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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KA
(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, 1997
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
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Commission file number 0-21940
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DONNKENNY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0228891
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Broadway
New York, New York 10018
- ---------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 730-7770
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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.
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[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 19, 1998 of $2.75 per share, was approximately
$38,706,085(1). As of March 19, 1998, 14,074,940 shares of Common Stock of
Registrant were outstanding.
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(1) 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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DONNKENNY, INC.
FORM 10-KA
DECEMBER 31, 1997
INTRODUCTORY NOTE
This Amendment on Form 10-K/A amends the Registrant's Annual Report on Form
10-K, as filed by the Registrant on March 31, 1998, and is being filed to
reflect the restatement of the Registrant's consolidated financial statements
(the "Restatement"). The Restatement reflects the appropriate recognition of
net sales, cost of sales and certain expenses.
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Item 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1997
and December 31, 1996 and for each of the fiscal years in the three year period
ended December 31, 1997 have been derived from the Company's consolidated
financial statements included elsewhere in this Form 10-K/A 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
3, 1994 and December 4, 1993 and for the fiscal years then ended have been
derived from the Company's consolidated financial statements, which are not
included herein. The December 4, 1993 financial statements 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.
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<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------------------
DECEMBER 4, DECEMBER 3, DECEMBER 2, DECEMBER 31, DECEMBER 31,
1993 1994 (2) 1995 (2) 1996 1997
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales ........................ $ 144,080 $ 145,784 $ 197,960 $ 255,179 $ 245,963
Cost of sales .................... 100,321 102,584 145,460 202,580 196,633
--------- --------- --------- --------- ---------
Gross profit ..................... 43,759 43,200 52,500 52,599 49,330
Selling, general and ............. 25,298 26,005 34,676 57,603 45,867
administrative expenses
Amortization of goodwill ......... 1,317 1,145 985 1,449 1,204
and other related
acquisition costs
Restructuring Charge ........... -- -- 2,815 -- 1,723
Gain on sale of license -- (1,116) -- -- --
--------- --------- --------- --------- ---------
Operating profit (loss) .......... 17,144 17,166 14,024 (6,453) 536
Interest expense, net ............ 5,312 2,870 4,135 5,154 4,955
--------- --------- --------- --------- ---------
Income (loss) before
income taxes and ............... 11,832 14,296 9,889 (11,607) (4,419)
extraordinary charge
Income taxes (benefit) ........... 4,615 5,717 4,254 (3,319) (1,210)
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary charge ........... 7,217 8,579 5,635 (8,288) (3,209)
Extraordinary charge
related to early
extinguishment of debt,
net of taxes ................... 453 295 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................ $ 6,764 $ 8,284 $ 5,635 $ (8,288) $ (3,209)
========= ========= ========= ========= =========
BASIC INCOME (LOSS) PER COMMON
SHARE (1) :
Income (loss) before
Extraordinary item ............. $ .74 $ .64 $ .41 $ (.59) $ (.23)
Extraordinary item ............... $ (.05) (.02) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................ $ .69 $ .62 $ .41 $ (.59) $ (.23)
========= ========= ========= ========= =========
Shares used in the calculation of
basic income (loss) per share ...... 9.816 13,330 13,910 14,012 14,070
========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
Working capital .................. $ 28,814 $ 53,817 $ 80,270 $ 16,917 $ 38,354
Total assets ..................... 93,112 107,937 157,486 139,433 102,460
Long-term debt, including
current portion ................ 32,110 28,315 62,611 50,761 27,048
Stockholders' equity ............. 39,782 57,351 65,147 55,278 53,086
</TABLE>
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(1) All per share amounts and the shares used in the calculation of basic
income (loss) per share have been retroactively restated to reflect the
two-for-one stock split paid on December 18, 1995 to stockholders of
record on December 4, 1995 and the effects of SFAS 128
(2) As restated, see Note 19 of the Company's notes to Consolidated Financial
Statements.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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>
December 2, December 31, December 31,
FISCAL YEAR ENDED 1995 (1) 1996 1997
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<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 73.5 79.4 79.9
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Gross profit 26.5 20.6 20.1
Selling, general and administrative expenses 17.5 22.6 18.7
Amortization of goodwill and other related acquisition 0.5 0.6 0.5
costs
Restructuring charge 1.4 -- 0.7
----- ----- -----
Operating income/(loss) 7.1 (2.5) 0.2
Interest expense, net 2.1 2.0 2.0
----- ----- -----
Income/(loss) before income taxes 5.0 (4.5) (1.8)
Income tax provision (benefit) 2.1 (1.3) (0.5)
----- ----- -----
Net income/(loss) 2.9% (3.2%) (1.3)
===== ===== =====
</TABLE>
(1) As restated, see Note 19 of the Company's notes to Consolidated Financial
Statements.
COMPARISON OF FISCAL 1997 WITH FISCAL 1996
NET SALES
Net Sales decreased by $9.2 million or 3.6% from $255.2 million in
fiscal 1996 to $246.0 million in Fiscal 1997. The decline in net sales was
primarily the result of decreases in the Licensed Character business which was
down $35.6 million or 46.9%. The decline was due to the discontinuation of the
Lewis Frimel division and the decrease in sales of other licensed character
lines. The decrease was partially offset by increases in the Company's core
divisions - Donnkenny, Beldoch and Oak Hill which had increases of $8.1
million, $9.8 million and $8.8 million respectively. 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 84% of 1997 net
sales while the licensed character business accounted for the remaining 16%
GROSS PROFIT
Gross profit for Fiscal 1997 was $49.3 million, or 20.1% of net
sales, compared to $52.6 million, or 20.6% of net sales, for Fiscal 1996.
Significant factors that contributed to the decline in gross profit included
the sell of inventory resulting form the closing of the Lewis Frimel Division;
softness in other licensed character lines and excess supply of these products
in the market place; softness in the sweater business due to warm warmer
weather during the winter of 1997; and approximately $0.3 million, applicable
to sales returns and allowances recorded in the fourth quarter of 1997 in the
normal course of business. Additionally, in the fourth quarter of Fiscal 1997,
the Company decided to discontinue certain licensed character lines, and as a
result recorded additional markdowns of $0.5 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $57.6
million in Fiscal 1996 to $45.9 million in Fiscal 1997. As a percentage of net
sales, these costs decreased from 22.6% in Fiscal 1996 to 18.7% in Fiscal 1997.
Included in Fiscal 1997 are one-time charges in the amount of approximately
$4.1 million, the largest component of which is $3.5 million in additional
professional fees as the result of legal fees associated
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with the previously reported class action lawsuits, legal and accounting fees
associated with the restatement of prior year quarterly and annual financial
statements and consulting services related to the Company's amended credit
facility. Included in Fiscal 1996 were one-time 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
of 40.9 million and professional fees of $2.8 million associated with the class
action lawsuits, legal and accounting fees related to the special investigation
and restatements of prior year financial results.
Excluding these charges, the balance of selling, general and
administrative expenses for Fiscal 1997 was $41.8 million or 17.0% of net sales
and for Fiscal 1996, $53.4 million, or 20.9% of net sales. The $11.6 million
decline in selling, general and administrative expense is due to reductions in
all expense categories except distribution and factoring fees. Distribution
expenses increased as a result of higher temporary employee expenses in South
Carolina distribution facility which were mostly offset by savings from the
closing of the Mississippi distribution facility and lower costs at the West
Hempstead distribution facility. As a result of the amended credit facility
discussed below, the Company incurred $1.0 million in factoring fees which were
not incurred in Fiscal 1996. The reductions in other selling, general and
administrative categories included: Design and Sample expense decreases which
were primarily the result of synergies resulting from consolidating company
activities and reduced sample expense related to the discontinuation of the
licensed character division; decrease in Sales expenses was the result of
headcount and advertising reductions and lower sales commissions related to the
reduced road force; decreases in Administrative expenses resulting from
headcount reductions; Occupancy expense reductions which were primarily the
result of closing the Plainview and Mississippi distribution facilities in
Fiscal 1996.
RESTRUCTURING CHARGE
In the fourth quarter of 1997, the Company decided to discontinue
the manufacture and sale of Mickey & Co. licensed character product line under
a license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1.7 million and a charge to cost of goods sold of $0.5
million for the write-down of merchandise inventories. The restructuring charge
included payments due under agreements with the licensor; write-downs of
property, plant and equipment; costs related to lease terminations; employee
severance payments; and other incremental charges directly attributable to
discontinuing the licensed character product lines.
INCOME FROM OPERATIONS
In fiscal 1997, the Company reported income from operations of $0.5
million, versus a loss form operations of $6.5 million in Fiscal 1996.
PROVISION FOR INCOME TAXES
The Company's tax benefit in Fiscal 1997 amounts to 27.0% of
pre-tax losses, as compared to a benefit of 28.6% for Fiscal 1996. The benefit
in Fiscal 1997 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 LOSS
In Fiscal 1997 the Company reported a Net Loss of $3.2 million, or
($0.23) per share, versus a net loss of $8.3 million, or ($0.59) per share in
Fiscal 1996.
COMPARISON OF FISCAL 1996 WITH FISCAL 1995
Subsequent to the issuance of the Company's December 31, 1997
consolidated financial statements, the Company's management discovered
accounting irregularities in the financial statements for the year ended
December 2, 1995 and the transition period from December 3, 1995 to December
31, 1995. As a result, the consolidated financial statements as of and for the
year ended December 2, 1995, have been restated from the amounts previously
reported to appropriately account for the recognition of net sales, cost of
sales, and certain expenses.
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NET SALES
Net sales increased by $57.2 million, or 28.9%, from $198 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 $52.5 million, or 26.5% of net sales, for Fiscal 1995. In
the fourth quarter of Fiscal 1996, management undertook a program 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 $34.7
million in Fiscal 1995 to $57.6 million in Fiscal 1996. As a percentage of net
sales, these costs increased from 17.5% 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 of $0.9 million;
litigation expenses of $1.2 million' and professional fees and special
investigation expenses 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 $18.7
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 $14.0 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 43.0% 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.
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NET INCOME
In Fiscal 1996 the Company reported a net loss of $8.3 million, or
($0.59) diluted loss per share, as a result of the factors described above,
versus Fiscal year 1995 net income of $5.6 million, or $0.40 diluted income 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
interest and principal payments related to certain indebtedness. The Company's
borrowing requirements for working capital fluctuate throughout the year.
Capital expenditures were $0.5 million for Fiscal 1997, compared to
$1.0 million in Fiscal 1996. In Fiscal 1998 the Company may spend up to $3.5
million on capital investments in accordance with the Revolving Credit
Agreement described below. As part of the 1998 capital expense budget, the
Company has committed to spend approximately $2.1 million for upgrading
computer systems to increase efficiencies and become Year 2000 compliant.
At the end of Fiscal 1997, direct borrowings were $27.0 million,
which included a senior term loan of $5.5 million and revolving credit
borrowings of $21.5 million. Additionally, the Company has letters of credit
outstanding of $20.9 million, with unused availability of $14.1 million. At the
end of Fiscal 1996, direct borrowings and letters of credit outstanding under
the prior credit facility were $50.8 million and $19.9 million respectively.
On April 30, 1997, the Company entered into an amended credit
facility (the "Credit Facility") to, among other things, include the Company's
operating subsidiaries Donnkenny Apparel, Inc., MegaKnits, Inc. and Beldoch
Industries Corporation as borrowers. The Credit Facility consists of a Term
Loan, a Revolving Credit Agreement, and a Factoring Agreement. The purpose of
the Credit Facility is to provide for working capital needs of the Company
including, the issuance of letters of credit. The Credit Facility expires on
March 31, 1999. Under the Credit Facility, The Chase Manhattan Bank serves as
agent (and holds a 35% interest), the CIT Group/Commercial Services Inc.
("CIT") serves as collateral agent (and holds a 15% interest), and each of
Fleet Bank, N.A. and the Bank of New York are co-lenders (each holding a 25%
interest).
As of March 20,1998, the balance of the Term Loan was $5.5 million.
The interest rate is equal to the prime rate plus 1 1/2 % per annum. The
amortization schedule calls for quarterly payments of approximately $1.3
million, with a balloon payment of $0.5 million due on March 31, 1999. An
excess cash flow recapture is payable annually within 15 days after receipt of
the Company's audited fiscal year-end financial statements. In addition, any
tax refunds received in Fiscal 1998 will be applied to reduce the balloon
payment. The default interest rate, if applicable, would be equal to 2% above
the otherwise applicable rate. The Term Loan does not carry any prepayment
penalty.
The total amount available under the Revolving Credit Agreement is
$85 million subject to an asset based borrowing formula, with sublimits of $70
million for direct borrowings and $35 million for letters of credit. The
interest rate is equal to the prime rate plus 1 1/2% per annum. Borrowings in
excess of an allowable overadvance will bear interest at the prime rate plus 3
1/2%. The Revolving Credit agreement also requires the Company to pay certain
letter of credit fees and unused commitment fees. Advances and letters of
credit are limited to (i) up to 85% of eligible accounts receivable plus (ii)
up to 60% of eligible inventory, plus (iii) an allowable overadvance.
In April 1997, the Company also entered into a Factoring Agreement
with CIT. The Factoring Agreement provides for a factoring commission equal to
0.45% of the gross amount of sales, plus certain customary surcharges. An
additional fee of 0.20% was paid upon the conversion to a factored receivable
arrangement.
Collateral for the Credit Facility includes a first priority lien
on all accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel,
Inc., Beldoch Industries Corp., and Megaknits, Inc.
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The Credit Facility contains numerous financial and operational
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.
At December 31, 1997, the Company was not in compliance with the
covenant related to the maximum cumulative net loss test. On March 31, 1998,
Chase Manhattan Bank, as agent, issued a waiver for the violation of this
covenant.
Additionally, on March 31, 1998, in support of the Company's 1998
business plan, the previously discussed Credit Facility was amended to provide
for a sublimit for direct borrowings of $60 million; a letter of credit line of
$35 million; and required seasonal overadvances. Any tax refunds applicable to
1997 and prior years and proceeds from the sale of fixed assets are to be
applied to reduce the balloon payment on the Term Loan.
On November 13, 1998, the Company and the Company's operating
subsidiaries Donnkenny Apparel, Inc., Megaknits, Inc., and Beldoch Industries
Corporation, as borrowers, entered into an amended and Restated Credit Facility
(the "Credit Facility"). The Credit Facility consists of a Term Loan, a
Revolving Credit Agreement, and a Factoring Agreement. The purpose of the
Credit Facility is to provide for general working capital needs of the Company,
including the issuance of letters of credit. The Credit Facility will expire on
March 31, 2000. Under the Credit Facility, the Chase Manhattan Bank serves as
agent, The CIT Group/Commercial Services Inc. ("CIT") serves as collateral
agent, and each of Fleet Bank, N.A. and the Bank of New York is a co-lender.
On November 13, 1998, the Credit Facility was amended as follows:
the total amount available under the Revolving Credit Agreement is $75 million
subject to an asset based borrowing formula, with sublimits of $55 million for
direct borrowings, $35 million for letters of credit and certain overadvances.
The interest rate is equal to the prime rate plus 1 1/2% per annum. Outstanding
borrowings under the Revolving Credit Agreement in excess of an allowable
overadvance will bear interest at the prime rate plus 3 1/2%. The Revolving
Credit Agreement also requires the Company to pay certain letter of credit fees
and unused commitment fees. Advances and letters of credit will be limited to
(i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible
inventory, plus (iii) an allowable overadvance. Proceeds from the sales of
fixed assets and income tax refunds are to be applied to reduce the overadvance
facility.
During Fiscal 1997, the Company's operating activities generated
$20.0 million more cash than they used, principally as the result of decreases
in accounts receivable, inventories and recoverable income taxes, partially
offset by decreases in accounts payable. During Fiscal 1996, the Company's
operating activities generated $5.8 million more cash then they used,
principally as the result of decreases in accounts receivable and inventories,
increases in accounts payable partially offset by the net loss.
Cash used in Fiscal 1997 for investing activities included $0.5
million for the purchase of fixed assets and the $1.2 million contingent
earnout payment related to the acquisition of Beldoch, which was partially
offset by proceeds from the sale of fixed assets. Cash used in Fiscal 1996 for
the purchase of fixed assets was $1.0 million and included purchases of
machinery and equipment, building improvements and leasehold improvements to
the Company's South Carolina distribution facility.
Cash used in financing activities in Fiscal 1997 was 22.7 million,
which represented repayments of 12.3 million on the Term Loan, net repayments
under the Revolving Credit Agreement of $11.5 million and the repayment of the
Virginia State Loan of $0.2 million. 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 the Chase Manhattan 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.
The Company believes that cash flows from operations and amounts
available under the revolving credit agreement will be sufficient for its needs
for the foreseeable future.
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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 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 to successfully anticipate the needs
of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
Foreign Operations
The Company's foreign sourcing operations are subject to various
risks of doing business abroad, including indirect vulnerability to currency
fluctuations, 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.
Asian Operations
The Company's operations in Asia are subject to certain political
and economic risks including, but not limited to, political instability,
changing tax and trade regulations and currency devaluations and controls. The
Company's risks associated with the Company's Asian operations may be higher in
1998 than has historically been the case, due to the fact financial markets in
East and Southeast Asia have recently experienced and continue to experience
difficult conditions, including a currency crisis. As a result of recent
economic volatility, the currencies of many countries in this region have lost
value relative to the US dollar. Although the Company has experienced no
material foreign currency transaction losses since the beginning of the crisis,
its operations in the region are subject to an increased level of economic
instability. Approximately 50% of the products sold by the Company in Fiscal
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1997 were manufactured in Asia. The impact of these events on the Company's
business, and in particular its sources of supply, cannot be determined at this
time.
Factors that May Affect Future Results and Financial Condition
The Company's future operating results and financial condition are
dependent upon the Company's ability to successfully design, manufacture,
import and market apparel.
Year 2000 Issue
The Company recognizes the need for, and has begun implementation of,
a comprehensive program intended to upgrade the operating systems, hardware and
software, which should eliminate any issues involving Year 2000 compliance. The
Company's current software systems, without modification, will be adversely
affected by the inability of the systems to appropriately interpret date
information after 1999. As part of the process of improving the Company's
information systems to provide enhanced support to all operating areas, the
Company will upgrade to new financial and operating systems. Such upgrade will
provide for or eliminate any issues involving Year 2000 compliance because all
software to be implemented is designed to be Year 2000 compliant. The Company
anticipates that its cost for such upgrade will be approximately $1.9 million
for Fiscal 1998 of which $0.6 million has been incurred to date and $1.3
million will be spent in the fourth fiscal quarter. The Company anticipates
that it will complete its systems conversion in time to accommodate Year 2000
issues. If the Company fails to complete such conversion in a timely manner,
such failure will have a material adverse effect on the business, financial
condition and results of operations of the Company. The Company does not
currently have any information concerning Year 2000 compliance status of its
suppliers and customers. In the event that the Company's significant suppliers
or customers do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be adversely affected. The Company is
currently evaluating its non-information technology systems (embedded
technology) issues and is also developing its contingency plans for its
information technology systems and believes that it will complete both issues
in time to accommodate Year 2000 issues.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosure about Segments of an Enterprise and Related Information" which is
effective for periods beginning after December 15, 1997. SFAS No. 131 requires
that public companies report certain information about operating segments in
their annual financial statements and in condensed financial statements of
interim periods issued to shareholders. This statement also requires that
public companies report certain information about their products and services,
the geographic areas in which they operate, and their major customers. The
Company is currently reviewing the impact of this statement on its current
level of disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
revises employer' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. This
statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures. The Company has determined that this statement will not have a
significant impact on its financial statements or disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes standards for
the accounting and reporting for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company has determined that
this statement will not have a significant impact on its financial statements
or disclosures, as it does not engage in derivative or hedging transactions.
12
<PAGE>
Forward Looking Statements
This Form 10-K (including by not limited to the sections hereof
entitled "Business" and "Management's Discussion and Analysis") 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following item 14 of this Annual Report of
Form 10-KA
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. Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1997 and
December 31, 1996
Consolidated Statements of Income for the Fiscal Years
ended December 31, 1997, December 31, 1996 and December
2, 1995 (restated)
Consolidated Statements of Stockholders' Equity for the
Fiscal Years ended December 31, 1997, December 31, 1996
and December 2, 1995 (restated)
Consolidated Statements of Cash Flows for the Fiscal
Years ended December 31, 1997, December 31, 1996 and
December 2, 1995 (restated)
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 no reports on Form 8-K during the last quarter of
Fiscal 1997.
13
<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: FEBRUARY 5, 1999
DONNKENNY, INC.
BY:
-----------------------------------
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.
DATED: FEBRUARY 5, 1999 --------------------------------------------
HARVEY A. APPELLE, CHAIRMAN OF THE BOARD OF
DIRECTORS AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATED: FEBRUARY 5, 1999 --------------------------------------------
HERBERT L. ASH, DIRECTOR
DATED: FEBRUARY 5, 1999 --------------------------------------------
SHERIDAN C. BIGGS, DIRECTOR
DATED: FEBRUARY 5, 1999 --------------------------------------------
ROBERT H. COHEN, DIRECTOR
DATED: FEBRUARY 5, 1999 --------------------------------------------
JAMES W. CRYSTAL, DIRECTOR
DATED: FEBRUARY 5, 1999 --------------------------------------------
HARVEY HOROWITZ, DIRECTOR
DATED: FEBRUARY 5, 1999 --------------------------------------------
DANIEL H. LEVY, DIRECTOR
14
<PAGE>
DATED: FEBRUARY 5, 1999 --------------------------------------------
BEVERLY EICHEL, CHIEF FINANCIAL OFFICER,
EXECUTIVE VICE PRESIDENT-FINANCE AND
ASSISTANT SECRETARY (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
DATED: FEBRUARY 5, 1999 --------------------------------------------
ROBERT H. MARTINSEN, DIRECTOR
DATED: FEBRUARY 5, 1999 --------------------------------------------
LYNN SIEMERS-CROSS, PRESIDENT AND CHIEF
OPERATING OFFICER
15
<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, 1997 and December 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the fiscal years in the three year period ended December
31, 1997. Our audits also included the financial statements schedule listed in
the Index at item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company'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. and
Subsidiaries at December 31, 1997 and December 31, 1996, and the results of
their operations and cash flows for each of the fiscal years in the three year
period ended December 31, 1997 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 19, the accompanying consolidated financial
statements for the year ended December 2, 1995 have been restated.
Deloitte & Touche LLP
New York, New York
March 20, 1998
(March 31, 1998 as to Note 8)
(February 2, 1999 as to Notes 18 & 19)
F-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................. $ 257 $ 3,998
Accounts Receivable, net of allowances of $720
and $2,240, respectively ........................................ 24,453 29,721
Recoverable income taxes ......................................... 1,181 8,625
Inventories ...................................................... 27,248 46,793
Deferred tax assets .............................................. 5,109 4,439
Prepaid expenses and other current assets ........................ 2,146 1,633
-------- --------
Total current assets ............................................. 60,394 95,209
PROPERTY, PLANT AND EQUIPMENT, NET ............................................ 9,620 11,774
INTANGIBLE ASSETS ............................................................. 32,446 32,450
-------- --------
TOTAL ......................................................................... $102,460 $139,433
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ................................ $ 5,000 $ 50,761
Accounts payable ................................................. 9,320 19,476
Accrued expenses and other current liabilities ................... 7,720 8,055
-------- --------
Total current liabilities ........................................ 22,040 78,292
-------- --------
LONG-TERM DEBT ................................................................ 22,048
DEFERRED TAX LIABILITIES ...................................................... 5,286 5,863
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 14,075 and 14,045
shares in 1997and 1996 respectively .............................. 141 140
Additional paid-in capital ....................................... 47,360 46,344
Retained earnings ................................................ 5,585 8,794
-------- --------
Total stockholders' equity ....................................... 53,086 55,278
-------- --------
TOTAL ......................................................................... $102,460 $139,433
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 2,
1997 1996 1995
------------ ------------ ------------
(AS RESTATED, SEE NOTE 19)
<S> <C> <C> <C>
NET SALES ...................................... $ 245,963 $ 255,179 $ 197,960
COST OF SALES .................................. 196,633 202,580 145,460
------------ ------------ ------------
Gross Profit ................................ 49,330 52,599 52,500
OPERATING EXPENSES:
Selling, general and administrative expenses ... 45,867 57,603 34,676
Amortization of goodwill and other related
acquisition costs ........................... 1,204 1,449 985
Restructuring charge (loss) .................... 1,723 2,815
------------ ------------ ------------
Operating income (loss) ..................... 536 (6,453) 14,024
OTHER EXPENSE:
Interest expense (net of interest income of
$500 in 1997) .................................. 4,955 5,154 4,135
------------ ------------ ------------
(Loss) income before income taxes ........... (4,419) (11,607) 9,889
INCOME TAX (BENEFIT) PROVISION ................. (1,210) (3,319) 4,254
------------ ------------ ------------
NET (LOSS) INCOME .............................. $ (3,209) $ (8,288) $ 5,635
============ ============ ============
Basic (loss) income per common share ........... $ (0.23) $ (0.59) $ 0.41
============ ============ ============
Diluted (loss) income per common share ......... $ (0.23) $ (0.59) $ 0.40
============ ============ ============
Shares used in the calculation of basic (loss)
income per common share ........................ 14,070,000 14,012,000 13,910,000
============ ============ ============
Shares used in the calculation of diluted (loss)
income per common share ........................ 14,070,000 14,012,000 13,986,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL RETAINED TOTAL STOCKHOLDERS'
STOCK STOCK PAID-IN CAPITAL EARNINGS EQUITY
--------- --------- --------------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 3, 1994 $ -- $ 137 $ 43,585 $ 14,104 $ 57,826
(As previously reported)
Prior period adjustment (See Note 19) (475) (475)
--------- --------- ----------- ---------- ----------
BALANCE, DECEMBER 3, 1994
(As restated)........................ 137 43,585 13,629 57,351
Exercise of stock options........... 2 2,159 2,161
Net income (As restated)............ 5,635 5,635
--------- --------- ----------- ---------- ----------
BALANCE, DECEMBER 2, 1995 139 45,744 19,264 65,147
(As restated)
Net loss - December 3, 1995 to
December 31, 1995
(As restated) (Note 2)............. (2,182) (2,182)
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
Issuance of Common Stock 1 116 117
Tax benefit attributable to the
exercise of stock options........... 900 900
Net loss (3,209) (3,209)
--------- --------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 1997 $ -- $ 141 $ 47,360 $ 5,585 $ 53,086
========= ========= =========== ========== ==========
</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 31, DECEMBER 2,
1997 1996 1995
------------ ------------ ------------
(AS RESTATED,
SEE NOTE 19)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ..................................... $ (3,209) $ (8,288) $ 5,635
Adjustments to reconcile net cash
provided by (used in) operating activities:
Deferred income taxes ................................. (1,247) (2,449) 1,279
Depreciation and amortization of fixed assets ......... 1,770 1,911 1,889
Amortization of inventory step up ..................... 1,905
Amortization of intangibles and other assets .......... 1,204 1,449 985
Write down of fixed assets ............................ 260
Provision for losses on accounts receivable ........... 282 231 1,065
Changes in assets and liabilities, net of the effects
of acquisitions and disposals:
Decrease (increase) in accounts receivable ............ 4,986 876 (14,256)
Decrease (increase) in recoverable income taxes ....... 7,444 (127) (4,355)
Decrease in inventories ............................... 19,545 3,458 5,470
(Increase) decrease in prepaid expenses and
other current assets .................................. (513) 1,378 289
Decrease (increase) in accounts payable ............... (10,156) 8,116 (6,286)
(Decrease) increase in accrued expenses and
other current liabilities ............................. (335) (796) 3,689
--------- --------- ---------
Net cash provided by (used in) operating
activities ............................................ 20,031 5,759 (2,691)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets .............................. (516) (1,016) (962)
Proceeds from sale of fixed assets .................... 640
Increase in intangibles ............................... (1,200)
Acquisitions, net of cash acquired .................... (29,715)
--------- --------- ---------
Net cash used in investing activities.. (1,076) (1,016) (30,677)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt ........................... (12,253) (7,100) (13,711)
Proceeds of long-term debt ............................ 25,000
Repayments under revolving credit line ................ (11,460) (151,010) (30,500)
Borrowings under revolving credit line ................ 151,300 51,500
Proceeds from exercise of stock options ............... 600 2,161
Issuance of Common Stock .............................. 117
Tax benefit attributable to exercise of stock
options ............................................... 900
--------- --------- ---------
Net cash (used in) provided by financing
activities ............................................ (22,696) (6,210) 34,450
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH .................................... (3,741) (1,467) 1,082
CASH, AT BEGINNING OF PERIOD ....................................... 3,998 5,465 1,606
--------- --------- ---------
CASH, AT END OF PERIOD ............................................. $ 257 $ 3,998 $ 2,688
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997,
DECEMBER 31, 1996 AND DECEMBER 2, 1995
(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, specialty stores, and chain
stores.
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 2).
INVENTORIES -- Inventories are stated at the lower of cost or market
using the first-in, first-out method (FIFO) (see Note 4).
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 (see Note 5).
Estimated useful lives are as follows:
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)
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 following a change in control, and the sportswear division of
Oak Hill Sportswear Corporation ("Oak Hill") and Beldoch Industries Corporation
("Beldoch") 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 (see Note
6).
ASSESSMENT OF ASSET MANAGEMENT -- 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.
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 operations or
assets. 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.
F-6
<PAGE>
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which is an 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
(see Note 9).
STOCK SPLIT -- On November 17, 1995, the Board of Directors authorized a
two-for-one stock split that 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, 1997 and
December 31, 1996 due to their short-term maturities. Long-term debt
approximates fair value due to its variable interest rate.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosure about Segments of an Enterprise and Related Information" which is
effective for periods beginning after December 15, 1997. SFAS No. 131 requires
that public companies report certain information about operating segments in
their annual financial statements and in condensed financial statements of
interim periods issued to shareholders. This statement also requires that
public companies report certain information about their products and services,
the geographic areas in which they operate, and their major customers. The
Company is currently reviewing the impact of this statement on its current
level of disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
revises employer's disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. This
statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures. The Company has determined that this statement will not have a
significant impact on its financial statements or disclosures.
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities", which establishes standards for
the accounting and reporting for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company has determined that
this statement will not have a significant impact on its financial statements
or disclosures, as it does not engage in derivative or hedging transactions.
F-7
<PAGE>
2. 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, restated to reflect adjustments for the effects of
the accounting irregularities discussed in Note 19:
INCOME STATEMENT DATA
Net sales ................................... $ 7,547
Gross profit ................................ 1,151
Operating expenses .......................... 4,430
Operating loss .............................. (3,279)
Other expense ............................... (422)
Net loss before income tax benefit........... (3,701)
Net loss .................................... (2,182)
CASH FLOW DATA
Cash flow from operating activities.......... $ 7,827
Cash flow 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
3. ACQUISITIONS
In June 1995, the Company acquired all of the issued and outstanding
shares of 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 (see Note 8). The Company is obligated to pay the
former owners additional consideration if certain financial results are
achieved through 1998. In 1997, the Company paid $1,200 which was recorded as
goodwill, and is being 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.
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 fiscal 1995. 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 fiscal 1995, or results that may occur in the future.
1995
--------
Net sales ................................. $253,352
Operating income .......................... 9,312
Net income ................................ 772
Basic and diluted earnings per share....... 0.06
4. INVENTORIES
Inventories consist of the following at December 31, 1997 and
December 31, 1996
1997 1996
------- -------
Raw materials ........... $ 4,209 $12,081
Work in process.......... 5,584 4,808
Finished goods........... 17,455 29,904
======= =======
$27,248 $46,793
======= =======
If the first-in, first-out method of inventory valuation had been used at
December 31, 1996, rather than the last-in, first-out method for certain
divisions, inventories would have been approximately $404, higher than
reported.
F-8
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, pant, and equipment consist of the following at December 31,
1997 and December 31, 1996:
1997 1996
------- -------
Land and land improvements ...................... $ 740 $ 747
Buildings and improvements ...................... 8,476 8,691
Machinery and equipment ......................... 7,162 8,787
Furniture and fixtures .......................... 1,693 1,342
------- -------
18,071 19,567
Less accumulated depreciation and
Amortization ................................. 8,451 7,793
======= =======
$ 9,620 $11,774
======= =======
6. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1997 and
December 31, 1996:
1997 1996
------- -------
Goodwill ...................................... $33,485 $32,059
Licenses ...................................... 6,325 6,550
------- -------
39,810 38,609
Less accumulated amortization ................. 7,364 6,159
======= =======
$32,446 $32,450
======= =======
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consists of the following
at December 31, 1997 and December 31, 1996:
1997 1996
------ ------
Accrued Salaries, Benefits & Bonus .............. $2,565 $3,127
Accrued Restructuring Expenses .................. 1,503 0
Other Accrued Expenses .......................... 3,652 4,928
====== ======
Total Accrued Expenses .......................... $7,720 $8,055
====== ======
8. LONG -TERM DEBT
Long-term debt consists of the following at December 31, 1997 and
December 31, 1996
1997 1996
------- -------
Revolving Credit Borrowings (a) .............. $21,540 $33,000
Senior Term Loan ............................. 5,508 17,500
Other ........................................ -- 261
------- -------
27,048 50,761
Less current maturities ....................... 5,000 50,761
------- -------
$22,048 $-
======= =======
On April 30, 1997 the Company entered into an amended Credit Facility
(the "Credit Facility") to, among other things, include the Company's operating
subsidiaries Donnkenny Apparel, Inc., Megaknits Inc. and Beldoch Industries
Corporation, as borrowers. The Credit Facility consists of a Term Loan, a
Revolving Credit Agreement,
F-9
<PAGE>
and a Factoring Agreement. The purpose of the Credit Facility is to continue to
finance increased working capital needs of the Company following the 1995
Beldoch and Oak Hill Sportswear acquisitions and for general working capital
purposes including the issuance of letters of credit. The Credit Facility will
expire on March 31, 1999. Under the Credit Facility, the Chase Manhattan Bank
serves as agent (and holds a 35% interest), the CIT Group/Commercial Services
Inc. (CIT) serves as collateral agent (and holds a 15% interest), and each of
Fleet Bank, N.A. and the Bank of New York are co-lenders (each holding a 25%
interest).
(a) As of December 31, 1997, the borrowings under the Revolving Credit
Agreement amounted to $21.5 million. The commitment under the Revolving
Credit Agreement is $85 million subject to an asset based borrowing
formula, with sublimits of $70 million for direct borrowings and $35
million for letters of credit. The interest rate (8.5% at December
31,1997) is equal to the prime rate (8.5% at December 31, 1997) plus
11/2% per annum. Outstanding borrowings under the Revolving Credit
Agreement in excess of an allowable overadvance bear interest at the
prime rate plus 31/2%. The Revolving Credit Agreement also requires the
Company to pay certain letter of credit fees and unused commitment fees.
Advances and letters of credit are limited to (i) up to 85% of eligible
accounts receivable plus (ii) up to 60% of eligible inventory, plus (iii)
an allowable overadvance.
(b) As of December 31, 1997, the balance of the Term Loan was $5.5 million.
The interest rate is equal to the prime rate (8.5% at December 31, 1997)
plus 1 1/2% per annum and the amortization schedule calls for quarterly
payments of $1.3 million. The balloon payment, which is due on March 31,
1999 has been reduced from $7.5 million to $0.5 million primarily from
the proceeds of tax refunds received by the Company in 1997. An excess
cash flow recapture is payable annually within 15 days after receipt of
the Company's audited fiscal year-end financial statements. The default
interest rate, if applicable, is equal to 2% above the otherwise
applicable rate. The Term Loan does not carry any prepayment penalty.
In April, 1997, the Company also entered into a Factoring Agreement with
CIT. The Factoring Agreement provides for a factoring commission equal to 0.45%
of the gross amount of sales, plus certain customary surcharges. An additional
fee of 0.20% was paid upon the conversion to a factored receivable arrangement.
Collateral for the Credit Facility includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel,
Inc., Beldoch Industries Corporation, and Megaknits, Inc.
The Credit Facility contains numerous financial and operational
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.
At December 31, 1997, the Company was not in compliance with the covenant
related to the maximum cumulative net loss test. On March 31, 1998, the Chase
Manhattan Bank, as agent, issued a waiver for the violation of this covenant.
Additionally, on March 31, 1998, the Credit Facility was amended to
provide for a sublimit for direct borrowings of $60 million; a letter of credit
line of $35 million; and required seasonal overadvances as requested by the
Company. Any tax refunds received applicable to 1997 and prior years and
proceeds from the sale of fixed assets are to be applied to reduce the balloon
payment on the Term Loan.
9. INCOME TAXES
Income tax expense (benefit) for 1997, 1996 and 1995 is comprised of the
following:
1997 1996 1995
------- ------- -------
Current:
Federal .................... $(1,537) $(1,462) $ 2,452
State and local ............ 35 592 523
Deferred ....................... 292 (2,449) 1,279
------- ------- -------
$(1,210) $(3,319) $ 4,254
======= ======= =======
F-10
<PAGE>
A reconciliation of the statutory Federal tax rate and the effective rate
follows:
1997 1996 1995
---- ---- ----
Federal statutory tax rate .................... (34)% (35)% 35%
State and local taxes, net of Federal
income tax benefit ........................ (3) (2) 4
Losses providing no state and local
tax benefit ............................... 4 4 --
Amortization of nondeductible goodwill ........ 5 3 3
Other ......................................... 1 1 1
=== === ===
(27)% (29)% 43%
=== === ===
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, DECEMBER 31,
1997 1996
------- -------
Deferred tax assets:
Accounts receivable allowances ............. $ 470 $ 662
Inventory valuation ........................ 1,991 2,356
Accrued expenses ........................... 1,546 584
Restructuring charges ...................... -- 448
State operating loss carryforwards ......... 614 634
Federal operating loss carryforwards ....... 822
Other ...................................... 131 182
------- -------
Total gross deferred tax assets ........ 5,574 4,866
Less valuation allowance ............... (465) (427)
------- -------
Total net deferred tax assets .......... 5,109 4,439
------- -------
Deferred tax liabilities:
Property, plant and equipment .............. (1,958) (2,294)
Intangibles ................................ (3,328) (3,569)
Total gross deferred tax liabilities.... (5,286) (5,863)
------- -------
Net deferred tax liability ..................... $ (177) $(1,424)
======= =======
As of December 31, 1997 and December 31, 1996, the Company had deferred
tax assets attributable to accounts receivable allowances, inventory valuation
reserves, accrued expenses, and other items. The Company considers these
deferred tax assets to be fully realizable at the Federal tax level based upon
the Company's anticipated future earnings and because many of these items are
expected to reverse within the next twelve months. As of December 31, 1997 and
December 31, 1996, the Company recorded a valuation allowance for a portion of
its state net operating loss carryforwards.
As of December 31, 1997, the following Federal and State net operating
loss carryforwards were available:
Expiration Dates Net Operating Losses
---------------- --------------------
Federal State
------- -----
2003 $1,676 $ --
2011 -- 6,070
2012 742 5,550
During the fourth quarter of the fiscal year ended December 31, 1997, the
Company recorded interest income of $500 related to prior year carry-back
claims.
F-11
<PAGE>
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 filed a
consolidated amended complaint. The Company is not presently in a
position to determine the ultimate outcome of these legal
proceedings or their impact on the 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,
which became a formal investigation in the latter part of 1996.
b. In connection with contingent liabilities arising from the alleged
inaccuracies in the Company's reporting of revenues and expenses
for certain reporting periods, the Company has agreed to deposit
$5,000 in an escrow account with the Company's insurance carrier
over a three year period to help defray claims, if any.
c. Rental expense for operating leases for the fiscal years ended
December 31, 1997, December 31, 1996 and December 2, 1995
approximated $4,505, $5,207 and $2,996, respectively. Minimum
future rental payments as of December 31, 1997 for operating leases
with initial noncancelable lease terms in excess of one year, are
as follows:
Year Ending December 31 Amount
1998.................................... $ 3,683
1999.................................... 3,309
2000.................................... 2,445
2001.................................... 1,998
2001.................................... 1,851
Thereafter.............................. 8,640
-------
$21,926
=======
d. At December 31, 1997 the Company was contingently liable on
outstanding letters of credit issued amounting to $ 20,917.
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. The Company did not
make contributions to the Plan in 1997, 1996 and 1995, except for the payment
of administrative costs.
12. EARNINGS PER SHARE
Basic EPS excludes potential dilution and is computed by dividing net
income or loss attributable to common stockholders by the weighted
average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or
other contracts to issue common stock (convertible preferred stock,
warrants to purchase common stock and common stock options using the
treasury stock method) were exercised or converted into common stock.
Potentially issuable common shares in the diluted EPS computation are
excluded in net loss periods, as their effect would be antidilutive.
F-12
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share, for the years ended December 31, 1997, December 31, 1996
and December 2, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Number of shares on which basic earnings per share is calculated:
Average outstanding during the period 14,070 14,012 13,910
Add-incremental shares under stock compensation plans 0 0 76
------- ------- ------
Number of shares on which diluted earnings per share is calculated 14,070 14,012 13,986
======= ======= ======
Net (loss) income $(3,209) $(8,288) $5,635
======= ======= ======
Basic (loss) income per share $(0.23) $(0.59) $0.41
======= ======= ======
Diluted (loss) income per share $(0.23) $(0.59) $0.40
======= ======= ======
</TABLE>
Stock options to purchase 311,500 shares in the year ended December 2,
1995 were outstanding, but not included in the computation of diluted
earnings per share because the options' exercise price was greater
than the average market price of the common shares, and therefore, the
effect would be antidilutive
13. SUPPLEMENTAL CASH FLOW INFORMATION
a. Cash paid for interest and income taxes was $5,692 and $0,
respectively, in 1997, $4,960 and $2,990, respectively, in 1996 and
$3,993 and $7,409, respectively, in 1995.
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.
14. STOCK OPTIONS
The Company has a stock award and incentive program that permits the
issuance of 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.
Information regarding the Company's stock option plan is summarized
below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- --------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year .................. 658,800 $ 10.51 543,600 $ 8.26 727,000 $ 7.55
Granted .......................... 1,300,500 3.73 216,350 18.15 198,000 8.14
Exercise ......................... 0 0 (76,100) 7.89 (323,200) 6.69
Canceled ......................... (298,650) 9.26 (25,050) 12.80 (58,200) 8.03
---------- ---------- ---------- --------- ---------- -----------
Outstanding at end of year........ 1,660,650 5.42 658,800 11.38 543,600 8.26
========== ========== ==========
Exercisable at end of year........ 234,800 268,100 130,000
========== ========== ==========
Available for grant at year end... 240,050 1,341,200 1,456,400
========== ========== ==========
</TABLE>
F-13
<PAGE>
The options outstanding at December 31, 1997 range in price as follows:
# OF OPTIONS EXERCISE PRICE
-------------- -------------------
402,900 $1.8064 - 3.6125
--------------
965,000 $3.6126 -5.4188
--------------
81,000 $7.2251 - 9.0313
--------------
21,200 $9.0313 - 10.8375
--------------
55,000 $10.8376 - 12.6438
--------------
135,550 $16.2564 - 18.0864
==============
1,660,650
==============
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, 1997, December 31, 1996 and December
2, 1995 would have been reduced to the pro forma amounts indicated below:
1997 1996 1995
---------------------------
Net (loss) income:
As reported ..................... $(3,209) $(8,288) $5,635
======== ======== ======
Pro forma........................ $(3,834) (8,414) $5,573
======== ======== ======
Basic net (loss) income per share:
As reported ..................... $ (0.23) $ (0.59) $ 0.41
======== ======== ======
Pro forma........................ $ (0.27) (0.60) $ 0.40
======== ======== ======
The weighted average Black - Scholes value of the options granted during
1997, 1996 and 1995 were $2.37, $10.49 and $4.29 respectively. The following
weighted-average assumptions were used in the Black - Scholes option-pricing
model for grants in 1997, 1996 and 1995 respectively: dividend yield of 0% for
all periods, volatility of 55%, 47% and 36%, risk-free interest rate of 6.51%,
6.90% and 6.41% and an expected life of 7 years.
15. RESTRICTED STOCK AND WARRANTS
Restricted Stock
In 1996, the Company adopted a plan to issue up to 1,000,000 shares of
restricted stock to employees of the Company. During 1997, 305,000 shares were
granted to employees of the Company at no cost to the employees. Of the total
number of restricted shares granted, 5,000 shares vested and were issued upon
the date of grant at the fair market value of $2.94 per share. The remaining
300,000 restricted shares were granted at a per share price of $2.94 and vest
as follows: 60,000 shares on March 31, 1999, and 240,000 shares on March 31,
2000. Compensation cost recorded in 1997 was $233,000, which represents the
amortization of the value of the restricted stock award at the date of grant
over the vesting period.
F-14
<PAGE>
Warrants
On January 14, 1997, the Company issued warrants to purchase 75,000
shares of Common Stock at $5.00 per share to the principal of a company to
rescind an acquisition transaction. The warrants are immediately exercisable
and will expire July 23, 2004.
16. RESTRUCTURING CHARGE
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of Mickey & Co. licensed character product line under a
license agreement with Disney Enterprises, Inc. and recorded a pre-tax
restructuring charge of $1,723 and a charge to cost of goods sold of $548 for
the write down of merchandise inventories. The restructuring charge included:
payments due under agreements with the licensor; write-downs of property, plant
and equipment; costs related to lease terminations; employee severance
payments; and other incremental charges which were primarily attributable to
discontinuing the licensed character product lines.
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 restructuring provision includes estimated costs of asset
write-downs, lease terminations and other charges.
17. 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
15%, 19% and 15% of the Company's sales in Fiscal 1997, 1996 and 1995,
respectively. No other customers accounted for more than eight percent of the
Company's sales in Fiscal 1997, 1996 and 1995, and no account receivable from
any customer exceeded $4,408 at December 31, 1997. 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.
18. SUBSEQUENT EVENTS
A. LONG TERM DEBT
On November 13, 1998, the Company and the Company's operating
subsidiaries, Donnkenny Apparel, Inc., Megaknits, Inc. and Beldoch Industries
Corporation, entered into an Amended and Restated Credit Facility (the "Credit
Facility") to, among other things, provide for general working capital needs of
the Company including letters of credit. The Credit Facility was amended as
follows: the total amount available under the Revolving Credit Agreement is $75
million subject to an asset based borrowing formula, with sublimits of $55
million for direct borrowings, $35 million for letters of credit and certain
overadvances. The interest rate is equal to the prime rate plus 1 1/2% per
annum. Outstanding borrowings under the Revolving Credit agreement in excess of
an allowable overadvance will bear interest at the prime rate plus 3 1/2 %. The
Revolving Credit Agreement also requires the Company to pay certain letters of
credit fees and unused commitment fees. Advances and letters of credit will be
limited to (i) up to 85% of eligible accounts receivable plus (ii) up to 60% of
eligible inventory,, plus (iii) an allowable overadvance. Proceeds from the
sales of fixed assets and income tax refunds are to be applied to reduce the
overadvance facility. The Credit Facility will expire on March 31, 2000.
B. SHAREHOLDERS RIGHTS PLAN
On April 2, 1998, the Company's board of directors authorized a
stockholder rights plan. Under the terms of the plan, stockholders of record at
the close of business on April 13, 1998, received a dividend distribution of
one preferred stock purchase right for each outstanding share of the Company's
common stock held. The rights will become exercisable only in the event, with
certain exceptions, an acquiring party accumulates fifteen percent or more of
the Company's voting stock, or if a party announces an offer to acquire fifteen
percent or more. The rights will expire on April 1, 2008.
F-15
<PAGE>
Each right will entitle stockholders to buy one one-hundreth of a
share of a new series of preferred stock at an exercisable price of $14.00. In
addition, upon the occurrence of certain events, holders of the rights will be
entitled to purchase either the Company's stock or shares in an "acquiring
entity" at half of market-value. Further, at any time after a person or group
acquires fifteen percent or more (but less than fifty percent) of the Company's
outstanding voting stock, the Board of Directors may, at its option, exchange
part or all of the rights (other than rights held by the acquiring person or
group, which will become void) for shares of the Company's common stock on a
one-for-one basis. The Company will be entitled to redeem the rights at $0.01
per right at any time until the tenth day following the acquisition of a
fifteen percent position in its voting stock.
C. LEGAL PROCEEDINGS
On September 29, 1998, the staff of the Securities and Exchange
Commission (the "Staff") notified Donnkenny's counsel that the Staff
would be recommending to the Securities and Exchange Commission (the
"SEC") that it commence an action against the Company for alleged
violations of Section 17(a) of the Securities Act of 1933 and Sections
10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities and
Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13. As of
February 2, 1999, the Company negotiated a resolution of these charges
and, without admitting or denying the charges, and without any
monetary penalty being assessed against the Company, has consented to
the issuance of an administrative cease-and-desist order.
19. RESTATEMENT
Subsequent to the issuance of the Company's December 31, 1997
consolidated financial statements, the Company's management discovered
accounting irregularities in the financial statements for the years ended
December 2, 1995 and December 3, 1994 and the Transition Period (see Note 2).
As a result, the consolidated financial statements for the years ended December
2, 1995 and December 3, 1994 and the Transition Period have been restated from
the amounts previously reported to appropriately account for the recognition of
net sales, cost of sales, and certain expenses.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
YEAR ENDED TRANSITION PERIOD ENDED
STATEMENT OF OPERATIONS DECEMBER 2, 1995 DECEMBER 31, 1995
- ----------------------- ---------------- -----------------
(As (As (As Previously (As
Previously Restated) Reported) Restated)
Reported)
<S> <C> <C> <C> <C>
Net Sales $193,306 $197,960 $6,838 $7,547
Gross Profit 51,178 52,500 915 1,151
Operating income (loss) 13,378 14,024 (3,424) (3,279)
Income (loss) before extraordinary item 5,247 5,635 (3,846) (3,701)
Net income (loss) 5,247 5,635 (2,269) (2,182)
Per common share:
Basic income per common share $0.38 $0.41 Not Not
Meaningful Meaningful
Not Not
Diluted income per common share $0.38 $0.40 Meaningful Meaningful
DECEMBER 2, 1995
----------------
(As (Restated)
Previously
Reported)
BALANCE SHEET
Current Assets $110,981 $110,803
Total Assets 157,664 157,486
Total Liabilities 92,430 92,339
Stockholders Equity 65,234 65,147
</TABLE>
A prior period adjustment of $475,000 has been reflected in Retained Earnings
at December 3, 1994.
F-16
<PAGE>
DONNKENNY, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II Valuation and Qualifying Accounts............
<PAGE>
Schedule II
DONNKENNY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Fiscal Years ended
December 31, 1997, December 31, 1996 and December 2, 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT END OF
BEGINNING COSTS AND PERIOD
OF PERIOD EXPENSES
---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Reserve for bad debts....... $ 986,000 (175,000) 282,000 $ 511,000
Reserve for discounts....... 1,272,000 3,872,000 4,935,000 209,000
---------- ----------
$2,240,000 $ 720,000
========== ==========
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
========== ==========
</TABLE>
