, while
the remaining seven stores are generally located in areas in which the
Company's customers do not sell its products. The size of these stores ranges
from 1,600 to 3,500 square feet. The annual minimum rental payments range
from approximately $15,000 to $45,000, and the leases
8
<PAGE>
terminate between 1997 and 1998. The Company expects to be able to renew or
replace each of these leases upon its expiration on terms comparable to the
existing terms. The Company is currently considering the desirability of
continuing to sell products through its own outlet stores.
ITEM 3. LEGAL PROCEEDINGS
IN RE DONNKENNY, INC. SECURITIES LITIGATION, 96 Civ. 8452 (MGC): Beginning
in November 1996, ten putative class action complaints were filed in the
United States District Court for the Southern District of New York. The
complaints name as defendants the Company, as well as Edward T. Creevy,
Ronald Hollandsworth and Richard Rubin, all of whom are former officers
and/or directors of the Company. The complaints allege that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by failing to disclose, among other things,
that the Company's financial statements for certain reporting periods
allegedly overstated sales and revenues. The complaints seek compensatory
damages, prejudgment interest, attorneys' fees and costs.
In December 1996 and January 1997, several groups of plaintiffs and
putative class members filed motions for (i) consolidation of the
aforementioned actions and (ii) the appointment of one or more lead
plaintiffs pursuant to the Private Securities Litigation Reform Act of 1995.
On January 31, 1997, the court issued an Order that the actions be
consolidated. Pursuant to the Order, the plaintiffs have until May 17, 1997
in which to file a consolidated complaint or designate one of the existing
complaints as the operative complaint. In addition, the defendants' time to
answer or otherwise respond to the complaints has been extended until after
the time that a previously designated complaint is designated as the
operative complaint or a consolidated complaint is filed.
On April 2, 1997, the Court appointed Emanon Partners, L.P. ("Emanon") as
the lead plaintiff in the action and ruled that Emanon may select the law
firms of Wolf Popper, LLP and Milberg Weiss Bershad Hynes & Lerach, LLP as
co-lead counsel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of Fiscal 1996.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the Nasdaq National Market under
the symbol "DNKY." The Common Stock began trading on the Nasdaq National
Market on June 17, 1993.
In November 1995, the Board of Directors of the Company declared a
two-for-one stock split to all holders of its common stock in the form of a
100% stock dividend payable to stockholders of record on December 4, 1995.
Additional shares reflecting the stock split were distributed on December 18,
1995.
The following table sets forth the quarterly high and low closing prices
of a share of Common Stock as reported by the Nasdaq National Market for the
period commencing with the trading of the Common Stock on December 4, 1993
and ending on March 31, 1997. Information with respect to periods prior to
December 19, 1995 has been retroactively restated to reflect the
above-described stock split.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------------------- -------- -------
<S> <C> <C>
Fiscal 1994
First Quarter ..... 9 15/16 8 13/16
Second Quarter ... 11 7/8 9 5/16
Third Quarter ..... 13 1/8 11 1/8
Fourth Quarter ... 12 13/16 6 1/16
Fiscal 1995
First Quarter ..... 9 1/16 6 3/4
Second Quarter ... 9 5/8 7 9/16
Third Quarter ..... 14 5/16 9 17/32
Fourth Quarter ... 17 1/8 12 25/32
Fiscal 1996
First Quarter ..... 18 10 1/8
Second Quarter ... 20 5/8 13 3/4
Third Quarter ..... 21 3/8 16
Fourth Quarter ... 17 1/8 3 5/8
Fiscal 1997
First Quarter ..... 5 3/8 2 1/8
</TABLE>
On March 31, 1997, the closing price for a share of Common Stock, as
reported by the Nasdaq National Market, was $2.75.
The number of holders of record for Registrant's Common Stock as of March
15, 1997 was 96 and the approximate number of beneficial holders of the
Common Stock was 2,500.
The Company paid a $3.0 million cash dividend to its stockholders in
February 1992. The Company currently anticipates that it will retain all its
earnings for use in the operation and expansion of its business and,
therefore, does not anticipate that it will pay any cash dividends in the
foreseeable future. In addition, the Company's existing credit facilities and
the proposed facility each prohibit the Company from declaring or paying
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 3, 1994, December
2, 1995 and December 31, 1996 and for the years then ended have been derived
from the Company's consolidated financial statements included elsewhere in
this Form 10-K which have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is also included herein. The selected
consolidated financial data as of December 4, 1993 and December 5, 1992 and
for the years then ended have been derived from the Company's consolidated
financial statements, which are not included herein, and were audited by
other auditors. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company and
its Subsidiaries and related notes thereto incorporated by reference herein.
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 5, DECEMBER 4, DECEMBER 3, DECEMBER 2, DECEMBER 31,
1992 1993 1994 1995 1996
------------- ------------- ------------- ------------- --------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA(1):
Net sales .................. $126,490 $144,080 $151,147 $193,306 $255,179
Cost of sales .............. 88,052 100,321 106,389 142,128 202,580
------------- ------------- ------------- ------------- --------------
Gross profit ............... 38,438 43,759 44,758 51,178 52,599
Selling, general and
administrative expenses .. 22,480 25,298 26,772 34,000 57,603
Amortization of goodwill
and other related
acquisition costs ......... 1,412 1,317 1,145 985 1,449
Restructuring Charge ....... -- -- -- 2,815 --
Gain on sale of license ... -- -- (1,116) -- --
------------- ------------- ------------- ------------- --------------
Operating profit ........... 14,546 17,144 17,957 13,378 (6,453)
Interest expense ........... (6,943) (5,312) (2,870) (4,135) (5,154)
------------- ------------- ------------- ------------- --------------
Income before income taxes
and extraordinary charge . 7,603 11,832 15,087 9,243 (11,607)
Income taxes ............... 3,090 4,615 6,034 3,996 (3,319)
------------- ------------- ------------- ------------- --------------
Income before extraordinary
charge .................... 4,513 7,217 9,053 5,247 (8,288)
Extraordinary charge
related to early
extinguishment of debt,
net of taxes .............. -- 453 295 -- --
------------- ------------- ------------- ------------- --------------
Net income ................. $ 4,513 $ 6,764 $ 8,758 $ 5,247 $ (8,288)
============= ============= ============= ============= ==============
INCOME (LOSS) PER COMMON
SHARE(4):
Income before extraordinary
charge..................... $ .61(2) $ .74 $ .68 $ .38 $ .59
Extraordinary item ......... -- $ (.05) $ (.02) -- --
------------- ------------- ------------- ------------- --------------
Net income.................. $ .61 $ .69 $ .66 $ .38 $ (.59)
============= ============= ============= ============= ==============
Cash dividend paid per
common share .............. $ .40(3) -- -- -- --
============= ============= ============= ============= ==============
Weighted average shares
outstanding................ 7,468 9,816 13,330 13,910 14,012
============= ============= ============= ============= ==============
CONSOLIDATED BALANCE SHEET
DATA:
Working capital ............ $ 24,103 $ 28,814 $ 54,292 $ 80,357 $ 16,917
Total assets ............... 79,669 93,112 109,179 157,664 139,549
Long-term debt, including
current portion ........... 57,882 32,110 28,315 62,611 50,761
Stockholders' equity ....... 3,361 39,782 57,826 65,234 55,278
</TABLE>
- ------------
(1) References herein to years through fiscal 1995 are to the Company's
52-or 53-week fiscal year. Data for the fiscal years ended November 30,
1991, December 5, 1992, December 4, 1993, December 3, 1994 and December
2, 1995 include the results of operations for 52, 53, 52, 52 and 52
weeks, respectively.
11
<PAGE>
(2) Earnings per share would have approximated $.48 if the Offering had
taken place at the beginning of the fiscal year ended December 5, 1992.
(3) In February, 1992, the Company paid a cash dividend of $3.0 million.
(4) All per share amounts and the weighted average shares outstanding of
the Company's common stock have been retroactively restated to reflect
the stock split.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In the fall of fiscal 1996, the Company announced that it would be
restating its financial statements for fiscal 1994 and fiscal 1995. The
discussion below, and information contained elsewhere in this Form 10-K with
respect to fiscal 1994 and fiscal 1995, reflect the restated amounts for
those periods.
RESULTS OF OPERATIONS
The following table sets forth selected operating data of the Company as a
percentage of net sales, for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1996 1995 1994 1993
- ------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........................ 79.4 73.5 70.4 69.6
Gross profit............................... 20.6 26.5 29.6 30.4
Selling, general and administrative ....... 22.6 17.6 17.7 17.6
Amortization of goodwill and other related
acquisition costs ........................ 0.6 0.5 0.8 0.9
Restructuring charge....................... -- 1.5 -- --
Gain on sale of license.................... -- -- 0.7 --
Operating Income/(Loss).................... (2.5) 6.9 11.9 11.9
Interest expense........................... 2.0 2.1 1.9 3.7
Income/(Loss) before income taxes and
Extraordinary Item........................ (4.5) 4.8 10.0 8.2
Income tax provision (Benefit)............. (1.3) 2.1 4.0 3.2
Income/(Loss) before
Extraordinary Item......................... (3.2) 2.7 6.0 5.0
Extraordinary Item......................... -- -- 0.2 0.3
Net Income/(Loss) ......................... (3.2%) 2.7% 5.8% 4.7%
</TABLE>
COMPARISON OF FISCAL 1996 WITH FISCAL 1995
Net Sales
Net sales increased by $61.9 million, or 32.0%, from $193.3 million in
fiscal 1995 to $255.2 million in fiscal 1996. Fiscal 1996 includes net sales
for Beldoch and Oak Hill for a full year as compared to net sales for six
months and five months, respectively, in fiscal 1995. The inclusion of first
half sales from these two divisions accounted for $52.2 million of the
increase. The balance of the net sales increase was achieved in each of the
Company's other divisions, other than the Lewis Frimel Division where net
sales declined by $3.8 million. The Company continues to stress its strategy
of diversifying its product mix while selling to a broad range of retail
stores. Sportswear accounted for approximately 70% of 1996 net sales while
the licensed character business accounted for the remaining 30%.
Gross Profit
Gross profit for fiscal 1996 was $52.6 million, or 20.6% of net sales,
compared to $51.2 million, or 26.5% of net sales, for fiscal 1995. In the
fourth quarter of fiscal 1996, management undertook a program
12
<PAGE>
to reduce excess inventories and balance quantities on hand with the
Company's near term needs. As a result, the Company recorded markdowns of
$11.4 million. The Company also recorded, in the fourth quarter,
approximately $5.1 million applicable to sales returns and allowances. The
decline in the gross profit margin was primarily the result of these
markdowns, and to a lesser extent, sales returns and allowances.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $34.0 million
in fiscal 1995 to $57.6 million in fiscal 1996. As a percentage of net sales,
these costs increased from 17.6% in fiscal 1995 to 22.6% in fiscal 1996.
Included in fiscal 1996 are charges totaling $4.2 million, or 1.7% of net
sales related to the following: the rescission of the Fashion Avenue
acquisition of $0.5 million; severance relating to departing employees caused
by the events as described in Part 1, Item 1 of $0.9 million; litigation
expenses related to the events as described in Part 1, Item 1 of $1.2
million; and professional fees for the events as described in Part 1, Item 1
and special investigation of $1.6 million. Excluding these charges, the
balance of SG&A for fiscal 1996 is $53.4 million or 20.9% of net sales. Of
the $19.4 million year to year change, as adjusted, $12.9 million (excluding
distribution expenses) or 5.1% of net sales, relates to Beldoch and Oak Hill
which were only included for six months and five months, respectively, in
fiscal 1995. Additionally, distribution expense increased by $3.8 million to
$7.8 million in fiscal 1996 or 3.1% of net sales, a 1.0 percentage point
increase over 1995. The increase is related to the opening of a new
distribution facility in Summerville, South Carolina and the closing of two
distribution centers in Mississippi and New York.
Loss From Operations
In fiscal 1996 the Company reported a loss from operations of $6.5 million
versus fiscal 1995 operating income of $13.4 million principally related to
the inventory adjustments and sales allowances and the $4.2 million of costs
discussed in the preceding paragraph.
Interest Expense
Interest expense increased by $1.1 million from $4.1 million in fiscal
1995 to $5.2 million in fiscal 1996. The increase in interest expense was
primarily due to the increased working capital needs of the Company resulting
from the acquisitions in 1995, which were funded by the revolving credit
agreement. These increases in borrowing and interest more than offset the
decline in interest expense as a result of reduced borrowing under the
Company's Senior Term Loan. As a percentage of net sales, interest expense
declined from 2.1% during fiscal 1995 to 2.0% in fiscal 1996.
Provision For Income Taxes
The Company's tax benefit in fiscal 1996 amounts to 28.6% of pre-tax
losses as compared to a provision of 43.2% for fiscal 1995. The benefit in
fiscal 1996 is lower than the Company's historical tax rate due to the
recording of a valuation allowance on a portion of deferred tax assets
related to state net operating loss carryforwards.
Net Income
In fiscal 1996 the Company reported a net loss of $8.3 million, or ($0.59)
per share, as a result of the factors described above, versus fiscal year
1995 net income of $5.2 million, or $0.38 per share.
COMPARISON OF FISCAL 1995 WITH FISCAL 1994
Net Sales
Net sales increased by $42.2 million, or 27.9%, from $151.1 million in
fiscal 1994 to $193.3 million in fiscal 1995. This increase was entirely the
result of sales from Oak Hill Sportswear and Beldoch Industries,
13
<PAGE>
which were acquired during the third quarter of fiscal 1995 and contributed
$78.4 million to fiscal 1995 net sales, which more than offset declines in
the other divisions. The Company continues to stress its strategy of
diversifying its product mix while selling to a broad range of retail stores.
Gross Profit
Gross profit for fiscal 1995 was $51.2 million, or 26.5% of net sales,
compared to $44.8 million, or 29.6% of net sales, during fiscal 1994. The
decline in gross profit margin was due primarily to costs related to the
discontinuance of certain of the Company's product lines (primarily intimate
apparel sold only to the mass merchants) totaling $5.1 million, or 2.6% of
net sales.
Selling, General And Administrative Expenses
Selling, general and administrative expenses increased from $26.8 million
in fiscal 1994 to $34.0 million in fiscal 1995 primarily as a result of
increased sales. As a percentage of net sales, these costs declined from
17.7% in fiscal 1994 to 17.6% in fiscal 1995.
Restructuring Charge
The Company took a restructuring charge of $2.8 million during the fourth
quarter of fiscal 1995 as described in Note 15 of the Consolidated Financial
Statements.
Other Income
The Company sold the rights to the Ship 'N Shore trademarks during the
first quarter of fiscal 1994 resulting in a pre-tax gain of $1.1 million.
Income From Operations
In fiscal 1995 the Company reported income from operations of $13.4
million versus fiscal 1994 operating income of $18.0 million.
Interest Expense
Interest expense increased from $2.9 million during fiscal 1994 to $4.1
million during fiscal 1995. The increase was the result of reduced borrowings
under the Company's Senior Term Loan with The Prudential Insurance Company of
America, Pruco Life Insurance Company of America, Pruco Life Insurance and
Prudential Reinsurance Company (The "Prudential Senior Term Loan"), which was
repaid in full on February 2, 1995, offset by higher average borrowings under
the Company's Credit Facility required to support higher working capital
needs and to finance the third quarter acquisitions of Beldoch Industries and
Oak Hill Sportswear.
Provision For Income Taxes
The Company provided for taxes at an effective rate of 43.2% for fiscal
1995 and 40.0% for fiscal 1994. The increase was due to an increase in
non-deductible goodwill amortization.
Net Income
In fiscal 1995 the Company reported net income of $5.2 million, or $0.38
per share, as a result of the factors described above, versus fiscal 1994 net
income of $8.8 million, or $0.66 per share.
COMPARISON OF FISCAL 1994 WITH FISCAL 1993
Net Sales
Net sales increased by $7.1 million, or 4.9%, from $144.1 million in
fiscal 1993 to $151.1 million in fiscal 1994. Sales increases were achieved
in the Company's licensed character product lines. The Company continues to
stress its strategy of diversifying its product mix while selling to a broad
range of retail stores.
14
<PAGE>
Gross Profit
Gross profit for fiscal 1994 was $44.8 million, or 29.6% of net sales,
compared to $43.8 million, or 30.4% of net sales, for fiscal 1993. The
decline in gross profit margin was due primarily to the introduction in
mid-1994 of intimate apparel which carries a lower gross margin and poor
winter weather that resulted in the closing of the sewing plants for thirteen
days during the first quarter of 1994.
Selling, General And Administrative Expenses
Selling, general and administrative expenses increased from $25.3 million
in fiscal 1993 to $26.8 million in fiscal 1994 primarily as the result of
increased net sales. As a percentage of net sales, these costs increased from
17.6% in fiscal 1993 to 17.7% in fiscal 1994.
Other Income
The Company sold the rights to the Ship 'N Shore trademarks during the
first quarter of fiscal 1994 resulting in a one-time pre-tax gain of $1.1
million.
Interest Expense
Interest expense declined to $2.9 million during fiscal 1994 as compared
to $5.3 million during fiscal 1993. This decline was primarily due to reduced
borrowings under the Prudential Senior Term Loan and reductions of long-term
indebtedness resulting from the repayment of $27.8 million in indebtedness
and accrued interest from the proceeds of the Company's initial public
offering in June 1993 and the repayment of an additional $10.0 million of
indebtedness with proceeds from the Company's second public offering which
closed on May 5, 1994, partially offset by higher average borrowings on the
Company's line of credit to support increased working capital needs.
Provision For Income Taxes
The Company provided for taxes at an effective rate of 40.0% for fiscal
1994 and 39.0% for fiscal 1993.
Extraodinary Items
The Company wrote off the prepayment penalty associated with the early
extinguishment of $10.0 million of debt owed pursuant to the Prudential
Senior Term Loan in the second quarter of fiscal 1994. This extraordinary
write-off was $491,000 before income taxes, and $295,000 net of taxes. A
similar write-off was taken in the second quarter of 1993 of $453,000 (net of
taxes) associated with the early extinguishment of certain subordinated
loans.
Net Income
In fiscal 1994 the Company reported net income of $8.8 million, or $0.66
per share, as a result of the factors described above, versus fiscal year
1993 net income of $6.8 million, or $0.69 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily inventory and accounts receivable, and the interest
and principal payments related to certain indebtedness, and in fiscal 1995,
from acquisitions. The Company's borrowing requirements for working capital
fluctuate throughout the year, with peak borrowing periods between July and
September.
Capital expenditures were $1.0 million for fiscal 1996, and $1.0 million
for fiscal 1995. The Company is permitted to spend up to $1.5 million
annually on capital expenditures in accordance with the Chase Manhattan Bank
(formerly Chemical Bank) Revolving Credit Agreement described below. The
Company has no material capital expenditure commitments.
15
<PAGE>
At the end of fiscal 1996, direct borrowings were $50.8 and included a
senior term loan of $17.5 million and revolving credit of $33.0 million with
zero availability. Additionally, the Company had letters of credit
outstanding of $19.9 million with unused availability of $5.1 million. At the
end of fiscal 1995, direct borrowings and letters of credit outstanding under
the prior credit facility were $62.6 million and $11.5 million, respectively.
On April 15, 1997, the Company agreed in principle to amend the Credit
Facility to, among other things, include Donnkenny Apparel, MegaKnits and
Beldoch as borrowers. The Facility consists of a term loan, a revolving
credit, and a factoring agreement. The purpose of the Facility is to continue
to finance increased working capital needs of the Company following the
Beldoch and Oak Hill Sportswear acquisition and for general working capital
purposes including the issuance of letters of credit. The Facility will
expire on March 31, 1999. Under the Facility, The Chase Manhattan Bank would
serve as agent (and would hold a 35% interest), The CIT Group/Commercial
Services Inc. would serve as collateral agent (and hold a 15% interest), and
each of Fleet Bank, N.A. and The Bank of New York would be co-lenders (each
holding a 25% interest).
As of April 1, 1997, the balance of the Term Loan was $16.3 million. The
interest rate is equal to the prime rate plus 1 1/2 % per annum. The
amortization schedule calls for quarterly payments of $1.3 million, with a
balloon payment of $7.5 million due on March 31, 1999. An excess cash flow
recapture would be payable annually within 15 days after receipt of the
Company's audited fiscal year-end financial statements. In addition, any tax
refunds received in excess of $2.0 million applicable to fiscal 1996 or prior
fiscal years would be applied to reduce the balloon payment. The default
interest would be equal to 2% above the otherwise applicable rate. The Term
Loan would carry no prepayment penalty.
The commitment under the Revolving Credit would be $85.0 million, with
sublimits of $70.0 for direct debt and $35.0 for letters of credit. The
interest rate would be equal to the prime rate plus 1 % per annum. Borrowings
in excess of an allowable overadvance would bear interest at the default
interest rate of 2% above the otherwise applicable rate. The Revolving Credit
would also require the Company to pay certain letter of credit fees and
unused commitment fees. Advances and letters of credit (in the aggregate)
would be limited to (i) up to 85% of eligible accounts receivable plus (ii)
up to 60% of eligible inventory, plus (iii) an allowable overadvance.
Under the Factoring Agreement the Company would be charged a factoring
commission equal to 0.45% of the gross amount of sales, plus certain
customary surcharges.
Collateral for the Facility includes a first priority lien on all accounts
receivable, machinery, equipment, trademarks, intangibles and inventory, a
first mortgage on all real property, a pledge of the Company's stock in
Beldoch, and a pledge of the Company's stock in Donnkenny Apparel and
MegaKnits. The Facility would (i) require the Company to make usual and
customary representations and warranties, (ii) provide for certain standard
events of default, including change-in-control and cross default provisions,
(iii) provide certain affirmative covenants, and (iv) provide certain
negative covenants, including limitations on debt, liens, restricted
payments, dividends, mergers, acquisitions, consolidations, asset sales, and
other usual and customary negative covenants.
The Company's operating activities for Fiscal 1996 generated $5.8 million
more cash than they used principally as the result of lower net income,
decreases in accounts receivable of $1.1 million, decreases in inventories of
$3.5 million and increases in accounts payable of $8.1 million.
During fiscal 1994 and fiscal 1995, the Company's operating activities
used more cash than they generated ($5.6 million in fiscal 1994 and $2.7
million in fiscal 1995) primarily as the result of increases in inventory and
receivables. Decreases in accounts payable were offset by decreases in
inventory and lower net income in fiscal 1995 to produce the $2.7 million use
of cash.
Cash used in fiscal 1996, 1995, and 1994 for the purchase of fixed assets
was $1.0 million, $1.0 million and $0.8 million respectively and include
purchases of machinery and equipment, office furniture, building improvements
and leasehold improvements to the Company's South Carolina Warehouse
facility.
During fiscal 1995, cash used for investment in acquisitions was $29.7
million, net of cash acquired. In June of 1995, the Company acquired all of
the issued and outstanding shares of Beldoch for $13.0
16
<PAGE>
million in cash and a $2.0 million note payable within one year of the
closing date, bearing interest at 6.0%. The transaction was financed with
long-term borrowings. The Company may be obligated to pay the former owners
additional consideration based on future earnings levels. Any additional
consideration paid will be recorded as goodwill and amortized over the
remainder of the 20-year period subsequent to the acquisition. In July of
1995, the Company completed the purchase of certain assets of Oak Hill for
$14.6 million, financed by additional borrowings under the Company's
revolving credit facility. The excess of the fair market value of net assets
acquired were recorded as goodwill and are being amortized over 20 years.
Cash used in financing activities in Fiscal 1996 was $6.2 million, which
represented repayments of $5.0 million for a senior term loan with Chase
Manhattan Bank (formerly Chemical Bank), and $2.0 million for the note
relating to the acquisition of Beldoch. This was offset by net borrowings
under the revolving credit line and proceeds from the exercise of stock
options.
Cash provided by financing activities in fiscal 1995 was $34 million,
which represented the net proceeds of $11.3 million of long-term debt, net
borrowings of $21.0 million under the revolving credit line, and proceeds of
$2.2 million from the exercise of stock options.
Cash provided by financing activities in fiscal 1994 was $7.0 million,
which represented repayments of $13.3 million of long-term debt, offset by
net borrowing of $9.5 million and the proceeds from the stock offering.
The Company believes that the amount available under the revolving credit
facility provided by the banking group along with the factoring agreement
will be sufficient to support the Company's working capital requirements for
the term of the agreement. Additionally, the Company believes that the letter
of credit facility will be sufficient to support the Company's projected
import business.
OTHER ITEMS AFFECTING THE COMPANY
Competition
The apparel industry in the United States is highly competitive and
characterized by a number of multi-line manufacturers (such as the Company)
and a larger number of specialty manufacturers. The Company faces substantial
competition in its markets from manufacturers in both categories.
Apparel Industry Cycles and other Economic Factors
The apparel industry historically has been subject to substantial cyclical
variation, with consumer spending on apparel tending to decline during
recessionary periods. A decline in the general economy or uncertainties
regarding future economic prospects may affect consumer spending habits,
which, in turn, could have a material adverse effect on the Company's results
of operations and its financial condition.
Retail Environment
Various retailers, including some of the Company's customers, have
experienced declines in revenue and profits in recent periods and some have
been forced to file for bankruptcy protection. To the extent that these
financial difficulties continue, there can be no assurance that the Company's
financial condition and results of operations would not be adversely
affected.
Seasonality of Business and Fashion Risk
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as
one year in advance and manufactured approximately one season in advance of
the related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability of the Company to successfully
anticipate the needs of the Company's retail customers and the tastes of the
ultimate consumer up to a year prior to the relevant selling season.
17
<PAGE>
Foreign Operations
The Company's foreign sourcing operations are subject to various risks of
doing business abroad, including currency fluctuations (although the
predominant currency used is the U.S. Dollar), quotas and, in certain parts
of the world, political instability. Any substantial disruption of its
relationship with its foreign suppliers could adversely affect the Company's
operations. Some of the Company's imported merchandise is subject to United
States Customs duties. In addition, bilateral agreements between the major
exporting countries and the United States impose quotas, which limit the
amount of certain categories of merchandise that may be imported into the
United States. Any material increase in duty levels, material decrease in
quota levels or material decrease in available quota allocation could
adversely affect the Company's operations.
Factors that May Affect Future Results and Financial Condition.
This Form 10-K contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that assumed facts or bases almost always vary from the actual
results, and the differences between assumed facts or bases and actual
results can be material, depending on the circumstances. Where, in any
forward-looking statement, the Company or its management expresses an
expectation or belief as to future results, there can be no assurance that
the statement of the expectation or belief will result, or be achieved or
accomplished. The words "believe", "expect", "estimate", "project", "seek",
anticipate and similar expressions may identify forward-looking statements.
The Company's future operating results and financial condition are dependent
upon the Company's ability to successfully design, manufacture, import and
market apparel.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 14 of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported on the Company's Form 8-K filed November 12, 1996,
on November 4, 1996 the Company's then auditors, KPMG Peat Marwick LLP,
informed the Company that they were resigning. They informed the Company that
they would no longer be able to rely on representations of financial
management and that they did not have access to sufficient, credible
information from others within the Company to enable them to continue as
auditors. On December 17, 1996, Deloitte & Touche LLP accepted appointment to
serve as the Company's new auditors.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Richard Rubin was the Chairman of the Board, President and Chief Executive
Officer of the Company until December 18, 1996, when he resigned from all
positions with the Company. Mr. Rubin joined the Company in 1978 as the
national sales manager for the Company's Kenny Classics division. In 1982, he
became President of Kenny Classics. In 1985, Mr. Rubin was named President
and Chief Executive Officer of the Company.
Harvey A. Appelle, a director of the Company, was appointed Chairman of
the Board and Chief Executive Officer of the Company on December 19, 1996.
Mr. Appelle has been the President of HarGil Capital Associates Ltd., a
private investment firm, since 1994. From 1985 to 1993, he was a Managing
Director of the Investment Banking Division of Merrill Lynch Pierce Fenner &
Smith Inc. and a Senior Vice President of Merrill Lynch Interfunding Inc. Mr.
Appelle is 52 years old.
James W. Crystal, a director of the Company, has been President since
1978, and Chairman of the Board since 1989, of Frank Crystal & Co., Inc.,
international insurance brokers. Mr. Crystal is 59 years old.
Sidney Eagle, a director of the Company, has been a principal of the law
firm Eagle & Fein, or its predecessor, for more than the past five years. Mr.
Eagle is 61 years old.
Harvey Horowitz, a director of the Company, became Vice President and
General Counsel of the Company on October 1, 1996. Prior thereto he was a
partner of the law firm Squadron, Ellenoff, Plesent & Sheinfeld, LLP, for
more than the past five years. Mr. Horowitz is 54 years old.
Edward T. Creevy, C.P.A., was the Chief Financial Officer and Vice
President of the Company from 1989 until December 18, 1996, when he resigned
from all positions with the Company.
Ronald Hollandsworth was Corporate Controller of the Company from 1989
until December 18, 1996, when he resigned from all positions with the
Company.
Stuart S. Levy has been Vice President-Finance and the Chief Financial
Officer of the Company since November 4, 1996. From January 1993 to July
1996, Mr. Levy was Vice President of Finance and Chief Financial Officer of
Xpedite Systems, Inc., a publicly-held provider of enhanced fax services.
From August 1996 through October 1996, Mr. Levy provided services to Xpedite
Systems, Inc., in connection with the completion and integration of
international acquisitions. Prior thereto, he was a financial consultant to
an investment group since 1988. Mr. Levy also serves as Assistant Secretary
of the Company. Mr. Levy is 55 years old.
Lynn Siemers-Cross became President and Chief Operating Officer of the
Company on April 14, 1997. Prior thereto she was President of the Oak Hill
Division, and has been continuously employed by Oak Hill for more than five
years. Ms. Siemers-Cross is 38 years old.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years
ended December 31, 1996, December 2, 1995 and December 3, 1994, to those
persons who were, at December 31, 1996 (i) the chief executive officer and
(ii) the other most highly compensated executive officers of the Company, who
are the only other executive officers of the Company (collectively, the
"Named Executive Officers"). The information in the following tables with
respect to the number of shares of Common Stock underlying options, option
exercise prices and the number of shares of Common Stock acquired upon the
exercise of options has been retroactively restated to reflect the
two-for-one stock split paid to all holders of Common Stock of record on
December 4, 1995 (the "Stock Split").
19
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
- ----------------------------- -------- ----------------------------------------
OTHER ANNUAL
FISCAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1)
- ----------------------------- -------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Richard Rubin
President and Chief 1996 $604,167 $ 0 $60,574(2)
Executive Officer until 1995 500,000 1,500,000 57,249(4)
December 18, 1996 1994 500,000 1,750,000 62,506(6)
Edward T. Creevy 1996 $196,667 $ 0 $88,220
Chief Financial Officer, 1995 190,000 205,000 59,696
V.P. until November 4, 1996 1994 188,750 200,000 0
Ronald Hollandsworth 1996 $140,652 $ 100,000 $67,520
Corporate Controller until 1995 120,000 100,000 63,435
November 4, 1996 1994 118,628 100,000 0
Harvey Appelle(7)
Chairman of the Board and
Chief Executive Officer 1996 0 0 0
Harvey Horowitz(7)
Vice President and General
Counsel 1996 124,444 0 0
Stuart S. Levy(7)
Vice President--Finance and
Chief Financial Officer 1996 31,667 0 0
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
- ----------------------------- ----------------------------- -------------
SECURITIES
UNDERLYING
RESTRICTED OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION STOCK AWARDS SARS COMPENSATION
- ----------------------------- --------------- ------------ -------------
<S> <C> <C> <C>
Richard Rubin
President and Chief 25,000 $72,233(3)
Executive Officer until 50,000 51,950(3)
December 18, 1996 $1,354,688(8) 0 46,908(3)
Edward T. Creevy 10,000 $ 1,740(6)
Chief Financial Officer, 20,000 1,740(6)
V.P. until November 4, 1996 $ 270,938(8) 20,000 1,020(6)
Ronald Hollandsworth 5,000 $ 488(6)
Corporate Controller until 10,000 409(6)
November 4, 1996 $ 162,563(8) 20,000 339(6)
Harvey Appelle(7)
Chairman of the Board and
Chief Executive Officer 0 2,500(9) 0
Harvey Horowitz(7)
Vice President and General
Counsel 0 2,500(9) 960(6)
Stuart S. Levy(7)
Vice President--Finance and
Chief Financial Officer 0 0 470
</TABLE>
- ------------
(1) Includes only items which are, in the aggregate, greater than or equal
to the lesser of $50,000 or 10% of the total annual salary and bonus.
(2) This amount represents a car allowance of $17,800, health insurance
premiums of $19,924 and disability insurance premiums of $22,850.
(3) Represents insurance premiums paid by, or on behalf of, the Company
during the covered fiscal year with respect to term and whole life
insurance for the benefit of the Named Executive Officer.
(4) This amount represents a car allowance of $17,904, health insurance
premiums of $19,782 and disability insurance premiums of $19,563.
(5) This amount represents a car allowance of $19,619, health insurance
premiums of $16,651 and disability insurance premiums of $26,236.
(6) Represents insurance premiums paid by, or on behalf of, the Company
during the covered fiscal year with respect to term life insurance for
the benefit of the Named Executive Officer.
(7) This individual became an executive officer of the Company in 1996.
(8) On April 19, 1996, pursuant to the terms of the Company's 1996
Restricted Stock Plan, Mr. Rubin was granted 75,000 shares, Mr. Creevy
was granted 15,000 shares and Mr. Hollandsworth was granted 9,000
shares of restricted stock. The closing price of the Company's common
stock on April 19, 1996 was $18.0625. As at December 31, 1996, all of
these restricted stock awards had been forfeited under the terms of
their grants.
(9) Represents options granted pursuant to the Company's 1994 Non-Employee
Director Option Plan.
EMPLOYMENT AGREEMENTS
Harvey Appelle
On April 14, 1997, the Company's Board of Directors authorized the Company
to enter into a three year employment agreement with Mr. Appelle to serve as
Chairman of the Board and Chief Executive Officer. The agreement will provide
for a base annual salary of $400,000 for each of the first two years,
increasing to $500,000 for the third year, and a discretionary performance
bonus based on achievement of goals set annually by the Compensation
Committee of the Board, as well as certain insurance and other benefits.
20
<PAGE>
In addition, in connection with the execution of the employment agreement,
the Compensation Committee authorized grants to Mr. Appelle of 150,000
restricted shares and options to purchase an aggregate of 150,000 additional
shares at a price equal to the closing price of the Common Stock on the date
of grant. The agreement will further provide for an incentive cash bonus
equal to the appreciation over five years of 50,000 shares of stock. The
restricted shares, options and right to receive the incentive cash bonus will
vest over the term of the agreement, subject to acceleration in the event of
a change in control of the Company.
The agreement will provide that in the event Mr. Appelle's employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Mr. Appelle will have the right to receive severance
benefits equal to three times the sum of the last annual salary inclusive of
performance bonus (but not incentive bonus).
Lynn Siemers-Cross
On April 14, 1997, the Company's Board of Directors authorized the Company
to enter into a four-year employment agreement with Ms. Siemers-Cross to
serve as President and Chief Operating Officer. The agreement will provide
for a base annual salary of $500,000, a discretionary performance bonus based
on achievement of goals set annually by the Compensation Committee, but not
less than $150,000 for fiscal 1997, as well as certain insurance and other
benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee authorized grants to Ms. Siemers-Cross of 150,000
restricted shares and options to purchase an aggregate of 150,000 additional
shares at a price equal to the closing price of the Common Stock on the date
of grant. The agreement will further provide for an incentive cash bonus
equal to the appreciation over five years of 50,000 shares of stock. The
restricted shares, options and right to receive the incentive cash bonus will
vest over the term of the agreement, subject to acceleration in the event of
a change in control of the Company.
The agreement will provide that in the event Ms. Siemers-Cross' employment
is terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Siemers-Cross will have the right to receive
severance benefits equal to three times the sum of the last annual salary
inclusive of performance bonus (but not incentive bonus).
Harvey Horowitz
On September 5, 1996, Mr. Horowitz entered into a three-year employment
agreement with a subsidiary of the Company to serve as Vice President,
General Counsel and Director of Operations. The agreement provides for a base
annual salary of $400,000, with an annual increase of 5% for each subsequent
year, a non-discretionary performance bonus based on achievement of certain
pre-tax profit goals, a discretionary performance bonus based on achievement
of pre-tax profits in excess of $30,000,000, as well as certain insurance and
other benefits.
In the event the Company does not renew the agreement, it will pay to Mr.
Horowitz compensation for a period of one year following the end of the term
of employment.
Stuart S. Levy
On January 28, 1997, Mr. Levy entered into a two year employment agreement
with the Company to serve as Chief Financial Officer, Vice President-Finance
and Assistant Secretary. The agreement provides for an annual salary of
$335,000, which will increase on November 4, 1997 to $350,000, an annual
bonus based on the performance of Mr. Levy and the Company, as well as
certain insurance and other benefits.
The Agreement provides for a grant of 5,000 restricted shares of Common
Stock, and options to purchase 100,000 shares of Common Stock at a price of
$4.43 per share, vesting over three years.
The Agreement provides for severance payments to be based on the current
year's salary and the preceding year's bonus and to continue for the longer
of the remaining term under the Agreement or six months after termination.
21
<PAGE>
1996 STOCK OPTIONS GRANTS
The Company strives to distribute stock option awards broadly throughout
the organization. Stock option awards are based on the individual's position
and contribution to the Company. The Company's long term performance
ultimately determines compensation from stock options because stock option
value is entirely dependent on the long term growth of the Company's common
stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers
during Fiscal 1996, including information concerning the potential realizable
value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
------------------------------------------------------ ----------------------
NUMBER OF % OF TOTAL #
SECURITIES OF OPTIONS
UNDERLYING GRANTED TO
OPTION EMPLOYEES EXERCISE
GRANTED IN FISCAL PRICE (4) EXPIRATION
NAME (#) YEAR ($/SH) DATE 5%($) 10%($)
- -------------------- ------------ -------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard Rubin........ 25,000(2) 11.83% $18.125 4/19/2006 $284,968 $722,165
Edward T. Creevy .... 10,000(2) 4.73% 18.125 4/19/2006 113,987 288,866
Ronald
Hollandsworth....... 5,000(2) 2.37% 18.125 4/19/2006 56,994 144,433
Harvey A. Appelle ... 2,500(3) 1.18% 18.125 4/19/2006 28,497 72,216
Harvey Horowitz...... 2,500(3) 1.18% 18.125 4/19/2006 28,497 72,216
Stuart S. Levy....... 0 0.00% N/A N/A N/A N/A
</TABLE>
- ------------
(1) The dollar amounts under these columns are the result of calculations
at the 5% and 10% rates set by the SEC and, therefore, are not intended
to forecast possible future appreciation, if any, of the Company's
stock price.
(2) These options expired as of March 31, 1997.
(3) Represents options granted to Messrs. Appelle and Horowitz as directors
pursuant to the Company's 1994 Non-Employee Director Option Plan.
(4) All options were granted at an exercise price equal to the market value
of the Company's common stock on the date of grant.
AGGREGATE OPTION
EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1996 DECEMBER 31, 1996(2)
ON EXERCISE VALUE ------------------------------ ------------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard Rubin(3)........ 0 $ 0 75,000 0 $ 0 $ 0
Edward T. Creevy(3) .... 14,000 88,220 4,800 49,200 0 0
Ronald
Hollandsworth(3)....... 8,000 67,520 7,200 37,800 0 0
Harvey Appelle.......... 0 0 22,500 0 0 0
Harvey Horowitz......... 0 0 22,500 0 0 0
Stuart S. Levy.......... N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------
(1) All options were granted at an exercise price equal to market value of
the Company's common stock on the date of grant.
22
<PAGE>
(2) Amount reflects the market value of the underlying shares of the
Company's common stock at the closing sales price reported on the
Nasdaq National Market on December 31, 1996 ($4.625 per share, which
amount has been retroactively adjusted to reflect the Stock Split) less
the exercise price of each option.
(3) These options expired as of March 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information, as of March 15, 1997,
with respect to beneficial ownership of the Company's Common Stock by: (i)
each of the Company's directors, (ii) each of the Company's Named Executive
Officers, (iii) each person who is known by the Company beneficially to own
more than 5% of the Company's Common Stock, and (iv) by all directors and
executive officers of the Company as a group. All information in the table
below with respect to the Common Stock of the Company has been restated to
reflect the two-for-one stock split paid to all holders of Common Stock of
record on December 4, 1995.
<TABLE>
<CAPTION>
NAME AND ADDRESS COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE OWNED
- -------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Richard Rubin(7) .................................... 479,640 3.41%
920 Park Avenue
New York, NY 10028
Shaenen Fox Capital ................................. 859,350(1) 6.11%
Management LLC
200 Park Avenue
Suite 3900
New York, NY 10166
Pax Clearing Company ................................ 1,199,200(2) 8.52%
Limited Partnership Capital
440 South LaSalle Street
Suite 3100
Chicago, IL 60605
Putnam Investments, Inc.............................. 1,087,300(1) 7.73%
1 Post Office Square
Boston, MA 02109
Pioneering Management Corporation .................. 730,000(1) 5.19%
60 State Street
Boston, MA 02109
Edward T. Creevy(7) ................................. 6,000 *
11 Nappa Drive
Westport, CT 06886
Ronald Hollandsworth(7) ............................. None *
190 Brookhaven Drive
Wytheville, VA 24382
Harvey A. Appelle(3) .............................. 32,500 *
James W. Crystal(4) ............................... 23,500 *
Sidney Eagle(5) ................................... 19,300 *
Harvey Horowitz(6) ................................ 22,500 *
Stuart S. Levy(8) ................................. 5,000 *
All directors and officers as a group (5 persons) 102,800 *
</TABLE>
- ------------
* Less than 1%.
(1) Based on information contained in a Schedule 13G filed with the
Company.
23
<PAGE>
(2) Based on information contained in a Schedule 13D filed with the
Company.
(3) Includes 22,500 shares underlying stock options which have been granted
to Harvey A. Appelle pursuant to the Company's 1994 Non-Employee
Director Option Plan. Such options are currently exercisable.
(4) Includes 22,500 shares underlying stock options which have been granted
to James Crystal pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(5) Includes 17,500 shares underlying stock options which have been granted
to Sidney Eagle, pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable.
(6) Includes 22,500 shares underlying stock options which have been granted
to Harvey Horowitz, pursuant to the Company's 1994 Non-Employee
Director Option Plan. Such options are currently exercisable.
(7) Based on information contained in a Form 4 filed with the Company.
(8) Shares to be issued pursuant to Mr. Levy's employment agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Crystal is Chairman and President of Frank Crystal & Co., Inc., which
provides insurance brokerage services to the Company. Frank Crystal & Co.,
Inc. received approximately $154,000 in commissions during 1996 for services
rendered to the Company.
Mr. Rubin was a party to an employment agreement with a subsidiary of the
Company, and is a party to a settlement agreement, as described in
"Business--Significant Financial and Business Developments."
Until October 1, 1996, Mr. Horowitz was the managing partner of Squadron,
Ellenoff, Plesent & Sheinfeld, LLP, which performs legal services for the
Company. During 1996, the Company paid approximately $494,000 in fees and
disbursement reimbursement to Squadron, Ellenoff, Plesent & Sheinfeld, LLP.
Mr. Horowitz is a party to an employment agreement with a subsidiary of the
Company, as set forth in Exhibit 10.35 hereto.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. The following financial statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996, December 2, 1995 and
December 3, 1994
Consolidated Statements of Operations for the Fiscal Years ended
December 31, 1996, December 2, 1995 and December 3, 1994
Consolidated Statements of Stockholders' Equity for the Fiscal Years
ended December 31, 1996, December 2, 1995 and December 3, 1994
Consolidated Statements of Cash Flows for the Fiscal Years ended
December 31, 1996, December 2, 1995 and December 3, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Valuation and Qualifying Accounts
3. The Exhibits, which are listed on the Exhibit Index attached hereto.
(b) Reports on Form 8-K
The Company filed, during the last quarter of Fiscal 1996, the following
reports on Form 8-K:
A report on Form 8-K on December 19, 1996, stating that the Company had
been informed that the Securities and Exchange Commission was formally
investigating various matters relating to the Company's financial statements
and to trading in the Company's securities; that, as of November 19, 1996,
Mr. Thomas E. Constance had resigned as a member of the Company's Board of
Directors; that, as of December 18, 1996, Mr. Richard Rubin had resigned as
the Company's President and Chief Executive Officer; and that the Company had
issued a press release to the effect that Mr. Harvey Appelle had been named
Chairman of the Board of Directors of the Company, and also that the
Company's Board of Directors had appointed an Executive Operating Committee.
A report on Form 8-K on November 12, 1996, stating that on November 4,
1996 KPMG Peat Marwick LLP, the Company's certifying accountant, had orally
advised the Company of its resignation; stating the reasons for such
resignation; stating that, on November 5, 1996, the Company had received from
KPMG Peat Marwick a letter affirming its resignation; and stating that the
Company had selected Deloitte & Touche LLP as its new independent auditors.
A report on Form 8-K on October 18, 1996, in which the Company confirmed
its announcement that it was changing its fiscal year to one ending on
December 31, 1996, and that it expected to file amended quarterly reports for
the 1995 fiscal year and the first two quarters of the 1996 fiscal year to
reflect adjustments to the timing of recognition of sales revenues. The
report further stated that the Company's Form 10-K for Fiscal 1995 was to be
amended with respect to the 1994 and 1995 fiscal years.
A report on Form 8-K on September 21, 1996, stating that, on September 6,
1996, pursuant to a Stock Purchase Agreement of September 3, 1996, Donnkenny
Apparel had acquired all of the outstanding capital stock of Fashion Avenue
Knits Inc. and related companies. Further, the report stated that the
Company, on September 11, 1996, determined to change its fiscal year to one
ending on December 31 of each year, and that its Form 10-Q filing for the
third quarter, ending September 30, 1996, would cover the transition period.
The report further stated that the Company expected to file amended quarterly
reports for the 1995 fiscal year and for the first two quarters of fiscal
1996 to reflect adjustments to the timing of recognition of sales revenues.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 1997
DONNKENNY, INC.
By: /s/ Harvey A. Appelle
-----------------------------------
Harvey A. Appelle, Chairman
of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Dated: April 14, 1997 /s/Harvey A. Appelle
-----------------------------------------------------
Harvey A. Appelle, Chairman of the Board of
Directors and Chief Executive Officer (Principal
Executive Officer)
Dated: April 14, 1997 /s/Sidney Eagle
-----------------------------------------------------
Sidney Eagle, Director
Dated: April 14, 1997 /s/James W. Crystal
-----------------------------------------------------
James W. Crystal, Director
Dated: April 14, 1997 /s/Harvey Horowitz
-----------------------------------------------------
Harvey Horowitz, Director
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
/s/ Stuart S. Levy
---------------------------------------------------------
Stuart S. Levy, Chief Financial Officer, Vice
President-Finance and Assistant Secretary (Principal
Dated: April 14, 1997 Financial and Accounting Officer)
</TABLE>
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ----------- ------------------------------------------------------------------------ -----------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of Donnkenny, Inc.,
dated May 15, 1992.(1)
3.3 Certificate of Ownership and Merger of DHC Holding Corporation into
Donnkenny, Inc.(1)
3.4 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Donnkenny, Inc., dated May 18, 1993.(2)
3.5 By-laws of Donnkenny, Inc., dated May 18, 1993.(2)
4.1 Specimen form of Common Stock Certificate.(4)
10.12 Amended and Restated Donnkenny, Inc. 1992 Stock Option Plan.(9)
10.13 Form of Indemnification Agreement with Directors and Executive
Officers.(2)
10.14 Donnkenny, Inc. Employees Savings 401(k) Plan.(1)
10.22 Employment Agreement between Richard Rubin and the Company, dated
September 23, 1992.(3)
10.23 Lease Purchase Agreement among The Industrial Development Authority of
Dickenson County, Virginia, Donnkenny, Inc. and the County of Dickenson,
Virginia, dated July 31, 1989.(3)
10.24 Loan Agreement between The Industrial Development Authority of Dickenson
County, Virginia and Donnkenny Apparel, Inc., dated as of June 8,
1992.(3)
10.25 Credit Agreement among Donnkenny Apparel, Inc. the Lenders Named therein
and Chemical Bank, as Agent, dated February 2, 1995.(5)
10.26 Satisfaction and Termination Agreement among Donnkenny, Inc., Donnkenny
Apparel, Inc., The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Prudential Reinsurance Company, dated February 2,
1995.(5)
10.27 Release of Security Interest-Marks among Donnkenny, Inc., Donnkenny
Apparel, Inc., The Prudential Insurance Company of America, Pruco Life
Insurance Company and Prudential Reinsurance Company, dated February 2,
1995.(5)
10.28 Asset Purchase Agreement between Oak Hill Sportswear Corporation and
Donnkenny Apparel, Inc., dated as of May 23, 1995,(5) together with
Amendment No. 1 thereto, dated as of June 26, 1995.(8)
10.29 Stock Purchase Agreement among Donnkenny Apparel, Inc. and all of the
Shareholders of Beldoch Industries Corporation, dated June 5, 1995.(6)
10.30 Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries
Corporation, the Guarantors Named therein, the Lenders Named therein and
Chemical Bank, as Agent, dated June 5, 1995.(7)
27
<PAGE>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ----------- ------------------------------------------------------------------------ -----------------
10.31 Employment Agreement between Richard Rubin and the Company, dated
November 30, 1995.(9)
10.32 Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors.(9)
10.33 Donnkenny, Inc. 1996 Restricted Stock Plan.(12)
10.34 Stock Purchase Agreement between Donnkenny Apparel, Inc. and Mel Weiss,
dated as of September 3, 1996.(10)
10.35 Employment Agreement between Harvey Horowitz and the Company, dated
September 5, 1996.
10.36 Settlement Agreement between Richard Rubin and the Company, dated
December 18, 1996.(11)
10.37 Rescission Agreement between Donnkenny Apparel, Inc. and Mel Weiss,
dated as of January 24, 1997.
10.38 Employment Agreement between Stuart S. Levy and the Company, dated
January 28, 1997.
10.39 Term Sheet and Commitment Letter for Credit Agreement.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
</TABLE>
- ------------
1 Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (Registration No. 33-48243), as filed with the Commission on
May 29, 1992 (the "Registration Statement").
2 Incorporated herein by reference to Amendment No. 4 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on May
24, 1993.
3 Incorporated herein by reference to Amendment No. 3 to the Registration
Statement (Registration Statement No. 33-48243), as filed with the
Commission on May 10, 1993.
4 Incorporated herein by reference to Amendment No. 5 to the Registration
Statement (Registration No. 33-48243), as filed with the Commission on
June 11, 1993.
5 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 3, 1994.
6 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on June 2, 1995.
7 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on June 17, 1995.
8 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on August 8, 1995.
9 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 2, 1995.
12 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on September 21, 1996.
11 Incorporated herein by reference to the Company's Report on Form 8-K, as
filed with the Commission on December 19, 1996.
12 Incorporated by reference to the Company's 1996 Proxy Statement, filed
March 22, 1996.
28
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------------------------------- ---------------------------------
<S> <C>
Christiansburg Garment Company Delaware
Donnkenny Apparel, Inc. Delaware
Beldoch Industries Corporation Delaware
MegaKnits, Inc. New York
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Donnkenny, Inc.
We have audited the accompanying consolidated balance sheets of Donnkenny,
Inc. and subsidiaries as of December 31, 1996, December 2, 1995 and December
3, 1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years then ended. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Donnkenny, Inc. at December
31, 1996, December 2, 1995 and December 3, 1994 and the results of their
operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note 2, the accompanying consolidated financial statements
for the years ended December 2, 1995 and December 3, 1994 have been restated.
Deloitte & Touche LLP
New York, New York
April 15, 1997
F-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................. $ 3,998 $ 2,688 $ 1,606
Accounts receivable, net of allowances of $2,240,
$1,946 and $881 in 1996, 1995 and 1994,
respectively..................................... 29,721 49,834 34,349
Recoverable income taxes.......................... 8,625 6,921 2,308
Inventories....................................... 46,793 47,660 34,458
Deferred tax assets............................... 4,439 2,414 1,330
Prepaid expenses and other current assets ........ 1,633 1,464 1,260
-------------- ------------- -------------
Total current assets............................. 95,209 110,981 75,311
PROPERTY, PLANT AND EQUIPMENT, NET................. 11,774 12,670 9,552
INTANGIBLE ASSETS.................................. 32,450 34,013 24,316
-------------- ------------- -------------
TOTAL.............................................. $139,433 $157,664 $109,179
============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................. $ 50,761 $ 7,092 $ 85
Accounts payable.................................. 19,476 13,178 16,959
Accrued expenses and other current liabilities ... 8,055 10,354 3,975
-------------- ------------- -------------
Total current liabilities........................ 78,292 30,624 21,019
-------------- ------------- -------------
LONG-TERM DEBT..................................... -- 55,519 28,230
DEFERRED TAX LIABILITIES........................... 5,863 6,287 2,104
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized 500
shares, issued none .............................
Common stock, $.01 par value; authorized 20,000
shares, issued and outstanding 14,045, 13,968
and 13,644 shares in 1996, 1995 and 1994,
respectively..................................... 140 139 137
Additional paid-in capital........................ 46,344 45,744 43,585
Retained earnings................................. 8,794 19,351 14,104
-------------- ------------- -------------
Total stockholders' equity....................... 55,278 65,234 57,826
-------------- ------------- -------------
TOTAL.............................................. $139,433 $157,664 $109,179
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 3)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
NET SALES.................................... $ 255,179 $ 193,306 $ 151,147
COST OF SALES................................ 202,580 142,128 106,389
-------------- ------------- -------------
Gross profit............................... 52,599 51,178 44,758
OPERATING EXPENSES:
Selling, general and administrative
expenses................................... 57,603 34,000 26,772
Amortization of goodwill and other related
acquisition costs.......................... 1,449 985 1,145
Restructuring charge........................ -- 2,815 --
Gain on sale of license..................... -- -- (1,116)
-------------- ------------- -------------
Operating (loss) income.................... (6,453) 13,378 17,957
OTHER EXPENSE:
Interest expense............................ 5,154 4,135 2,870
-------------- ------------- -------------
(Loss) income before income taxes and
extraordinary item........................ (11,607) 9,243 15,087
INCOME TAX PROVISION (BENEFIT)............... (3,319) 3,996 6,034
-------------- ------------- -------------
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM.......................... (8,288) 5,247 9,053
EXTRAORDINARY ITEM--
Net of income taxes......................... -- -- 295
-------------- ------------- -------------
NET (LOSS) INCOME............................ $ (8,288) $ 5,247 $ 8,758
============== ============= =============
(LOSS) INCOME PER COMMON SHARE:
(Loss) income before extraordinary item .... $ (0.59) $ 0.38 $ 0.68
Extraordinary item.......................... -- -- (0.02)
-------------- ------------- -------------
Net (loss) income........................... $ (0.59) $ 0.38 $ 0.66
============== ============= =============
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING............... 14,012,116 13,910,342 13,330,192
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996, AND
YEARS ENDED DECEMBER 2, 1995 AND DECEMBER 3, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 4, 1993 ..... $-- $ 62 $32,775 $ 6,945 $39,782
Adjustment of results of prior
periods....................... -- -- -- (1,599) (1,599)
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 4, 1993
(As restated)................. -- 62 32,775 5,346 38,183
Stock Split (two for one) .... -- 69 (69) -- --
Proceeds from stock offering . -- 6 10,879 -- 10,885
Net income (as restated) ..... -- -- -- 8,758 8,758
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 3, 1994 (As
restated)...................... -- 137 43,585 14,104 57,826
Exercise of stock options .... 2 2,159 -- 2,161
Net income (as restated) ..... -- -- -- 5,247 5,247
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 2, 1995
(As restated)................. -- 139 45,744 19,351 65,234
Net loss--December 3, 1995 to
December 31, 1995 (Note 3) .. -- -- -- (2,269) (2,269)
Exercise of stock options .... 1 600 601
Net loss--year ended December
31, 1996..................... -- -- -- (8,288) (8,288)
----------- -------- ------------ ---------- ---------------
BALANCE, DECEMBER 31, 1996 .... $-- $140 $46,344 $ 8,794 $55,278
=========== ======== ============ ========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income before extraordinary item............. $ (8,288) $ 5,247 $ 9,053
Extraordinary item.................................. -- -- (295)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes.............................. (2,449) 1,279 350
Depreciation and amortization of fixed assets ..... 1,911 1,889 1,036
Amortization of inventory step up.................. -- 1,905 --
Amortization of intangibles and other ............. 1,449 985 1,145
Provision for losses on accounts receivable ....... 231 1,065 (237)
Changes in assets and liabilities, net of the
effects of acquisitions and disposals:
Decrease (increase) in accounts receivable ........ 876 (9,601) (5,587)
Increase in recoverable income taxes............... (127) (4,613) (2,308)
Decrease (increase) in inventories................. 3,458 2,138 (10,406)
Decrease in prepaid expenses and other current
assets............................................ 1,378 289 524
Increase (decrease) in accounts payable............ 8,116 (6,286) 3,002
(Decrease) increase in accrued expenses and other
current liabilities............................... (796) 3,012 (1,722)
Decrease in income taxes payable................... -- -- (116)
-------------- ------------- -------------
Net cash provided by (used in) operating
activities........................................ 5,759 (2,691) (5,561)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets............................ (1,016) (962) (815)
Acquisitions, net of cash acquired.................. -- (29,715) --
-------------- ------------- -------------
Net cash used in investing activities............. (1,016) (30,677) (815)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES: ...............
Repayment of long-term debt......................... (7,100) (13,711) (13,330)
Proceeds of long-term debt.......................... -- 25,000 --
Repayments under revolving credit line.............. (151,010) (30,500) (18,000)
Borrowings under revolving credit line.............. 151,300 51,500 27,500
Proceeds of stock offering.......................... -- -- 10,885
Proceeds from exercise of stock options............. 600 2,161 --
-------------- ------------- -------------
Net cash (used in) provided by financing
activities........................................ (6,210) 34,450 7,055
-------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH...................... (1,467) 1,082 679
CASH, AT BEGINNING OF PERIOD......................... 5,465 1,606 927
-------------- ------------- -------------
CASH, AT END OF PERIOD............................... $ 3,998 $ 2,688 $ 1,606
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996,
DECEMBER 2, 1995 AND DECEMBER 3, 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- The Company designs, manufactures, imports and
markets a broad line of moderately priced women's sportswear and sleepwear.
In addition, the Company manufactures, imports and markets men's, women's and
children's sportswear and intimate apparel featuring various licensed cartoon
character images. The Company's products are primarily sold throughout the
United States by retail chains, department stores and smaller specialty
shops.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Donnkenny, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
CHANGE IN YEAR END -- In September 1996, the Company adopted December 31
as its fiscal year end. Prior to 1996, the Company's fiscal year ended on the
first Saturday in the month of December. Summarized statement of operations
and cash flow data for the transition period from December 3, 1995 through
December 31, 1995 (the "Transition Period") is included herein (See Note 3).
PUBLIC OFFERING -- On May 5, 1994, the Company completed a public offering
of 5,060,000 shares of common stock of which 1,177,640 shares were sold by
the Company and 3,882,360 shares were sold by certain stockholders. The price
per share of $10.3725 for the offering resulted in proceeds of $10,885. The
net proceeds were used to repay indebtedness, accrued interest and a
prepayment penalty.
INVENTORIES -- Inventories are stated at the lower of cost or market. Cost
is determined using the last-in, first-out method (LIFO) for $28,769 and the
first-in, first-out method (FIFO) for the balance of the inventories at
December 31, 1996.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are
recorded at cost. Depreciation and amortization are computed on a
straight-line basis over the estimated useful lives of the assets or, where
applicable, the term of the lease, if shorter.
Estimated useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 9 to 38 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 7 to 10 years
Leasehold improvements 7 to 10 years
(or lease term if shorter)
</TABLE>
INTANGIBLE ASSETS -- Goodwill, which represents the excess purchase price
over fair value of net assets acquired relates to the acquisition of the
Company in 1989, and the sportswear division of Oak Hill Sportswear
Corporation ("Oak Hill") in 1995. Goodwill is amortized on a straight-line
basis over the expected periods to be benefited, ranging from 20 to 40 years.
Also included in intangible assets are organizational expenses and costs
related to licenses acquired by the Company, which are being amortized using
the straight-line method over periods of 5 to 20 years, respectively.
ASSESSMENT OF ASSET IMPAIRMENT -- The Company periodically assesses the
recoverability of the carrying value of long-lived assets, including
identifiable intangible assets, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
assessment of recoverability of the carrying amount of an asset is based on
estimated undiscounted future cash flows from the use of the asset and
eventual disposition. If the estimated undiscounted future cash flows are
less than the carrying value, an impairment loss is charged to operations
based on the difference between the carrying amount and the fair value of the
asset.
F-6
<PAGE>
The Company assesses the recoverability of goodwill by determining
whether the amortization of goodwill over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation or
asset. If the estimated cash flows are less than the carrying value, an
impairment loss is charged to operations based on the difference between the
carrying amount and the estimated discounted cash flows.
INCOME TAXES -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in income in the period that
includes the enactment date. SFAS No. 109 requires that deferred tax assets
are to be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
STOCK SPLIT -- On November 17, 1995, the Board of Directors authorized a
two-for-one stock split which was paid to all holders of record on December
4, 1995. All references in the accompanying consolidated financial statements
to number of shares, per share amounts, and prices of the Company's common
stock for periods prior to December 4, 1995 have been restated to reflect the
stock split.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amount of significant
financial instruments, which includes accounts receivable, accounts payable
and accrued expenses, all approximated fair value as of December 31, 1996,
December 2, 1995, and December 3, 1994 due to their short maturities. Bank
debt approximates fair value due to its variable interest rate.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- During 1996, the Company
adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes financial accounting and reporting standards
for stock-based employee compensation plans. This statement allows employers
to continue to apply previous accounting guidance regarding stock-based
compensation and only disclose the proforma impact the accounting provisions
of the new standard would have had. The pro forma amounts required to be
disclosed will reflect the difference between compensation cost, if any,
included in net income and the related cost measured by the fair value based
method defined in this Statement.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities (such as accounts receivable, inventories, restructuring
reserves, and valuation allowances for income taxes), and disclosures of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the years ended
December 2, 1995 and December 3, 1994 because of errors discovered for those
periods subsequent to the issuance of such financial statements. The
financial statements for the years ended December 2, 1995 and December 3,
1994 required restatement to correct the reporting for the recognition of net
sales, cost of sales, and certain expenses.
F-7
<PAGE>
The impact of the restatement on the Company's balance sheets and
statements of operations is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
STATEMENTS OF OPERATIONS DECEMBER 2, 1995 DECEMBER 3, 1994
- ----------------------------------- --------------------------- ---------------------------
(AS ORIGINALLY (AS ORIGINALLY
REPORTED) (RESTATED) REPORTED) (RESTATED)
<S> <C> <C> <C> <C>
Net sales .......................... $210,270 $193,306 $158,800 $151,147
Gross profit........................ 56,351 51,178 46,517 44,758
Operating income.................... 13,869 13,378 18,600 17,957
Income before extraordinary charge 5,763 5,247 10,064 9,053
Net income.......................... 5,763 5,247 9,769 8,758
Per common share:
Income before extraordinary item . $ 0.41 $ 0.38 $ 0.76 $ 0.68
Net income ........................ $ 0.41 $ 0.38 $ 0.74 $ 0.66
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DECEMBER 2, 1995 DECEMBER 3, 1994
- ----------------------------------- --------------------------- ---------------------------
(AS ORIGINALLY (AS ORIGINALLY
REPORTED) (RESTATED) REPORTED) (RESTATED)
<S> <C> <C> <C> <C>
Current Assets .................... $111,603 $110,981 $ 77,758 $ 75,311
Total Assets ...................... 161,647 157,664 111,626 109,179
Total Liabilities ................. 93,287 92,430 51,190 51,353
Stockholders' Equity .............. 68,360 65,234 60,436 57,826
</TABLE>
3. TRANSITION PERIOD
The following information represents the condensed consolidated income
statement and cash flow information for the transition period from December
3, 1995 to December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
INCOME STATEMENT DATA
Net sales ............................ $ 6,838
Gross profit.......................... 915
Operating expenses ................... 4,339
Operating loss ....................... (3,424)
Other expense ........................ (422)
Net loss before income tax benefit .. (3,846)
Net loss ............................. (2,269)
CASH FLOW DATA
Cash flow from operating activities . $ 7,827
Cash flows from investing activities (11)
Cash flow from financing activities . (5,039)
Net increase in cash ................. 2,777
Cash at beginning of period .......... 2,688
Cash at end of period ................ 5,465
</TABLE>
4. ACQUISITIONS
In June 1995, the Company acquired all of the issued and outstanding
shares of Beldoch Industries Corporation ("Beldoch") for $13,000 in cash and
a $2,000 note payable due within one year of the closing date, bearing
interest at 6%. The transaction was financed with long-term borrowings (Note
8). The Company may be obligated to pay the former owners additional
consideration based on future earnings levels. Any additional consideration
paid will be recorded as goodwill and amortized over the remainder of the 20
year period subsequent to the acquisition.
In July 1995, the Company completed the purchase of certain assets of Oak
Hill for $14,600, financed by additional borrowings under the Company's
revolving credit line. The excess of the purchase price over the fair market
value of net assets acquired was recorded as goodwill and is being amortized
over 20 years.
F-8
<PAGE>
The operating results of each acquisition are included in the Company's
consolidated results of operations from the respective date of acquisition.
The following unaudited pro forma information assumes the acquisitions of
Beldoch and Oak Hill were completed as of the beginning of each of the
respective years. These results have been presented for comparative purposes
only and do not purport to be indicative of results that would have occurred
if the acquisitions had been made at the beginning of each of the respective
years, or results that may occur in the future:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net sales .......... $248,698 $296,458
Operating income ... 8,666 21,069
Net income ......... 384 8,461
Earnings per share 0.03 0.63
</TABLE>
5. INVENTORIES
Inventories consist of the following at December 31, 1996, December 2,
1995, and December 3, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Raw materials ................... $12,081 $11,071 $ 8,320
Work in process ................. 4,808 4,783 4,314
Finished goods .................. 29,904 31,806 21,824
--------- --------- --------
$46,793 $47,660 $34,458
========= ========= ========
</TABLE>
If the first-in, first-out method of inventory valuation had been used,
inventories would have been approximately $404, $346, and $270 higher than
reported at December 31, 1996, December 2, 1995, and December 3, 1994,
respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consist of the following at December 31,
1996, December 2, 1995, and December 3, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
LAND AND LAND IMPROVEMENTS ...... $ 747 $ 747 $ 747
<S> <C> <C> <C>
Buildings and improvements ...... 8,691 8,342 7,039
Machinery and equipment .......... 8,787 9,207 5,718
Furniture and fixtures ........... 1,342 1,021 806
--------- --------- --------
19,567 19,317 14,310
Less accumulated depreciation and
amortization .................... 7,793 6,647 4,758
--------- --------- --------
$11,774 $12,670 $ 9,552
========= ========= ========
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996, December
2, 1995, and December 3, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Goodwill....................... $32,059 $32,059 $27,913
Licenses ...................... 6,550 6,550 616
--------- --------- ---------
38,609 38,609 28,529
Less accumulated amortization 6,159 4,596 4,213
--------- --------- ---------
$32,450 $34,013 $24,316
========= ========= =========
</TABLE>
F-9
<PAGE>
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996, December 2,
1995, and December 3, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revolving credit (a) ....... $33,000 $36,500 $15,500
Senior term (b) ............ 17,500 23,750 --
Seller note (c) ............ -- 2,000 --
Prudential senior term (d) -- -- 12,368
Other ...................... 261 361 447
--------- --------- ---------
50,761 62,611 28,315
Less current maturities ... 50,761 7,092 85
--------- --------- ---------
$ -- $55,519 $28,230
========= ========= =========
</TABLE>
- ------------
(a) The revolving credit line, which was originally scheduled to expire on
February 2, 1999, was modified by the fifth amendment and waiver
agreement to waive any defaults through April 30, 1997. The agreement
provides for maximum borrowings of up to $35,500. Each advance bears
interest at the prime plus 0.5%. At December 31, 1996, the prime rate
was 8.25%.
(b) On June 5, 1995, the Company entered into a senior term loan with Chase
Manhattan Bank (formerly Chemical Bank) for $25,000. The loan is
payable in quarterly installments of $1,250 which began September 30,
1995, with a balloon payment of $7,500 due February 2, 1999. The loan
bears interest at the prime rate plus 1.0% at December 31, 1996.
(c) Note payable to former owners of Beldoch which was due and paid in June
1996. This note bears interest at 6%.
(d) The senior term loan from an insurance company with a face amount of
$30,000 was issued in February 1990 to refinance then existing
indebtedness. This loan was payable in installments that began in March
1992, with the final payment made in February 1995. Interest was
payable quarterly at 11.7%.
The agreements contain certain restrictive covenants which, among other
things, require the Company to maintain certain financial ratios, and to
restrict investments, additional indebtedness and the payment of dividends.
The revolving credit and senior term loan are secured by substantially all
of the assets of the Company and Beldoch.
New Loan Agreement
On April 15, 1997, the Company agreed to a new credit facility to amend
and replace its existing credit facility. The new facility, which expires on
March 31, 1999, consists of a term loan, a revolving credit facility and a
factoring agreement.
The Company's debt under the existing credit facility which was scheduled
to expire on February 2, 1999 was classified as current portion of long-term
debt as of December 31, 1996 because of the existence of covenant defaults
allowing the Company's lenders to call the debt. Upon the closing of the new
credit facility, that portion of the Company's debt which is not payable
within one year will be long term.
The term loan, in the original amount of $25,000 is payable in quarterly
installments of $1,250 with a balloon payment of $7,500 on March 31, 1999 and
bears interest at the prime rate (8.25% at December 31, 1996) plus 1 1/2%.
Additional principal payments are required out of excess cash flow, as
defined, which includes any tax refunds for 1996 and prior years in excess of
$2,000. As a result, an additional $6,625 has been classified as current at
December 31, 1996.
F-10
<PAGE>
The revolving credit facility provides for borrowings of up to $85,000,
subject to an asset based borrowing formula with a direct debt sublimit of
$70,000 and a letter of credit sublimit of $35,000. Borrowings under the
revolving loan facility bear interest at prime plus 1/2%.
As part of the aforementioned amendment, the Company agreed to a factoring
agreement with a member of the lending group, whereby all accounts receivable
will be factored for the duration of the loan agreement.
As collateral for borrowings under the agreement, the Company has granted
the lenders a first priority lien on all accounts receivable, inventory,
machinery, equipment and intangibles and pledged the stock of Beldoch and
Donnkenny Apparel, Inc.
The Credit Agreement contains numerous financial and operating covenants,
including limitations on additional indebtedness, liens, dividends, stock
repurchases and capital expenditures.
In addition, the Company is required to maintain specified levels of
tangible net worth and comply with a maximum cumulative net loss test.
9. INCOME TAXES
Income tax expense (benefit) for 1996, 1995 and 1994 is comprised of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......... $(1,462) $2,241 $4,762
State and local 592 476 922
Deferred ......... (2,449) 1,279 350
---------- -------- --------
$(3,319) $3,996 $6,034
========== ======== ========
</TABLE>
A reconciliation of the statutory Federal tax rate and the effective rate
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate ................. (35)% 35% 35%
State and local taxes, net of Federal
income tax benefit ........................ (2) 4 3
Losses providing no state and local tax
benefit.................................... 4 -- --
Amortization of nondeductible goodwill ..... 3 3 2
Other ...................................... 1 1 --
--------- -------- --------
(29)% 43% 40%
========= ======== ========
</TABLE>
F-11
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 2, DECEMBER 3,
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances ...... $ 662 $ 513 $ 427
Inventory valuation .................. 2,356 1,182 853
Accrued expenses ..................... 584 249 50
Restructuring charges ................ 448 470 --
State operating loss carryforwards ... 634 -- --
Other ................................ 182 -- --
-------------- ------------- -------------
Total gross deferred tax assets .... 4,866 2,414 1,330
Less valuation allowance ............ (427) -- --
-------------- ------------- -------------
Total net deferred tax assets ...... 4,439 2,414 1,330
-------------- ------------- -------------
Deferred tax liabilities:
Property, plant and equipment ....... (2,294) (2,489) (2,104)
Intangibles .......................... (3,569) (3,798) --
-------------- ------------- -------------
Total gross deferred tax liabilities (5,863) (6,287) (2,104)
-------------- ------------- -------------
Net deferred tax liability............. $(1,424) $(3,873) $ (774)
============== ============= =============
</TABLE>
As of December 31, 1996, December 2, 1995, and December 3, 1994, the
Company has deferred tax assets attributable to accounts receivable
allowances, inventory valuation, accrued expenses, restructuring charges and
other items. The Company considers these assets to be fully realizable based
on the Company's anticipated future earnings and the fact that most of these
items are expected to reverse within the next twelve months. At December 31,
1996, the Company recorded a valuation allowance for a portion of its state
net operating loss carryforward.
10. COMMITMENTS AND CONTINGENCIES
a. In November 1996, ten designated class action lawsuits were
commenced against the Company and certain former officers in the
United States District Court for the Southern District of New
York. The complaints in these actions allege various violations of
the federal securities laws and seek an unspecified amount of
monetary damages and other monetary relief. These actions have now
been consolidated pursuant to court order and the plaintiffs have
been directed to file a consolidated complaint. As this
consolidated complaint has yet to be filed, the Company is not
presently in a position to determine the ultimate outcome of these
legal proceedings or the impact on their financial condition of
the Company.
In September 1996, the Securities and Exchange Commission ("SEC")
obtained an order directing a private investigation of the Company
in connection with, among other things, the alleged overstatement
of revenues and expenses for certain reporting periods. The
Company is continuing to cooperate with the SEC's ongoing
investigation. In addition, the Nasdaq Stock Market, Inc.
commenced a review of the Company's eligibility for continued
listing on the Nasdaq Stock Market. Management believes that the
accompanying restated financial statements reflect all adjustments
necessary to correct previously issued financial statements.
F-12
<PAGE>
b. Rental expense for operating leases for the periods ended December
31, 1996, December 2, 1995 and December 3, 1994 approximated
$5,207, $2,996, and $1,729, respectively. Minimum future rental
payments as of December 31, 1996 for operating leases with initial
noncancelable lease terms in excess of one year, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------
<S> <C>
1997..................... $ 3,909
1998..................... 3,761
1999..................... 3,475
2000..................... 2,590
2001..................... 2,402
Thereafter .............. 11,643
--------
$27,780
========
</TABLE>
c. At December 31, 1996, the Company was contingently liable on
outstanding letters of credit issued amounting to $19,166.
11. EMPLOYEE BENEFIT PLAN
The Company sponsors an Employees' Savings 401(k) Plan (the "Plan")
covering substantially all of its employees. Contributions to the Plan are
made by the Company at the discretion of the Board of Directors. Total
contributions to the Plan charged to operations for 1996, 1995 and 1994
amounted to approximately $0, $0 and $302, respectively, exclusive of
administrative costs.
12. SUPPLEMENTAL CASH FLOW INFORMATION
a. Cash paid for interest and income taxes was $4,960 and $2,990,
respectively, in 1996, $3,993 and $7,409, respectively, in 1995
and $2,464 and $7,314, respectively, in 1994.
b. In connection with the acquisition of all the issued and
outstanding shares of Beldoch and certain assets of Oak Hill for
$32,400 (inclusive of a $2,000 note payable), the Company acquired
assets with a fair value of $38,241 and assumed liabilities of
$9,987 and recorded goodwill of $4,146.
13. GAIN ON SALE OF LICENSE
The Company sold the rights to the Ship 'N Shore trademarks in December
1993 resulting in one-time pretax gain of $1,116 equal to $0.05 per share on
an after-tax basis.
14. STOCK OPTIONS
The Company has a stock award and incentive program which permits the
issuance up to 2,000,000 options on terms as determined by the Board of
Directors.
Under the terms of the plan, options granted may be either non-qualified
or incentive stock options and the exercise price, determined by the Stock
Option committee, may not be less than the fair market value of a share on
the date of the grant.
F-13
<PAGE>
Information regarding the Company's stock option plan is summarized
below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- -------------- ----------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year ................... 543,600 $ 8.26 727,000 $7.55 582,000 $ 6.69
Granted ........................ 216,350 18.15 198,000 8.14 187,000 10.39
Exercised ...................... (76,100) 7.89 (323,200) 6.69
Canceled ....................... (25,050) 12.80 (58,200) 8.03 (42,000) 7.99
----------- -------------- ----------- -------------- ---------- --------------
Outstanding at end of year .... 658,800 11.38 543,600 8.26 727,000 7.55
=========== =========== ==========
Exercisable at year end ........ 268,100 130,000 275,000
=========== =========== ==========
Available for grant at year
end............................ 1,341,200 1,456,400 1,273,000
=========== =========== ==========
</TABLE>
The options outstanding at December 31, 1996 range in price as follows:
<TABLE>
<CAPTION>
# OF OPTIONS EXERCISE PRICE
- -------------- --------------
<S> <C>
454,100 $6.69-$11.06
204,700 $18.15
- --------------
658,800
==============
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation
plans because the exercise price for stock options granted equaled the market
price of the underlying stock at the date of grant. Had compensation cost for
the Company's stock option plans been determined based upon the fair value at
the grant date for awards under these plans consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's net income and
earnings per share for the years ended December 31, 1996 and December 2, 1995
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Net (loss) income:
As reported ................ $(8,288) $5,247
Pro forma .................. (8,414) 5,185
Net (loss) income per share:
As reported ................ $ (0.59) $ 0.38
Pro forma .................. (0.60) 0.37
</TABLE>
The weighted average fair value of the options granted during 1996 and
1995 were $10.49 and $4.29, respectively.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1996 and 1995, respectively: dividend yield of 0% and 0%,
volatility of 47% and 36%, risk-free interest rate of 6.90% and 6.41%, and an
expected life of 7 years and 7 years.
15. RESTRUCTURING CHARGE
During the fourth quarter of 1995, the Company adopted a plan of
restructuring and recorded a pretax charge of $2,815. The key elements of the
restructuring plan include the costs associated with the consolidation of
certain manufacturing facilities and the discontinuance of certain product
lines. The
F-14
<PAGE>
restructuring provision includes estimated costs of asset write-downs, lease
terminations and other charges. As of the December 31, 1996 and December 2,
1995, approximately $1,135 and $1,200 of the charge is represented by an
accrual for future expenditures, principally related to lease terminations
and the closing of a manufacturing facility.
16. BUSINESS CONCENTRATIONS
Substantially all of the Company's sales are made to customers in the
United States. Sales to one chain store retailer accounted for approximately
19%, 15% and 18% of the Company's sales in fiscal 1996, 1995 and 1994,
respectively. Sales to another mass retailer accounted for 15% of the
Company's sales in fiscal 1994. No other customers accounted for more than
four percent of the Company's sales in fiscal 1996, 1995 and 1994, and no
account receivable from any customer exceeded $7,981 at December 31, 1996.
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimate of its bad debts.
F-15
<PAGE>
DONNKENNY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<PAGE>
SCHEDULE II
DONNKENNY, INC.
Valuation and Qualifying Accounts
For the Fiscal Years ended
December 3, 1994, December 2, 1995 and December 31, 1996
<TABLE>
<CAPTION>
BALANCE OF CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Reserve for bad debts $ 897,000 233,000 162,000 $ 968,000
Reserve for discounts 1,112,000 6,357,000 6,197,000 1,272,000
------------ ------------
$2,009,000 $2,240,000
============ ============
Year ended December 2, 1995:
Reserve for bad debts $ 468,000 795,000 666,000 $ 597,000
Reserve for discounts 413,000 3,686,000 2,750,000 $1,349,000
------------ ------------
$ 881,000 $1,946,000
============ ============
Year ended December 3, 1994:
Reserve for bad debts $ 592,000 169,000 293,000 $ 468,000
Reserve for discounts 526,000 2,483,000 2,596,000 413,000
------------ ------------
$1,118,000 $ 881,000
============ ============
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated as of September 5, 1996 between Donnkenny Apparel,
Inc. (the "Company"), and Mr. Harvey Horowitz ("Employee").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company desires to enter into this Employment Agreement
with Employee, and Employee desires to be employed by the Company, on the terms
and conditions set forth in this Employment Agreement.
NOW, THEREFORE, the parties hereto, in consideration of the premises
and the mutual covenants herein contained, hereby agree as follows:
1. (a) Term of Employment. Subject to the terms and conditions
hereinafter set forth, the Company shall employ Employee and Employee shall be
employed by the Company, or of any subsidiary or affiliate of the Company as
the Company shall from time to time select, for an employment term of three (3)
years commencing as of October 1, 1996 and terminating on September 30, 1999
(the "Initial Term"). Such three (3) year period, as it may be extended
pursuant to paragraph 1(b) below, or such shorter period as may be contemplated
by this Employment Agreement during which Employee shall be employed by the
Company is hereinafter called the "Term of Employment."
<PAGE>
(b) Renewal. Following the Initial Term, this Employment Agreement
shall be automatically renewed upon the same terms and conditions hereof for
successive one-year periods unless either party gives the other party 60 days
prior written notice of termination before the end of any such one-year period.
2. (a) Scope of Employment. During the Term of Employment, Employee
shall be employed as Vice President, General Counsel and Director of Operations
and shall report directly to the President of the Company. In addition,
Employee shall well and faithfully render and perform such other reasonable
executive and managerial services as may be assigned to him, from time to time,
by or under the authority of the Board of Directors or the President of the
Company. Employee will devote his full time and efforts to the business and
affairs of the Company, as now or hereafter conducted, and shall be at all
times subject to the direction and control of the Board of Directors or the
President of the Company. Employee shall render such services to the best of
his ability and shall use his best efforts to promote the interests of the
Company. Employee will not engage in any capacity or activity which is, or may
be, contrary to the welfare, interest or benefit of the business now or
hereafter conducted by the Company.
(b) Board Positions. Notwithstanding anything to the contrary
contained herein, Employee may continue to serve on the Boards of Director or
similar governing bodies of the United Jewish Appeal, Queens College, Paul
Taylor Dancers, and such other
-2-
<PAGE>
charitable, educational or arts-related organizations as Employee may elect
from time to time so long as any such position does not conflict with
Employee's obligations hereunder.
3. (a) Compensation. As full compensation for all services provided
for herein, the Company will pay, or cause to be paid, to Employee, and
Employee will accept:
(i) a salary of $400,000 for the year ending September 30,
1997, with an annual increase of 5% for each subsequent year during
the Term of Employment. The salary shall be paid in regular
installments in accordance with the Company's usual paying practices,
but not less frequently than monthly (the "Base Salary"); and
(ii) a bonus (the "Bonus") for each of the fiscal years (pro
rated for any partial fiscal years) during the Term of Employment,
based upon the Company's "pre-tax profits" (as hereinafter defined).
Employee shall receive a Bonus in the amount set forth in the
following table:
Amount of Pre-tax Profits
per Fiscal Year Aggregate Amount of Bonus
------------------------- -------------------------
to $10,000,000 $100,000
$10,000,001-$20,000,000 $200,000
$20,000,001-$30,000,000 $300,000
If the pre-tax profits should exceed $30,000,000 in any fiscal year,
an additional bonus may be payable at the Company's discretion.
-3-
<PAGE>
Such Base Salary and Bonus payments will be subject to such deductions
by the Company as the Company is from time to time required to make pursuant to
law, government regulations or order or by agreement with, or consent of,
Employee. Such payments may be made by check or checks of the Company or any of
its parent, subsidiaries or affiliates as the Company may, from time to time,
find proper and appropriate. The Employee's Bonus shall be paid not more than
one hundred twenty (120) days after the end of each of the Company's fiscal
years. If Employee terminates his employment with the Company or if his
employment is terminated by the Company for cause (as hereinafter defined), no
Bonus shall be due or payable to Employee for the Term of Employment. If the
Company terminates this Employment Agreement in accordance with the terms
hereof for any reason other than cause, the Company shall pay to Employee the
Bonus for the fiscal year during which such termination occurs, as determined
herein, prorated by multiplying the pre-tax profits of the Company for such
fiscal year by a fraction, the numerator of which is the number of days of
actual employment pursuant to this Employment Agreement and the denominator of
which is 365, and thereafter Employee shall not be entitled to receive any
Bonus with respect to any subsequent periods.
(b) Pre-tax Profits of the Company Defined. For purposes of this
Employment Agreement, "pre-tax profits" shall be
-4-
<PAGE>
as determined by the Company's internal accounting department in accordance
with the Company's accounting practice.
The determination of the Company's internal accounting department
as to pre-tax profits shall be final and binding on the parties and shall not
be subject to arbitration as provided herein unless the arbitration proceeding
is commenced within six (6) months after the parties are advised of such
determination.
4. Expenses. Employee shall be entitled to (a) a non-accountable
expense allowance of $2,000 per month to cover his car lease and maintenance
payments, bar association and other professional organization membership dues,
and home office expenses and (b) reimbursement by the Company for other
reasonable expenses actually incurred by him on the Company's behalf, in the
course of his employment, upon the presentation by Employee, from time to time,
of an itemized account of such expenditures together with such vouchers and
other receipts as the Company may request.
5. Vacation. Employee shall be entitled to vacations in accordance
with the Company's prevailing policy for its operating executives as in prior
years.
6. Termination.
(a) Disability. If, during the Term of Employment, Employee shall
be unable, for a period of more than three (3) consecutive months or for
periods aggregating more than twenty (20)
-5-
<PAGE>
weeks in any fifty-two (52) consecutive weeks to perform the services provided
for herein as a result of illness, incapacity or a physical or other disability
of any nature, the Company may, upon not less than thirty (30) days notice,
terminate Employee's employment hereunder. The Company shall pay to Employee,
or his legal representatives, compensation as specified in paragraph 3 hereof
to the end of the month in which such termination occurs. Employee shall be
considered unable to perform the services provided for herein if he is unable
to attend to the normal duties required of him. Upon completion of the
termination payments provided for in this paragraph, all of the Company's
obligations to pay compensation under this Employment Agreement shall cease.
(b) Death. If Employee shall die during the Term of Employment,
this Employment Agreement shall terminate at the end of the month in which
Employee's death takes place and Employee's estate shall continue to receive
the compensation specified in paragraph 3 hereof until the end of such month
and Employee's family's coverage under the Company's medical and
hospitalization plan will continue for a period of six (6) months thereafter.
(c) For Cause. In addition to the provisions for the cancellation
and/or termination hereof hereinabove provided, the Company may, at any time
and in its sole discretion, terminate and/or cancel this Employment Agreement
and the Term of Employment for cause (as hereinafter defined) by sending notice
to the Employee of its intention to so cancel and/or terminate.
-6-
<PAGE>
Cancellation and/or termination under this paragraph shall become effective
within forty-eight (48) hours of the date of receipt of notice under this
paragraph, without Employee having any recourse against the Company for
damages.
For purposes of this Employment Agreement, "cause" shall be defined to
mean (i) fraud, dishonesty or similar malfeasance, (ii) substantial refusal to
comply or default in complying with the Company's reasonable directions and/or
failure to comply or perform any of the material terms and/or obligations of
this Employment Agreement and such refusal, default or failure continues for a
period of more than ten (10) days after receipt by Employee of notice from the
Company setting forth in reasonable detail the activity by Employee which the
Company deems to be cause for termination of this Employment Agreement or (iii)
Employee's alcohol or drug abuse.
(d) Change of Control. In the event Mr. Richard Rubin no longer
serves in an executive management position with the Company, Employee may, upon
not less than thirty (30) days notice, terminate his employment hereunder and
the Company shall continue to pay to Employee compensation as specified in
paragraph 3 hereof for a period of one year following the Initial Term.
(e) Election Not to Renew. In the event the Company elects not to
renew this Employment Agreement pursuant to paragraph 1(b), the Company shall
pay to Employee compensation as specified
-7-
<PAGE>
in paragraph 3 hereof for a period of one year following the end of the Term of
Employment.
7. Benefits.
(a) Employee shall be entitled to participate in all group life
insurance, group disability insurance, medical and hospitalization plans, and
pension and profit sharing plans as are presently being offered by the Company
or which may hereafter, during the Term of Employment, be offered to its
operating executives on a company wide basis.
(b) From and after the date of this Employment Agreement the term
"compensation" as used in any pension or profit sharing plan maintained by the
Company shall include only the Base Salary (exclusive of the Bonus) payable
hereunder.
8. Disclosure. Employee will not any at time, directly or indirectly,
disclose or furnish to any other person, firm or corporation:
(a) any information concerning the methods of conducting or
obtaining business, of manufacturing or advertising products, or of obtaining
customers;
(b) any confidential information acquired by him during the course
of his employment by the Company, including, without limiting the generality of
the foregoing, the names of any customers or prospective customers of, or any
person, firm or
-8-
<PAGE>
corporation who or which have or shall have traded or dealt with, the Company
(whether such customers have been obtained by Employee or otherwise); and/or
(c) any confidential information relating to the products, designs,
styles, processes, discoveries, materials, ideas, creations, inventions or
properties of the Company.
9. Covenants Not to Compete.
(a) During the Term of Employment, Employee agrees not to engage,
directly or indirectly, in any business which is competitive with the business
now or at any time during the Term of Employment conducted by the Company.
(b) During the Term of Employment and for the period that any
payments are made pursuant to paragraphs 6(d) or 6(e), Employee agrees not to:
(i) engage, directly or indirectly, within the United States of
America in any apparel business involving ladies' or children's
wearing apparel which is directly competitive with the business
conducted by the Company; or
(ii) directly or indirectly, on behalf of himself or any
business in which he may, directly or indirectly, be engaged, recruit,
solicit, induce (or attempt to induce), or have any part in, the
diversion of any of the Company's employees or sales representatives
from their relationships
-9-
<PAGE>
with the Company or retain or employ any of the Company's employees or
sales representatives.
(c) In addition, Employee shall not at any time, during or after
the termination of this Employment Agreement, engage in any business which uses
as its name, in whole or in part, "Donnkenny" or any other name used by the
Company during or prior to the Term of Employment.
For the purposes of this paragraph 9, Employee will be deemed
directly or indirectly engaged in a business if he participates in such
business as proprietor, partner, joint venturer, stockholder, director,
officer, lender, manager, employee, consultant, advisor or agent or if he
controls such business. Employee shall not for purposes of this paragraph be
deemed a stockholder or lender if he holds less than two (2%) percent of the
outstanding equity or debt of any publicly owned corporation engaged in the
same or similar business to that of the Company, provided that Employee shall
not be in a control position with regard to such corporation.
10. Inventions. As between Employee and the Company, all products,
designs, styles, processes, discoveries, materials, ideas, creations,
inventions and properties, whether or not furnished by Employee, created,
developed, invented, or used in connection with Employee's employment hereunder
or prior to this Employment Agreement, will be the sole and absolute property
of the
-10-
<PAGE>
Company for any and all purposes whatever in perpetuity, whether or not
conceived, discovered and/or developed during regular working hours. Employee
will not have, and will not claim to have, under this Employment Agreement or
otherwise, any right, title or interest of any kind or nature whatsoever in or
to any such products, designs, styles, processes, discoveries, materials,
ideas, creations, inventions and properties.
11. Arbitration. Any controversy arising out of or relating to this
Employment Agreement, including any modification or amendment thereof, shall be
resolved by arbitration in the City of New York, pursuant to the rules then
obtaining of the American Arbitration Association. The parties agree that the
arbitrators sitting in any controversy shall have no power to alter or modify
any express provision of this Employment Agreement, or make any award which by
its terms effects such alteration or modification. The parties consent to the
application of the New York or Federal Arbitration Statutes and to the
jurisdiction of the Supreme Court of the State of New York, and of the United
States District Court of the Southern District of New York, for judgment on an
award and for all other purposes in connection with said arbitration and
further consent that any notice, process or notice of motion or other
application to either of said Courts or Judges thereof, or of any notice in
connection with any arbitration hereunder, may be served in or out of the State
or Southern District of New York by certified or registered mail, return
receipt requested, or by
-11-
<PAGE>
personal service, provided a reasonable time for appearance is allowed, or in
such other manner as may be permitted under the rules of the American
Arbitration Association or of either of said Courts. Judgment upon the award
rendered may be entered by any Court having jurisdiction. Any provisional
remedy which, but for this provision to arbitrate disputes, would be available
at law, shall be available to the parties hereto pending the final award of the
arbitrators.
12. Injunctive Relief. The parties hereto recognize that irreparable
damage may result to the Company and its business and properties if Employee
fails or refuses to perform his obligations under this Employment Agreement and
that the remedy at law for any such failure or refusal may be inadequate.
Accordingly, notwithstanding the provisions of paragraph 11 hereof to arbitrate
disputes arising hereunder, it is understood that the Company has not waived
its rights to seek any provisional remedies (including, without limitation,
injunctive relief) and damages. The institution of any arbitration proceedings
shall not bar injunctive relief, or any other provisional remedy, pending the
final award of the arbitrators.
13. Absence of Restrictions. Employee represents and warrants that he
is not a party to any agreement or contract pursuant to which there is any
restriction or limitation upon his entering into this Employment Agreement or
performing the services called for by this Employment Agreement.
-12-
<PAGE>
14. Further Instruments. Employee will execute and deliver all such
other further instruments and documents as may be necessary, in the opinion of
the Company, to carry out the purposes of this Employment Agreement, or to
confirm, assign or convey to the Company any products, designs, styles,
processes, discoveries, materials, ideas, creations, inventions or properties
referred to in paragraph 10 hereof, including the execution of all patent,
design patent, copyright, trademark or trade name applications.
15. Invalidity and Severability. If any provisions of this Employment
Agreement are held invalid or unenforceable, such invalidity or
unenforceability shall not affect the other provisions of this Employment
Agreement, and, to that extent, the provisions of this Employment Agreement are
intended to be and shall be deemed severable. In particular and without
limiting the foregoing sentence, if any provision of paragraph 9 of this
Employment Agreement shall be held to be invalid or unenforceable by reason of
geographic or business scope or the duration thereof, such invalidity or
unenforceability shall attach only to such provisions and shall not affect or
render invalid or unenforceable any other provisions of this Employment
Agreement, and any such provisions of this Employment Agreement shall be
construed as if the geographic or business scope or the duration of such
provision had been more narrowly drawn so as not to invalid or unenforceable.
-13-
<PAGE>
16. Notices. Any notice required or permitted to be given under this
Employment Agreement shall be sufficient if in writing and if sent by
registered or certified mail or telegram, as follows:
As to Employee: Harvey Horowitz, Esq.
239 East 79th Street
New York, New York 10021
As to the Company: Donnkenny Apparel, Inc.
1411 Broadway
New York, New York 10018
Attn: Richard Rubin, Chairman
and Chief Executive Officer
with a copy to: Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attn: Thomas E. Constance, Esq.
or to such other address as either party hereto may designate by notice given
in accordance with this Employment Agreement.
17. Assignment. A party hereto may not assign this Employment
Agreement or any rights or obligations hereunder without the consent of the
other party hereto; provided, however, that upon the sale or transfer of all or
substantially all of the assets of the Company, or upon the merger by the
Company into, or the combination with, another corporation, this Employment
Agreement will inure to the benefit of and be binding upon the person, firm or
corporation purchasing such assets, or the corporation surviving such merger or
consolidation, as the case may be. The provisions of this Employment Agreement
where applicable are binding upon the
-14-
<PAGE>
heirs of Employee and upon the successors and assigns of the parties hereto.
18. Waiver of Breach. Waiver by either party of a breach of any
provision of this Employment Agreement by the other shall not operate or be
construed as a waiver of any subsequent breach by such other party.
19. Definition of Company. As used in this Employment Agreement the
term "Company" shall also include any subsidiary or affiliate of the Company.
20. Entire Employment Agreement. This instrument contains the entire
agreement of the parties as to the subject matter hereof and supersedes and
replaces all prior oral or written agreements between the parties. It may not
be changed orally, but only by an amendment to the Employment Agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
21. Applicable Law. This Employment Agreement shall be construed in
accordance with the laws of New York.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the day and year first above written.
DONNKENNY APPAREL, INC.
By: /s/ Richard Rubin
------------------------------
Richard Rubin, Chairman
and Chief Executive Officer
/s/ Harvey Horowitz
---------------------------------
Harvey Horowitz
-16-
<PAGE>
RESCISSION AGREEMENT
--------------------
RESCISSION AGREEMENT, dated as of January 24, 1997 (the "Agreement"),
by and between Mel Weiss ("Seller") and Donnkenny Apparel, Inc., a Delaware
corporation ("Buyer").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the parties hereto are parties to that certain Stock Purchase
Agreement between Seller and Buyer, dated as of the 3rd day of September 1996
(the "Stock Purchase Agreement"); and
WHEREAS, the parties hereto desire to rescind the transactions
effected pursuant to the Stock Purchase Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
Section 1. Definitions. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Stock
Purchase Agreement.
Section 2. Rescission.
(a) Subject to the terms and conditions of this Agreement, Seller and
Buyer hereby agree to rescind all of the transactions effected pursuant to the
Stock Purchase Agreement, including, without limitation, the transfer of the
Seller Shares from Seller to Buyer, the payment of the Purchase Price by Buyer
to Seller, the release or discharge of any and all Affiliate Liabilities and
the deposit of the Lonestar Shares with the Escrow Agent pursuant to the terms
and conditions set forth in that certain Escrow Agreement, dated as of
September 3, 1996, among Seller, Buyer and Squadron, Ellenoff, Plesent &
Sheinfeld, LLP (the "Escrow Agreement"). In connection with such rescission,
Buyer hereby agrees to return the Seller Shares to Seller, free and clear of
all liens, claims and encumbrances.
(b) Buyer hereby agrees to waive the repayment of an aggregate of
approximately $400,000 of inter-company loans made by Buyer to the Companies
during the period commencing on September 3, 1996 and ending on the date
hereof.
(c) As additional consideration for the transactions contemplated
hereby, Buyer hereby agrees to cause Parent to issue to Seller at the closing
of these transactions (i) 25,000 shares of Parent Common Stock, which will be
restricted shares within
<PAGE>
the meaning of the Securities Act and (ii) a Warrant to purchase 75,000 shares
of Parent Common Stock which will be exercisable for a period of seven and
one-half years commencing on the date hereof and which will have an exercise
price equal to the average of the closing market price of the Parent Common
Stock for the five trading days prior to the date hereof, rounded up to the
nearest whole number. Such warrants will be granted pursuant to a Warrant
Agreement which will provide for customary anti-dilution rights. Furthermore,
Seller will receive customary piggy-back registration rights for a period of
seven and one-half years commencing on the date hereof relating to both the
25,000 restricted shares and to the 75,000 shares underlying the warrant
referred to above. Should Seller exercise such piggy-back registration rights,
all costs of such registration (other than underwriting discounts and
commissions) shall be borne by Buyer and/or Parent.
(d) Buyer hereby agrees to pay all fees and expenses associated with
KPMG's completion of the August 31, 1996 audit of the Companies' books.
Furthermore, Buyer hereby agrees to provide to Seller copies of any written
reports, surveys or analyses of any nature concerning the business of the
Companies that have been or will be prepared by or on behalf of Buyer.
(e) Contemporaneously herewith, Seller hereby agrees to take all
action necessary to replace the balances due and unpaid on two (2) letters of
credit issued by Chase Manhattan Bank, N.A. to the Companies, being L/C# 1821139
in the original amount of $168,538.63 and L/C# 1821161 in the original amount of
$363,038.90, or arrange for Rosenthal and Rosenthal to indemnify Chase Manhattan
Bank, N.A. with respect thereto, it being recognized that certain payments have
already been made and received, which include Buyer or Parent as a party
thereto.
(f) With respect to contract work done by Buyer for the Companies
and/or by the Companies for Buyer, Seller and Buyer hereby agree to pay for any
work which has been commenced as of the date hereof.
(g) Buyer hereby agrees to pay Seller $50,000 as reimbursement for
Seller's legal and other fees and expenses incurred in connection with the
negotiation of this Agreement.
Section 3. Release and Termination. Concurrently with the rescission
of the transactions referred to in Section 2(a) hereof, each of Seller and
Buyer shall execute a General Release, in the form attached hereto as Exhibit
A, excepting only their respective ongoing duties and obligations under this
Agreement.
Section 4. Donnkenny Option. For a period of three months following
the date of this Agreement, Buyer shall have the option to re-acquire the
Companies by reinstating the terms and conditions of the Stock Purchase
Agreement, provided, however, that
2
<PAGE>
(i) the aggregate purchase price shall be the price set
forth in the Stock Purchase Agreement plus $1,000,000,
(ii) the Purchase Price shall be paid as follows: (a) Seller shall
have the option of receiving $3,000,000 of the Purchase Price
either in cash or in Parent Common Stock and (b) the balance
of the Purchase Price shall be paid entirely in cash,
(iii) the Purchase Price shall not be subject to the post-closing
adjustments set forth in Section 1.6 of the Stock Purchase
Agreement, and
(iv) should Seller exercise his option to receive $3,000,000 of
the Purchase Price in the form of Parent Common Stock, the
number of shares of Parent Common Stock shall be calculated
using the average of the closing market price of the Parent
Common Stock for the five trading days prior to the date on
which such option is exercised.
Section 5. Further Assurances. From and after the date hereof, Seller
and Buyer agree to execute and deliver such further documents and instruments
and to do such other acts and things as Buyer or Seller, as the case may be,
may reasonably request in order to effectuate the transactions contemplated by
this Agreement.
Section 6. Covenants.
(a) Buyer hereby covenants and agrees that prior to the closing of the
transactions contemplated by this Agreement, none of the Companies will have
incurred any expense, or have made any payment or distribution, or otherwise
engaged in any transaction which is outside the ordinary course of that
Company's business, or have paid any money to Donnkenny.
(b) Buyer hereby covenants and agrees that, to the extent permissible
by law or court order, in the event that the transactions contemplated by this
Agreement are treated as a preference in any subsequent bankruptcy proceeding,
all claims of Seller and the Companies shall be reinstated as if the rescission
transactions contemplated by this Agreement had not occurred.
(c) Each of Buyer and Seller hereby covenant and agree that no press
releases will be released by either party hereto unless both parties hereto
have previously mutually agreed upon the language contained therein.
Section 7. Representations and Warranties. Each of the parties hereto
represents and warrants to the other party hereto that (i) the execution,
delivery and performance of this
3
<PAGE>
Agreement by it and the consummation of the transactions contemplated hereby
have been duly authorized, if necessary, and (ii) this Agreement, when executed
and delivered in accordance with the provisions hereof, will constitute the
valid and legally binding obligation of such party, enforceable against it in
accordance with its terms.
Section 8. Headings. The section headings of this Agreement are for
reference purposes only and are to be given no effect in the construction or
interpretation of this Agreement.
Section 9. Separability. If at any time any of the covenants or the
provisions contained herein shall be deemed invalid or unenforceable by the
laws of the jurisdiction wherein it is to be enforced or for any reason, such
covenants or provisions in such jurisdiction shall be considered divisible as
to such portion and such covenants or provisions shall become and be
immediately amended and reformed to include only such covenants or provisions
as are enforceable by the court or other body having jurisdiction of this
Agreement in such jurisdiction and the parties agree that such covenants or
provisions, as so amended and reformed, shall be valid and binding in such
jurisdiction as though the invalid or unenforceable portion had not been
included herein.
Section 10. Amendment; Waiver. No provision of this Agreement may be
amended or modified except by an instrument or instruments in writing signed by
the parties hereto. Either party may waive compliance by the other party with
any of the provisions of this Agreement. No waiver of any provision hereof
shall be construed as a waiver of any other provision. Any waiver must be in
writing.
Section 11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and each party
thereto may become a party hereto by executing a counterpart hereof. This
Agreement and any counterpart so executed shall be deemed to be one and the
same instrument.
Section 12. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
without regard to its principles of conflicts of law.
Section 13. Consent to Jurisdiction and Service of Process. Any legal
action, suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby may be instituted in any state or federal
court location
4
<PAGE>
in New York County, State of New York, and each party agrees not to assert, by
way of motion, as a defense, or otherwise, in any such action, suit or
proceeding, any claim that it is not subject personally to the jurisdiction of
such courts, that its property is exempt or immune from attachment or
execution, that the action, suit or proceeding is brought in an inconvenient
forum, that the venue of the action, suit or proceeding is improper or that
this Agreement of the subject matter hereof may not be enforced in or by such
court. Each party further irrevocably submits to the jurisdiction of any such
court in any such action, suit or proceeding. Any and all service of process
and any other notice in any such action, suit or proceeding shall be effective
against any party if given personally or by registered or certified mail,
return receipt requested, or by any other means of mail that requires a signed
receipt, postage prepaid, mailed to such party as herein provided, or by
personal service on such party with a copy of such process mailed to such party
by first class mail or registered or certified mail, return receipt requested,
postage prepaid. Nothing herein contained shall be deemed to affect the right
of any party to serve process in any manner permitted by law or to commence
legal proceedings or otherwise proceed against any other party in any
jurisdiction other than New York.
Section 14. Assignment and Binding Effect. Neither of the parties
hereto may assign any of its or his rights or delegate any of its or his duties
under the Agreement without the prior written consent of the others. All of the
terms and provisions of this Agreement shall be binding on, and shall inure to
the benefit of, the respective successors and permitted assigns of the parties.
Section 15. Entire Agreement. This Agreement contains, and is intended
as, a complete statement of all of the terms and agreements between the parties
hereto with respect to the matters covered hereby, and supersedes any previous
agreements and understandings between the parties with respect to those
matters.
Section 16. Notices. All notices and other communications under this
Agreement shall be in writing and shall be either delivered personally, mailed
by certified mail, return receipt requested, sent by recognized overnight
delivery service or, to the extent receipt is confirmed, by telecopy, telefax,
or other electronic transmission service to the parties at the following
addresses (or to such other address as a party may have specified by notice
given to the other party pursuant to this provision). Notice shall be deemed
given upon receipt.
5
<PAGE>
If to Seller, to:
Mel Weiss
c/o Fashion Avenue Knits, Inc.
1710 Flushing Avenue
Ridgewood, New York 11385
Telecopy No.: (718) 456-9011
Confirmation No.: (718) 456-9000
with a copy to:
Silverberg Stonehill & Goldsmith, P.C.
11 West 40th Street
New York, New York 10018
Attention: Sheldon Silberberg, Esq.
Telecopy No.: (212) 391-4556
Confirmation No.: (212) 730-1900
If to Buyer, to:
Donnkenny Apparel, Inc.
1411 Broadway
New York, New York 10018
Attention: Harvey Horowitz
Telecopy No.: (212) 768-3974
Confirmation No.: (212) 730-7770
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Dennis J. Block, Esq.
Telecopy No.: (212) 310-8007
Confirmation No.: (212) 310-8000
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
/s/ Mel Weiss
-----------------------------------
MEL WEISS
DONNKENNY APPAREL, INC.
By: /s/ Harvey Horowitz
--------------------------------
Name: Harvey Horowitz
Title: Vice President
ACKNOWLEDGED:
SQUADRON, ELLENOFF, PLESENT
& SHEINFELD, ESCROW AGENT
By:
-------------------------------
Name:
Title:
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
-----------------------------------
MEL WEISS
DONNKENNY APPAREL, INC.
By:
--------------------------------
Name:
Title:
ACKNOWLEDGED:*
SQUADRON, ELLENOFF, PLESENT
& SHEINFELD, ESCROW AGENT
By: /s/ Shalom Leaf
-------------------------------
Name: Shalom Leaf
Title: Partner
* The undersigned acknowledges this Agreement, but notes that (i) in
accordance with the terms of the Stock Purchase Agreement and the Escrow
Agreement, the undersigned never received or held the Escrowed Shares, and
(ii) the Escrow Agreement terminated by its terms since the undersigned did
not receive any Escrowed Funds (as defined therein) on or prior to
January 13, 1997.
7
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 28th day of January, 1997, by and
between DONNKENNY APPAREL, INC., a Delaware corporation (the "Company"), and
Stuart S. Levy ("Executive").
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is willing
to provide such services to the Company for said period, and upon the other
terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. Services Provided. The Company agrees to utilize the services of
Executive, and Executive agrees to provide such services, for the period stated
in Paragraph 2 hereof and upon the other terms and conditions herein provided.
2. Term and Duties.
(a) Term of Agreement, The term of this Agreement will commence as
of February 1, 1997, and will continue through January 31, 1999; provided,
however, that the Company may terminate Executive's employment hereunder for
any reason, and Executive may terminate his employment hereunder for any
reason, in each case upon not less than 60 days' prior written notice to the
other.
(b) Duties. During the period of his employment hereunder,
Executive shall serve as Chief Financial Officer, Vice President-Finance and
Assistant Secretary of the Company, or as otherwise directed by the Board of
Directors or the Chief Executive Officer of the Company. Except for illness,
vacation periods, and reasonable leaves of absence, Executive shall devote all
of his business time, attention, skill, and efforts to the faithful performance
of his duties in said offices, and will use his best efforts to further the
Company's business interests.
<PAGE>
3. Compensation and Reimbursement of Expenses.
(a) Compensation. For all services rendered by Executive to the
Company during the term of this Agreement, the Company shall pay Executive a
base salary (retroactive to November 4, 1996, Executive's date of employment
with the Company) of $335,000 per year (the "Base Salary"), subject to increase
as provided below; plus an annual bonus (the "Bonus"). The amount of the Bonus
shall be determined by the Board of Directors of the Company (or by a committee
designated by the Board of Directors), taking into account the performance of
Executive and the Company during the year in respect of which the Bonus is
payable. The Base Salary shall be paid in accordance with the Company's normal
payroll policies. The Bonus shall be payable at or as soon as practicable after
the end of each calendar year (generally after completion of the annual audit),
in cash. The Base Salary shall increase on November 4, 1997 to $350,000 per
year.
(b) Reimbursement of Expenses and Administrative Support. The
Company shall pay or reimburse Executive, upon the presentation of appropriate
documentation of such expenses, for all reasonable travel and other expenses
incurred by Executive in performing his obligations under this Agreement. The
Company further agrees to furnish Executive with office space and
administrative support, and any other assistance and accommodations as shall be
reasonably required by Executive in the performance of his duties under this
Agreement.
(c) Automobile Allowance. The Company agrees to lease for the
benefit of Executive an automobile selected by Executive and will pay directly
the lease payments with respect thereto up to $1,200 monthly and will pay or
reimburse Executive for all gasoline, insurance, parking, maintenance and
similar expenses (the "Car Arrangement") during the term of this Agreement.
(d) Stock Options and Other Compensation. In addition to the
payments provided above, Executive shall be entitled to participate during the
term of Executive's employment in the Company's benefit programs for which key
executives of the Company are or become eligible, on the same terms as other
key executives of the Company. In addition to and without limiting the
generality of the foregoing, (i) Executive is hereby granted pursuant to the
Company's Restricted Stock Plan 5,000 restricted shares of
2
<PAGE>
Common Stock of the Company at a purchase price of $0 per share, vested in full
on November 4, 1996; (ii) Executive shall be entitled to receive options to
purchase 100,000 shares of Common Stock of the Company pursuant to the
Company's Incentive Stock Option Plan, with the purchase price upon exercise to
be equal to $4.43 per share (the closing price on January 28, 1997) and with
vesting of the right to exercise such options as follows: (A) 33,334 options
may be exercised on November 4, 1997, (B) 33,333 options may be exercised on
November 4, 1998 and (C) 33,333 options may be exercised on November 4, 1999;
provided, however, that the vesting of such options shall be accelerated in the
event of a Change in Control (as defined herein), (iii) the Company shall pay
50% of the premiums, up to a maximum of $6,250 annually, relating to that
certain life insurance policy in the amount of $500,000, which policy is owned
by Executive, (iv) the Company shall provide, in addition to any such insurance
regularly provided to the Company's executives and/or employees, long-term
disability insurance which will pay at least sixty percent (60%) of Executive's
Base Salary (as such salary may be adjusted from time to time), (v) the Company
shall reimburse Executive for any costs incurred by Executive for health
insurance for him and his immediate family during the period from the date of
his employment with the Company (i.e., November 4, 1996) and the date on which
Executive and his immediate family became eligible to participate in the
Company's health plans and (vi) the Company shall reimburse Executive for his
legal fees incurred in connection with the preparation, amendment and
enforcement of this Agreement, up to a maximum of $4,000.
(e) Vacation. Executive shall be entitled to four (4) weeks paid
vacation in each calendar year.
(f) Deductions. All payments made under this Agreement shall be
subject to such deductions at the source as from time to time may be required
to be made pursuant to any law, rule, regulation or order.
4. Participation in Benefit Plans.
(a) In addition to the payments provided in Paragraphs 3 and 5
hereof, Executive shall be entitled to participate, during the term of this
Agreement, in the Company's benefit programs, including but not limited to
group hospitalization, health, dental care, death benefit, or other present or
future group employee benefit plans or
3
<PAGE>
programs of the Company for which key executives are or shall become eligible
(collectively, the "Benefit Plans"), on the same terms as other key executives
of the Company.
(b) In the event that Executive shall, by reason of illness or
mental or physical disability or incapacity, be unable to perform the duties
and responsibilities required to be performed by him on behalf of the Company,
the payments of Base Salary specified in Paragraph 3(a) hereof shall continue
for a period of one hundred eighty (180) days (the "Continuation Period"),
after the date (the "Cessation Date") on which Executive ceases to perform his
duties and responsibilities required to be performed by him on behalf of the
Company pursuant hereto. Such payments of Base Salary, and the Company's
obligation to pay Executive the Base Salary, shall terminate at the end of the
Continuation Period; provided, however, that such payments shall be resumed
upon the resumption by Executive of his activities on behalf of the Company
pursuant hereto.
5. Payments to Executive Upon Termination of Agreement.
(a) Termination. Upon the occurrence of an Event of Termination (as
hereinafter defined) during the term of this Agreement, the provisions of this
Paragraph 5 shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following:
(i) The termination by the Company of this Agreement for any
reason, other than a breach by Executive of this Agreement as
described in Paragraph 6 hereof;
(ii) Executive's termination of this Agreement, pursuant to:
A. An adverse change by the Company of the then applicable
Base Salary, Car Arrangement or Benefits payable to Executive or
the then applicable opportunity to be paid a Bonus hereunder
(other than in connection with such a change which is applicable
to all members of the Company's senior management), and any such
material change shall be deemed a continuing breach of this
Agreement.
4
<PAGE>
B. A merger (other than a merger in which the Company is
the surviving corporation) or consolidation of the Company with
or into another entity, a sale of all or substantially all of the
assets of the Company, or a liquidation or dissolution of the
Company (collectively, a "Change in Control"); or
C. Any breach in any material respect of this Agreement by
the Company.
Upon the occurrence of any event described in clauses A, B, or C
above, Executive shall have the right to elect to terminate this Agreement,
upon not less than thirty (30) days prior written notice to the Company given
within a reasonable period of time not to exceed, except in case of a
continuing breach, three (3) calendar months after the event giving rise to
Executive's right to terminate this Agreement.
(b) Continuation of Payments. Upon the occurrence of a termination
of this Agreement pursuant to an Event of Termination, the Company shall pay to
Executive the Base Salary at the rate in effect at the time such termination
occurs and an amount equal to the Bonus paid to Executive in the year
immediately preceding the year in which such termination occurs (collectively,
the "Severance Payments"). Such payments shall commence on the first day of the
month following the month in which such termination occurs and shall continue
for the longer of (a) the remaining term of this Agreement or (b) six (6)
months after such termination (the "Severance Period"). Upon the occurrence of
a termination of this Agreement pursuant to an Event of Termination, Executive
shall continue to be entitled to receive the Car Arrangement and Benefits
payable to Executive pursuant hereto, and to participate, at the expense of the
Company, in the Benefit Plans, during the Severance Period.
6. Termination for Breach by Executive.
(a) Executive shall be considered in breach of this Agreement, and
the Agreement shall be subject to termination by the Company, in the following
circumstances:
(i) Executive shall engage in willful misconduct in the
performance of his duties hereunder; or
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<PAGE>
(ii) Conviction of Executive of any illegal act made or
undertaken in carrying out his duties on behalf of the Company, any
crime involving the property of the Company or any felony; or
(iii) If Executive shall die.
(b) In the event the Company elects to terminate this Agreement
pursuant to Paragraph 6(a), the Company shall give a thirty (30) day written
notice of termination to Executive setting out, in detail, the reasons for such
termination. Upon the expiration of such thirty (30) day notice period, this
Agreement shall be wholly terminated subject to the payment to Executive of any
Compensation or other amounts owing as at the date of such termination. During
such thirty (30) day notice period, Executive will not be entitled to receive
any Compensation, to reimbursement of expenses or to administrative support as
otherwise provided in Paragraph 3 hereof.
7. Ownership.
(a) Executive hereby covenants and agrees that, during the
continuance of his employment hereunder, all rights, title and interest in and
to any intellectual or industrial property, including without limitation, all
works, ideas, processes, systems and improvements to or relating to the
Company's operations (collectively, the "Improvements"), that are created or
suggested by Executive in connection with his duties at the Company, and each
of them, together with all patents and trademarks therein, if any, shall be and
remain the exclusive property of the Company and of the Company's assignees and
successors.
(b) Executive hereby covenants and agrees to fully disclose all
such Improvements, as and when such are created and shall promptly upon the
Company's request, and without further consideration other than that provided
for herein, but at no expense to Executive, make all such applications, execute
all such papers, and do all such things as may be necessary or desirable so
that the property rights with respect to such Improvements shall vest in the
Company and so that the Company may obtain, own and exploit, for its own
benefit, letters patent and other property rights with respect to such
Improvements in all and any countries.
6
<PAGE>
8. Confidential Information.
(a) Executive shall not, either during the term of this Agreement
or at any time thereafter, disclose any confidential or proprietary information
of the Company or any of its affiliates to any person or entity other than the
employees, officers and directors of the Company, and shall not use for his own
purposes or for any purpose other than the purposes of the Company any
confidential or proprietary information of the Company or any of its affiliates
which Executive may possess. "Confidential or proprietary information" shall
mean business or customer lists, pricing information, commission arrangements,
system designs and computer programs) and other information which is not known
or generally available from sources outside the Company or its affiliates.
(b) Upon termination of this Agreement, all documents, records,
notebooks and similar repositories of confidential or proprietary information,
including all copies thereof, then in Executive's possession, whether prepared
by Executive or others, will be left with the Company.
9. Covenant Not to Compete. Executive agrees that, during the
Non-Compete Period (as hereinafter defined), Executive shall not, directly or
indirectly, without the prior written consent of the Company, participate, or
make any financial investment in, or become employed by or render consulting,
advisory or other services to or for any person, firm, corporation or other
business enterprise (a "Competitor"), which is engaged, directly or indirectly,
in the business of designing, manufacturing, importing or marketing men's,
women's or children's sportswear or intimate apparel; provided, however,
nothing contained in this Section 9 shall be construed to preclude Executive
from making any investment in the securities of any business enterprise if such
securities are traded on a national securities exchange or in the
over-the-counter market in the United States or on any foreign securities
exchange and Executive's holdings of such securities represent, at the time of
acquisition, not more than 5% of the aggregate voting power of such business
enterprise. For the purposes hereof, "Non-Compete Period" shall mean the term
of this Agreement and, in the event of any termination of this Agreement by
Executive other than following the occurrence of any event described in clauses
A, B or C in
7
<PAGE>
paragraph 5(a)(ii), the six-month period following the termination of this
Agreement by Executive.
10. Arbitration. Any disputes, differences or controversies arising
under this Agreement shall be settled and finally determined by arbitration
before a panel of three arbitrators in New York, New York, chosen and otherwise
acting in accordance with the rules of the American Arbitration Association in
force and hereafter adopted. The arbitrators shall be requested to settle such
dispute not later than 30 days following their appointment. The arbitrators
shall make their award (which shall be binding on the parties) in accordance
with and based upon all the provisions of this Agreement and judgment upon any
award rendered by the arbitrators shall be entered in any court having
jurisdiction thereof. It is understood and agreed, however, that any award
entered by the arbitrators shall be entered in any court having jurisdiction
thereof. It is understood and agreed, however, that the arbitrators are not
authorized or entitled to include as part of any award rendered by them,
special, exemplary or punitive damages or amounts in the nature of special,
exemplary or punitive damages regardless of the nature or form of the claim or
grievance that has been submitted to arbitration.
11. Effect of Prior Agreements. This Agreement sets forth the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes any prior agreement between the Company or any
predecessor of the Company and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
any kind elsewhere provided and not expressly provided in this Agreement.
12. Binding Agreement. This Agreement shall be binding upon, and inure
to the benefit of, Executive and the Company and their respective permitted
successors and assigns.
13. Modification and Waiver.
(a) Amendment of Agreement. This Agreement may not be modified or
amended except by an instrument in writing signed by the parties hereto.
(b) Waiver. No term or condition of this Agreement shall be deemed
to have been waived, nor shall there be any estoppel against the enforcement of
any
8
<PAGE>
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
14. Governing Law. This Agreement has been executed and delivered in
the State of New York, and its validity, interpretation, performance and
enforcement shall be governed by the laws of said state.
15. Notices. All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the addressee or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Executive:
Stuart S. Levy
12 Brittany Road
Montville, New Jersey 07045
If to the Company:
Donnkenny Apparel, Inc.
1411 Broadway
New York, New York 10018
Attention: Chairman
or at such other address as either party shall have informed the other in
writing in accordance herewith. Notice shall be effective when actually
received by the addressed.
9
<PAGE>
IN WITNESS WHEREOF, the Company and Executive have executed this
Agreement as of the day and year first above written.
DONNKENNY APPAREL, INC.
By: /s/ Harvey Appelle
--------------------------------
Name: Harvey Appelle
Title: Chairman
/s/ Stuart S. Levy
-----------------------------------
Stuart S. Levy
10
<PAGE>
EXHIBIT 10.39
DONNKENNY APPAREL, INC.
Revolving Credit and Term Loan Agreement
Summary Term Sheet
April 14, 1997
*For Discussion Purposes Only*
CO-BORROWERS: Donnkenny Apparel, Inc.
Beldoch Industries Corporation
Megaknits, Inc.
TYPES OF FACILITIES: 1) Term Loan
2) Revolving Credit
3) Two year notification factoring agreement covering
all new and takeover sales of the Company on a
collected funds basis.
PURPOSE: 1) Finance the acquisition of the stock of Beldoch
Industries Corp. and the purchase of certain assets
of Oak Hill Sportswear Corp.
2) General working capital purposes including the
issuance of letters of credit.
EXPIRY DATE: Two years (March 31, 1999)
CLOSING FEE: $500,000 shared amongst the bank group on a pro rata
basis payable at closing.
AGENT: The Chase Manhattan Bank (35.0762%)
COLLATERAL AGENT: The CIT Group/Commercial Services Inc. (14.8148%)
CO-LENDERS: Fleet Bank, N.A. (25.0545%)
The Bank of New York (25.0545%)
TERM LOAN
COMMITMENT AMOUNT: $25,000,000 (Current balance at 4/1/97 of $16,250,000)
AMORTIZATION: $1,250,000 payable quarterly beginning September 30,
1995.
Balloon payment of $7,500,000 due March 31, 1999.
Excess cashflow recapture (defined as 50% of annual
consolidated: net income + depreciation +
amortization + other non-cash charges - capital
expenditures - scheduled long term debt payments -
change in net
1
<PAGE>
working assets) to reduce balloon payment, payable
15 days after receipt of audited fiscal year-end
financial statements.
Any tax refunds received in excess of $2,000,000
applicable to 1996 and prior years to be applied
to reduce balloon payment.
MATURITY: March 31, 1999
INTEREST RATE: Prime + 1 1/2% p.a.
DEFAULT INTEREST: 2% above the otherwise applicable rate.
PREPAYMENT PENALTY: None
REVOLVING CREDIT
COMMITMENT AMOUNT: $85,000,000
SUBLIMIT AMOUNT: Direct Debt - $70,000,000
Letters of Credit - $35,000,000
PERMITTED STANDBY L/C: $200,000 (1.75% p.a. commission) to support insurance
premium on workmen's compensation policy.
BORROWING BASE: Advances and L/Cs (aggregate) limited to -
1) up to 85% of Eligible Accounts Receivable of the
Borrowers PLUS;
2) up to 60% of Eligible Inventory of the Borrowers
including inventory covered by letters of credit
issued for the importation of finished goods
(per agreed upon caps outlined in attached
Attachment), PLUS;
3) the Allowable Overadvance.
Eligibility of collateral to be determined by the
Collateral Agent in its sole discretion.
ALLOWABLE OVERADVANCE: See Attachment
INTRAMONTH OVERADVANCE: See Attachment
ALLOWABLE INVENTORY
ADVANCE: See Attachment
2
<PAGE>
EXPIRATION DATE: March 31, 1999
INTEREST RATE: Prime + 1 1/2% p.a.
(Borrowings in excess of the Allowable Overadvance
will bear interest at Prime + 3 1/2% p.a.).
DEFAULT INTEREST: 2% p.a. above the otherwise applicable rate.
LETTER OF CREDIT FEES: 1/8% upon issuance; 1/8% on the average monthly
balance; plus all bank charges (CIT to act as letter
of credit issuing bank).
UNUSED COMMITMENT FEES: 40 bp per annum on the unused Revolving Credit
Commitment Amount, payable quarterly in arrears.
COLLATERAL AGENT'S FEE: $6,000 per month.
FACTORING FACILITY
FACTORING COMMISSION: .45% of the gross amount of sales, plus our customary
surcharges for sales with extended terms and sales
to D.I.P. and other special risk customers.
.20% on takeover accounts receivable.
COLLECTION DAYS: One business day will be charged at a per annum rate
equal to Prime + 1.50%.
COVENANTS AND CONDITIONS
COLLATERAL: First priority lien on all accounts receivable,
machinery, equipment, trademarks, intangibles and
all inventory.
First mortgage on all real property.
Pledge of stock of Beldoch Industries Corp.
Pledge of stock of Donnkenny Apparel Inc.
GUARANTORS: Donnkenny, Inc.
Donnkenny Apparel, Inc.
Beldoch Industries Corporation
Christiansburg Garment Company Incorporated
Megaknits, Inc.
3
<PAGE>
REPRESENTATIONS AND
WARRANTIES: 1) Usual and customary representations and warranties,
including but not limited to, corporate
organization and existence, good standing, power
and authorization, employee benefit plans,
environmental compliance, non-contravention, title
to assets, adequate insurance, legal compliance and
no tax deficiencies.
EVENTS OF DEFAULT: 1) Cross default with all other indebtedness.
2) Material change of ownership and/or control.
3) Standard bankruptcy and material adverse change
clauses.
4) Usual and customary events of default, including,
but not limited to, inaccuracies of representations,
failure to make payments or comply with covenants,
final judgments over $325,000 and tax liens
aggregating $100,000 or more.
AFFIRMATIVE COVENANTS: 1) Financial Information:
a) Consolidated annual audited statements and
auditor's management letter along with
unaudited consolidating statements within
90 days.
b) Consolidated and consolidating three, six and
nine month unaudited statements, within
45 days.
c) Management prepared quarterly compliance
certificate.
d) Detailed one year monthly projection to be
provided to Banks by November 30 of each year
updated quarterly thereafter.
e) Monthly inventory certificates detailing
locations and amounts by division by normal
course vs excess classifications at each
location.
f) Weekly inventory certificates segregating
finished goods and piece goods by company by
normal course vs excess classification.
g) Eight week, weekly cashflow and collateral
projection by the last day of each month
until June 30, 1997.
h) Other standard information as may be requested
by the Banks.
2) Usual and customary affirmative covenants,
including, but not limited to, corporate existence,
maintenance of insurance and properties, payment
of taxes, notice of significant events, inspection,
maintain compliance with laws and cause any newly
formed subsidiary to guarantee and pledge its
assets.
3) Covenant pledging to liquidate excess inventory
consistent with the Company's projections.
NEGATIVE COVENANTS: 1) Limitation on additional debt and guarantees,
except Donnkenny Apparel, Inc. and Beldoch
Industries Corp. may guarantee each others'
4
<PAGE>
normal trade liabilities under guarantee
agreements acceptable to the Banks.
2) Limitation on additional liens, subject to usual
exceptions.
3) Limitation on restricted payments: The Borrowers
and all subsidiaries are prohibited from making
loans and advances to, or investments in other
entities, except for:
a) Loans and advances to Donnkenny, Inc. to pay
taxes which are currently due and payable, to
pay litigation costs and to fund payroll and
payroll related expenses and general overhead
expenses, but not in excess of $500,000) up
to an aggregate amount of $5,000,000 in any
fiscal year.
b) Loans and advances to any affiliate (other
than Donnkenny, Inc. or Beldoch Industries
Corp.) in excess of $500,000.
4) Dividends and stock redemptions are prohibited
without the prior consent of the Banks.
5) Limitation on transfer of assets: Mergers,
consolidations and acquisitions, or the sale,
transfer or disposal (except in the ordinary course
of business) of assets prohibited without the prior
consent of the Banks.
6) Other usual and customary negative covenants.
Financial tests to be tested quarterly on a
consolidated basis.
1) Pre-tax loss on a rolling four quarter basis of no
greater than $4.0MM effective 12/31/97.
2) Capital Expenditures no greater than $1,500,000 in
any fiscal year.
3) Tangible Net Worth of not less than $15,000,000 at
6/30/97 and 6/30/98 and $18,000,000 at all other
times.
CONDITIONS PRECEDENT: 1) Execution of legal documentation satisfactory to
the Banks and counsel.
2) Usual and customary conditions to funding,
including, but not limited to, legal opinion,
certified charter, by-laws and resolutions and
incumbency, perfection of collateral, payment of
fees, expenses and insurance.
MISCELLANEOUS: 1) Usual and customary, including but not limited to
capital adequacy protection, survival of
agreements, waiver and delay, waiver of jury trial,
extensions of maturity, modification of agreements,
severability, counterparts, enforcement,
indemnities, and payment of fees and expenses.
Approval for non-monetary amendments/waivers
requires consent by Lenders representing 51% of the
aggregate Commitments. Monetary amendments/waivers
require 100%.
5
<PAGE>
2) Field examinations to be performed by the
Collateral Agent on a quarterly basis. Daily fee
of $750/day/field examiner to be paid by the
Borrower.
3) Legal fees and other due diligence expenses are for
the account of the Borrower.
4) Receipt of a $50,000 deposit payable to The CIT
Group/Commercial Services, Inc. to cover out-of-
pocket expenses including legal fees and other due
diligence expenses which must be paid upon
acceptance of this term sheet. This deposit will be
refunded net of actual expenses incurred in the
event a transaction is not consummated; otherwise,
any balance after expenses will be applied to the
closing fee.
THIS TERM SHEET IS PROVIDED FOR DISCUSSION PURPOSES ONLY AND DOES NOT IMPLY
A COMMITMENT TO LEND.
6
<PAGE>
DONNKENNY APPAREL, INC.
$85,000,000 REVOLVING CREDIT FACILITY
ATTACHMENT
<TABLE>
<CAPTION>
MAXIMUM/MINIMUM END OF MONTH
(OVERADVANCE)/AVAILABILITY MAXIMUM INVENTORY
END OF MONTH* INTRAMONTH* AVAILABILITY
------------ ---------- ------------
<S> <C> <C> <C>
April 1997 (5,500) (6,500) 21,900
May (8,500) (11,500) 24,000
June (13,000) (14,500) 27,000
July (12,000) (19,000) 29,800
August (8,800) (18,000) 28,100
September (3,600) (14,800) 23,400
October 800 (9,600) 19,200
November 2,800 (5,200) 15,600
December 1,800 (3,200) 16,600
January 1998 2,600 (4,200) 17,000
February 2,200 (3,400) 16,400
March 700 (3,800) 15,800
</TABLE>
Intramonth Maximum Overadvances are calculated based on the prior month end
figure per the Company's projection plus an additional $7,000M flexibility.
End of Month Overadvance/Minimum Availability is based on the Company's
budgeted figure plus $1MM in flexibility.
Inventory availability is calculated based on inventory projections at 70% of
gross at a 60% advance rate with $500M in flexibility.
*End of Month is defined as the last business day of the month through the
fifth day of the following month.
**Intramonth is defined as all other days of the month.
All overadvance limits will be re-adjusted quarterly based on the results of
field examinations performed by the collateral agent's auditors.
7
<PAGE>
April 15, 1997
Donnkenny Apparel, Inc.
Beldoch Industries Corporation
The Guarantors Listed as Signatories Below
1411 Broadway
New York, New York 10018
Attention: Mr. Harvey Appelle
Re: Eighth Amendment to the Credit Agreement dated June 5, 1995 among
Donnkenny Apparel, Inc. and Beldoch Industries Corporation, the
Guarantors named therein, the Lenders named therein and The Chase
Manhattan Bank, as Agent
Dear Mr. Appelle:
Reference is made to the Credit Agreement dated June 5, 1995 among Donnkenny
Apparel, Inc. and Beldoch Industries Corporation (each a "Borrower"), the
Guarantors named therein, the lenders named in Schedules 2.01(a) and (b)
thereof (the "Lenders") and The Chase Manhattan Bank (formerly known as
Chemical Bank), as Agent (the "Agent") for the Lenders (as the same has been
amended, modified or supplemented from time to time to the date hereof in
accordance with its terms, the "Credit Agreement"). All capitalized terms used
but not defined herein shall have the meanings ascribed to them in the Credit
Agreement.
Please be advised that the Agent, the Lenders and The CIT Group/Commercial
Services, Inc. ("CIT") are prepared to enter into an Eighth Amendment to the
Credit Agreement (the "Proposed Amendment") on the terms and conditions
contained in the attached Summary Term Sheet, dated April 14, 1997 (which by
reference is incorporated into this commitment letter), subject to the
conditions set forth below. The Proposed Amendment would, among other things,
(i) extend the Final Maturity Date to March 31, 1999, (ii) add MegaKnits, Inc.,
a New York corporation ("MegaKnits"), as a Borrower, (iii) reflect the partial
assignment of Notes by one or more of the Lenders to CIT, (iv) reflect the
addition of CIT as Administrative Agent for the Lenders, (v) increase the Total
Revolving Credit Commitment to $85,000,000 and the direct debt sublimit to
$70,000,000 and (vi) amend certain financial covenants.
This commitment letter and Summary Term Sheet supersedes all prior proposals
for a further amendment to the Credit Agreement issued to you by the Agent
and/or CIT. The text of this letter and Summary Term Sheet is intended to
provide a brief description of the principal terms of the Proposed Amendment
as contemplated by the Agent, the Lenders and CIT. Furthermore, this commitment
is subject to: (i) no situation, event or circunstance occurring which would,
in the opinion of the Agent or CIT, materially adversely affect (a) the
ability of any Borrower (including MegaKnits which is proposed to be added as
a Borrower) or Guarantor to perform its obligations under the documents
governing and to be delivered pursuant to the Proposed Amendment and/or
(b) the assets and properties currently pledged as collateral under the
Loan Documents and contemplated to be pledged as collateral in connection
with the Proposed Amendment; (ii) the preparation, completion and execution
of legal documentation that is satisfactory to the Agent, the Lenders,
CIT and their respective counsel; and (iii) CIT's providing to the Borrowers
the factoring facility described, in part, in the Summary Term Sheet.
<PAGE>
By executing this letter, the Borrowers and the Guarantors agree to indemnify,
defend and hold harmless each of the Agent, the Lenders and CIT and their
respective officers, directors, controlling persons, agents, employees and
counsel (collectively, the "Indemnified Persons") from and against any and
all losses, claims, damages, liabilities, deficiencies, judgments or expenses
incurred by any of them arising out of or by result of any litigation,
investigation, claim or proceeding, pending or threatened, which arise out of
or are in any way based upon this letter and/or the Proposed Amendment,
including without limitation, amounts paid in settlement, court costs and the
fees and disbursements of counsel of any Indemnified Person incurred in
connection with any such litigation, investigation, claim or proceeding, but
excluding any loss, claim, damage, liability, deficiency, judgment or expense
arising from the gross negligence and willful misconduct of the Indemnified
Persons.
Based upon (i) your acceptance of this commitment letter, (ii) your payment
of the portion of the Closing Fee due upon acceptance of this commitment letter
(the "Deposit"), as detailed in the Closing Fee definition contained in the
attached Summary Term Sheet (with the balance of such Closing Fee due at
closing), (iii) your payment of the portion of CIT's out-of-pocket expenses
due upon acceptance of this commitment letter (the "Expense Deposit"), as
detailed in the Miscellaneous Section of the attached Summary Term Sheet
(with the remaining balance of such Expense Deposit, if any, after expenses
to be applied to the Closing Fee) and (iv) your acknowledgment (which shall
be evidenced by your acceptance of this commitment letter) that the entire
Deposit is non-refundable and that only that portion of the Expense Deposit
in excess of actual expenses incurred, if any, is refundable, we shall
authorize our attorneys to prepare the necessary documentation, the charges
for which agree to pay, whether or not the transaction contemplated herein
is consummated (it being understood and agreed that each of the Agent and
CIT are engaging separate outside counsel in connection with the Proposed
Amendment and your obligation to pay attorneys' fees and expenses applies
to each such outside counsel). In addition, this offer is governed by the
laws of the State of New York, shall not be assignable, and may not be
amended, waived or modified without the prior written consent of the Agent,
the Lenders and CIT and is contingent upon your acceptance by April 15, 1997
and to documentation for the proposed transaction being executed and
delivered, and a closing occurring no later than April 30, 1997.
In addition, the Borrowers, the Guarantors and the Agent, the Lenders and CIT
agree that this letter is delivered on the understanding that neither this
letter nor any of its terms or substance nor the existence of this letter
shall be disclosed by you, directly or indirectly, to any other person,
except to the Borrowers' (including MegaKnits) respective employees, agents
and advisors who are directly involved in the consideration of this matter;
provided, however, that neither this letter nor any of its terms or substance
nor the existence of this letter shall be disclosed or referred to by you or
any of the foregoing persons in any press release or public filing except
with the prior consent of each of the Agent and CIT.
The execution and delivery of this letter by the parties shall not in any way
limit the rights and remedies of the Agent and/or the Lenders under the Credit
Agreement and the other Loan Documents as currently in effect. The obligations
of the Borrowers and the Guarantors arising under this letter shall be joint
and several.
If this letter or the subject matter hereof becomes the subject of any
dispute, each of the parties waives trial by jury in connection herewith.
The Borrowers, the Guarantors and the Agent, the Lenders and CIT waive any
claims for consequential damages with respect to any such dispute.
2
<PAGE>
If the Summary of Terms and this commitment letter correctly set forth your
understanding of the terms and conditions the parties have discussed, please
indicate your acceptance by signing in the space provided below and returning
the original to the Agent, together with the Deposit in the aggregate amount
of $250,000 payable to the Agent for the ratable benefit of the Lenders and
CIT (in the percentages set forth in the Summary Term Sheet) and the Expense
Deposit in the amount of $50,000 payable to CIT.
Very truly yours,
THE CHASE MANHATTAN BANK
(formerly known as Chemical Bank)
By: /s/ Joseph F. Abruzzo
----------------------------------
Name: Joseph F. Abruzzo
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Ronald R. Pagoto
----------------------------------
Name: Ronald R. Pagoto
Title: Vice President
FLEET BANK, N.A.
By: /s/ Ralph C. Palma
----------------------------------
Name: Ralph C. Palma
Title: Senior Vice President
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: /s/ Terry S. Schwartz
----------------------------------
Name: Terry S. Schwartz
Title: Vice President
ACCEPTED AS OF THE DATE
FIRST ABOVE WRITTEN:
DONNKENNY APPAREL, INC.
By: /s/ Harvey Appelle
--------------------------
Name: Harvey Appelle
Title: President
BELDOCH INDUSTRIES CORPORATION
By: /s/ Harvey Appelle
--------------------------
Name: Harvey Appelle
Title: President
CHRISTIANSBURG GARMENT
COMPANY INCORPORATED
By: /s/ Harvey Appelle
--------------------------
Name: Harvey Appelle
Title: President
MEGAKNITS, INC.
By: /s/ Harvey Appelle
--------------------------
Name: Harvey Appelle
Title: President
DONNKENNY INC.
By: /s/ Harvey Appelle
--------------------------
Name: Harvey Appelle
Title: Chairman
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Donnkenny
Corporation's Condensed Consolidated Balance Sheet and Statement of Earnings and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000029693
<NAME> DONNKENNY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,998
<SECURITIES> 0
<RECEIVABLES> 38,990
<ALLOWANCES> 9,269
<INVENTORY> 46,293
<CURRENT-ASSETS> 95,209
<PP&E> 19,567
<DEPRECIATION> 7,793
<TOTAL-ASSETS> 139,433
<CURRENT-LIABILITIES> 39,255
<BONDS> 50,761
0
0
<COMMON> 140
<OTHER-SE> 55,138
<TOTAL-LIABILITY-AND-EQUITY> 139,433
<SALES> 255,179
<TOTAL-REVENUES> 255,179
<CGS> 57,603
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,449
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,154
<INCOME-PRETAX> (11,607)
<INCOME-TAX> (3,319)
<INCOME-CONTINUING> (8,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,233)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> 0
</TABLE>
