<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21940
DONNKENNY, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0228891
- ------------------------------- -----------------------------------
(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)
Registrant's telephone number, including area code (212) 790-3900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.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. __
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 10, 2000 of $0.97 per share, was approximately
$13,784,867*. As of March 10, 2000, 14,229,540, shares of Common Stock of
Registrant were outstanding.
* 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 1
ITEM 1. BUSINESS
Donnkenny, Inc. (together with its subsidiaries, the "Registrant" or the
"Company") was incorporated in Delaware in 1978 and is a holding company with
four subsidiaries. Donnkenny Apparel, Inc. ("Donnkenny Apparel") and Beldoch
Industries Corporation ("Beldoch") are the operating subsidiaries of the
Company. The Company designs, manufactures, imports and markets a broad line of
moderately priced women's sportswear labels, all of which are engaged in the
same line of business.
PRODUCTS
The Company designs, manufactures, imports, and markets broad lines of
moderately priced women's sportswear. The Company's major labels include Casey
& Max(R), Donnkenny(R), Pierre Cardin(R)and Victoria Jones(R).
Victoria Jones
The Victoria Jones label represents moderately-priced womens' knit and
sweater products which are sold to department stores, specialty stores and
chains including May Company, Kohl's, Dillard's, Saks, Inc., Stage Stores,
Catherine's, Goody's, Sam's Club, J.C. Penney and Sears. Its products are
marketed for missy, large sizes and petites. Approximately 81% of these
products are imported, predominately from Hong Kong, China and India. In
addition, it sells exclusive private label products to such customers as QVC,
Dillard's and Mervyn's.
Casey & Max
Casey & Max manufactures and imports novelty woven tops and sportswear.
The Casey & Max line consists of moderately-priced products sold to department
stores, specialty stores and chains including Kohl's, Dillard's, Federated, May
Company, Saks, Inc., Stage Stores, Catherine's, Goody's, Sam's Club, J.C.
Penney and Sears. The products are marketed for missy, large sizes and petites.
Approximately 98% of these products are imported, predominately from Hong Kong,
China and India. In addition, it sells exclusive private label products to such
customers as QVC , Dillard's and Mervyn's.
Donnkenny
Donnkenny manufactures and imports moderately-priced women's career and
casual pants for missy, petites and large sizes. Its major customers include
Stage Stores, Saks, Inc., Sterns, Bealls, J.C. Penney and Sears. Donnkenny has
been an established brand name for over 60 years. Approximately 50% of
Donnkenny products are manufactured domestically. In addition, it also sells
exclusive private label products to such customers as J.C. Penney.
Pierre Cardin
Pierre Cardin produces women's knitwear pursuant to a license. The Pierre
Cardin product is sold to knitwear departments of department stores and
specialty stores. Its major customers include Federated, Belk, Sam's Club,
Saks, Inc., and the Chadwick's Catalog. Approximately 76% of these products are
imported, predominately from Hong Kong, China and India. In addition, it also
sells exclusive private label products to such customers as Saks, Inc. and the
Bon Ton.
MANUFACTURING AND IMPORTING
Approximately 21% of the Company's products sold in the year ended
December 31, 1999 ("Fiscal 1999") were manufactured in the United States, as
compared with 29% in the year ended December 31, 1998 ("Fiscal 1998"). In
Fiscal 1999, the Company's domestically produced products were manufactured at
the Company's production facilities in Virginia and by several outside
contractors.
The remaining 79% of the Company's products sold in Fiscal 1999 were
produced abroad and imported into the United States, principally from Hong
Kong, China, India, Guatemala, Turkey, Bangladesh, the Dominican Republic, and
the Philippines. The percentage of the Company's products which are
manufactured in the United States is expected to decrease further during the
Company's year ending December 31, 2000 ("Fiscal 2000").
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. One foreign contractor accounted for 12% of the Company's
products, but no other domestic or foreign contractor manufactured more than
10% of the Company's products in Fiscal 1999.
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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 four 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 relationships 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 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.
The portion of the Company's products which it currently imports from Asia
is further 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 impact, if any, of these regional
events on the Company's business, and in particular its sources of supply,
cannot be determined at this time. Approximately 70% of the products sold by
the Company in Fiscal 1999 were manufactured in Asia.
CUSTOMERS
In Fiscal 1999, the Company shipped orders to approximately 9,200 stores
in the United States. This customer base represents approximately 1,300
accounts. Of the Company's net sales for Fiscal 1999, department stores
accounted for approximately 62%, wholesale clubs for approximately 18%, mass
merchants for approximately 6%, chain stores for approximately 5%, catalog
customers for approximately 3%, specialty retailers for approximately 3%, and
other customers for approximately 3%.
The Company markets its products to major department stores, including J.
C. Penney, Dillard's, May Company, Federated, Stage Stores, Saks, Inc., Sears,
as well as wholesale clubs including Sam's and mass merchants including K-Mart.
The Company also sells exclusive private label products to catalog specialty
retailers and suppliers. In addition, the Company manufactures products
exclusively for J.C. Penney private label.
In Fiscal 1999, sales to Wal-Mart accounted for 16% and sales to J.C.
Penney accounted for 11% of the Company's net sales. The loss of, or
significantly decreased sales to, these customers could have a material adverse
effect on the Company's consolidated financial condition and results of
operations.
The Company's Electronic Data Interchange computer system ("EDI") connects
the Company to approximately 39 of its large customers and, in Fiscal 1999, was
used to place 55% of the Company's order dollars. The Company is also linked by
EDI to several of its major fabric suppliers, which allows the Company to
review purchase orders for fabric on a weekly basis.
SALES AND MARKETING
At March 10, 2000, the Company had a 12 person sales force, of whom 8 were
Company employees and 4 were independent commissioned sales representatives.
These sales representatives are located in 3 cities and provide nationwide
coverage to retailers ranging from individual specialty shops to national chain
stores and catalogs. The Company's principal showrooms are in New York City.
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 domestic
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 domestic 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.
3
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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: Beldoch Popper (R), Casey & Max (R), Donnkenny
(R), Victoria Jones (R). 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(R) trademark, including sweaters, pants, skirts, knitwear, jeans,
swimwear and activewear. Such license is automatically continued from year to
year at the Company's option provided net sales equal specified minimums. The
Company's sales during Fiscal 1999 surpassed the minimum requirements of this
license, and the Company intends to renew this license for an additional one
year period.
BACKLOG
At March 25, 2000, the Company had unfilled, confirmed customer orders of
approximately $48.9 million, compared to approximately $50.7 million of such
orders at March 27, 1999, 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 10, 2000, the Company had 545 full-time employees, of whom 133
were salaried and 412 were paid on an hourly basis. The Company had 4 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.
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's production requirements continued to shift from domestically
owned or leased facilities to foreign sourced suppliers. The following table
indicates the facilities owned or leased at December 31, 1999.
As of March 10, 2000, the Company operated five facilities in Virginia,
one in Summerville, South Carolina, one in New York State and one in Hong Kong.
4
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<TABLE>
<CAPTION>
Approximate Square Owned or
Location Footage Function Leased
- ------------------------- --------------------- ------------------------------------------ ------------
<S> <C> <C> <C>
Floyd, Virginia............................ 79,600 Fabric warehouse, sewing, cutting Owned
Independence (Grayson), Virginia........... 70,350 Sewing, finishing Owned
Independence (Kendon), Virginia............ 37,550 Company leasing to third party Owned
Rural Retreat, Virginia.................... 61,230 Storage Owned
Wytheville, Virginia....................... 161,800 Distribution, administration Owned
Summerville, South Carolina(1)............. 200,000 Distribution center Leased
New York, New York(2)...................... 47,050 Offices and principal showrooms Leased
Hong Kong (Comet Building) (3)............. 2,200 Administration, sourcing, quality control Leased
-------
TOTAL.................................. 659,780
=======
</TABLE>
- ---------------------
1) This facility is leased, with annual rental payments totaling $463,500,
and is subject to a 3% annual rental escalation, until March 19, 2006, at
which time the lease expires.
2) Annual rental payments for the New York office/showroom space are
approximately $2,000,000 in the aggregate. The Company sublet
approximately 4,000 square feet in 1999 (sublease expired February 2000),
offsetting the rental payments by approximately $145,000. The leases for
the New York office/showrooms expire in 2006 and 2008.
3) Lease expires in 2002.
Management believes that its current facilities are sufficient to meet its
needs for the foreseeable future. On March 15, 2000 the Company announced that
it would be closing its domestic manufacturing facilities located in Grayson
and Floyd Virginia. The closings are scheduled to take place in May 2000.
ITEM 3. LEGAL PROCEEDINGS
Commencing November 1996, nine class action complaints were filed against
the Company in the United States District Court for the Southern District of
New York. Among other things, the complaints alleged violation of the federal
securities laws. By order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and entities who purchased
publicly traded securities or sold put options of the Company between February
14, 1995 and November 1996.
On October 7, 1999, the Company entered into a stipulation of settlement
(the "Settlement") with the class action plaintiffs. In consideration for the
discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million is the Company's share, and the balance is
payable by the Company's insurers; issue 3 million shares of the Company's
common stock, and to pursue litigation against two of the Company's insurers to
recover under its excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all appeals and
reviews. A settlement hearing on the proposed settlement was held on March 31,
2000 and the court orally approved the settlement. A written order should be
signed in due course. In 1999, the Company recorded a charge of $5.9 million,
which represented the cost of the Settlement. The Company had funded its
required cash contribution to the settlement as of December 31, 1999 except for
a) the sum of $0.6 million, which the Company paid during the quarter ended
March, 31, 2000; and b) the cost of the litigation with two of the Company's
insurers which are not expected to be material.
On April 27, 1998, an action was commenced against the Company in the
United States District Court for the Western District of Virginia by Wanda
King, a former employee of the Company. In her complaint, the Plaintiff claimed
that she was constructively discharged by reason of the fact that she resigned
from her position rather than follow alleged improper and illegal instructions
from her supervisors and superiors. The Company has denied the allegations
contained in the Complaint. On July 26, 1999, the District Court dismissed the
Complaint on the grounds that it failed to plead a legally recognizable case
against the Company. On August 30, 1999, the Plaintiff filed an amended
Complaint alleging additional actions on part of the Company and former
employees and seeking damages against the Company in excess of $8.0 million. On
February 1, 2000, the District Court ruled that the allegations in the amended
Complaint, if true, state claims against the Company. The Company has
interposed an answer to the Complaint denying the material allegations.
On October 7, 1999, NASDAQ notified the Company that it would delist the
Company's Common Stock from the NASDAQ National Market. NASDAQ sought the
delisting because the bid price for the Common Stock had been below $1.00.
During the quarter ended December 31, 1999, the high and low bid prices ranged
from approximately $1.25 per share to $0.53 per share. The
5
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Company appealed this decision before a NASDAQ Listing Qualifications Panel. An
oral hearing was held on February 10, 2000 before the NASDAQ Listing
Qualifications Panel. At the hearing, the Company suggested that the Company
would effect a reverse split of its outstanding shares of Common Stock to see
if the bid price would rise above the $1.00 minimum bid price required for
continued listing on the NASDAQ National Market. The Company's management
believes, but cannot assure, that by reverse splitting the outstanding shares
of Common Stock on a one-for-four basis, the bid price for the Common Stock
will exceed $1.00 per share. By decision dated February 22, 2000, the NASDAQ
Listing Qualifications Panel decided to allow the Company to continue to be
listed on the NASDAQ National Market provided that on or before April 21, 2000,
the Company evidences a closing price of at least $1.00 per share and
immediately thereafter, the Company must evidence a closing bid price of at
least $1.00 per share for a minimum of ten consecutive trading days. The NASDAQ
Listing Qualifications Panel reserved the right to review its decision at any
time upon the happening of a material change in the Company's financial or
operational character.
The Company is also party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse effect on
the financial condition, results of operations, liquidity or business of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's annual meeting of Shareholders was held on November 11,
1999. The results of the vote at the meeting for the election of directors were
as follows:
NAME OF NOMINEE VOTES FOR VOTES WITHHELD
Harvey A. Appelle 13,425,130 236,972
James W. Crystal 13,433,880 228,222
Harvey Horowitz 13,433,780 228,322
Lynn Siemers-Cross 13,426,880 235,222
Herbert L. Ash 13,434,180 227,922
Sheridan C. Biggs 13,434,180 227,922
Daniel H. Levy 13,434,180 227,922
All Nominees were elected. Herbert L. Ash and James W. Crystal resigned
their positions as directors for personal reasons in December 1999 and February
2000, respectively.
At the Annual Meeting there was a proposal to ratify the appointment of
Deloitte & Touche LLP as the independent auditors of the Company for the fiscal
year ending on December 31, 1999. The result of the vote taken at the meeting
for the ratification of the appointment of Deloitte & Touche LLP, which was
approved, was as follows:
FOR AGAINST ABSTAIN
13,547,762 75,550 38,790
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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.
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
Company's two most recent fiscal years, plus the interim period through March
10, 2000.
PERIOD HIGH LOW
Fiscal 1998
First Quarter...................... $ 3 5/32 2 1/2
Second Quarter..................... 4 1/2 2 3/4
Third Quarter...................... 3 13/32 1 1/4
Fourth Quarter..................... 2 1/2 15/16
Fiscal 1999
First Quarter...................... $ 2 1/16 31/32
Second Quarter..................... 1 11/16 27/64
Third Quarter...................... 1 5/8 1/2
Fourth Quarter..................... 1 1/4 17/32
Fiscal 2000
Ten Weeks Ended March 10, 2000.... $ 1 1/16 21/32
On March 10, 2000, the closing price for a share of Common Stock, as
reported by the NASDAQ National Market, was $0.97 per share.
The number of holders of record for Registrant's Common Stock as of March
10, 2000 was 73.
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.
7
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1999 and 1998
and for each of the years in the three year period ended December 31, 1999 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 31, 1997, December 31, 1996
and December 2, 1995 and for the fiscal years December 31, 1996 and December 2,
1995 have been derived from the Company's consolidated financial statements,
which are not included herein. 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.
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------------------
December 2, December 31, December 31, December 31, December 31,
1995 1996 1997 1998 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
Net sales.......................... $197,960 $255,179 $245,963 $197,861 $173,749
Cost of sales...................... 145,460 202,580 196,633 157,069 138,816
-------- -------- -------- -------- --------
Gross profit....................... 52,500 52,599 49,330 40,792 34,933
Selling, general and
administrative expenses........... 34,508 57,370 45,361 38,221 33,002
Amortization of goodwill and
other related acquisition costs... 985 1,449 1,204 1,321 1,390
Provision for settlement of
litigation............ -- -- -- -- 5,875
Restructuring Charge.............. 2,815 -- 1,723 1,180 --
-------- -------- -------- -------- --------
Operating income (loss)........... 14,192 (6,220) 1,042 70 (5,334)
Interest expense, net............. 4,303 5,387 5,461 4,778 4,007
-------- -------- -------- -------- --------
Income (loss) before
income taxes...................... 9,889 (11,607) (4,419) (4,708) (9,341)
Income taxes (benefit)............ 4,254 (3,319) (1,210) (644) 87
-------- -------- -------- -------- --------
Net income (loss)................. $ 5,635 $ (8,288) $ (3,209) $ (4,064) $ (9,428)
======== ======== ======== ======== ========
BASIC INCOME (LOSS) PER COMMON SHARE(1):
Net income (loss).................. $ 0.41 $ (0.59) $ (0.23) $ (0.29) $ (0.66)
======== ======== ======== ======== ========
Shares used in the calculation of
basic income (loss) per share 13,910 14,012 14,070 14,150 14,208
======== ======== ======== ======== ========
DILUTED INCOME (LOSS) PER
COMMON SHARE (1):
Net Income (loss)................... $ 0.40 $ (0.59) $ (0.23) $ (0.29) $ (0.66)
======== ======== ======== ======== ========
Shares used in the calculation of
diluted income (loss) per share 13,986 14,012 14,070 14,150 14,208
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................... $ 80,270 $ 16,917 $ 38,354 $ 42,661 $ 48,302
Total assets....................... 157,486 139,433 102,460 100,215 101,837
Long-term debt, including
Current portion................... 62,611 50,761 27,048 32,055 42,775
Stockholders' equity............... 65,147 55,278 53,086 49,258 41,881
</TABLE>
- ----------------------------
(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.
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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
percentages of net sales, for the periods indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
YEAR ENDED 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.9 79.4 79.9
----- ----- -----
Gross profit 20.1 20.6 20.1
Selling, general and administrative expenses 18.5 19.3 19.0
Amortization of goodwill and other related acquisition
costs 0.5 0.7 0.8
Provision for settlement of litigation 0.0 0.0 3.3
Restructuring charges 0.7 0.6 0.0
----- ----- -----
Operating income/(loss) 0.4 (0.0) (3.0)
Interest expense, net 2.2 2.4 2.3
----- ----- -----
Loss before income taxes (1.8) (2.4) (5.3)
Income tax (benefit) (0.5) (0.3) 0.1
----- ----- -----
Net (loss) (1.3%) (2.1%) (5.4%)
===== ===== =====
</TABLE>
COMPARISON OF FISCAL 1999 WITH FISCAL 1998
NET SALES
Net Sales decreased by $24.1 million or 12.2% from $197.9 million in
Fiscal 1998 to $173.8 million in Fiscal 1999. The decline in net sales was due
to decreases in the Donnkenny label of $8.7 million (primarily due to a
reduction in orders from two major customers which resulted from the Company
exiting the coordinate business), the Victoria Jones label of $5.5 million, and
the Pierre Cardin label of $6.8 million (primarily from the decrease of $6.6
million in orders from one of it's customers which was caused by its change in
buying pattern). The decreases were partially offset by increases in the Casey
& Max label of $2.1 million. In addition, there was also a decline in net sales
which resulted from the Company's exiting of outside contract work, closing the
outlet divisions and exiting the Licensed Character business, which accounted
for $5.2 million of the decline.
GROSS PROFIT
Gross profit for Fiscal 1999 was $34.9 million, or 20.1% of net sales,
compared to $40.8 million, or 20.6% of net sales, for Fiscal 1998. Significant
factors that contributed to the decline in gross profit included a competitive
retail environment for non-major branded products, higher domestic
manufacturing variances due to decreased sales volume in the Donnkenny label,
and higher transportation costs. Subsequent to year end, the Company announced
its plan to exit the domestic manufacturing business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $38.2 million
in Fiscal 1998 to $33.0 million in Fiscal 1999. As a percentage of net sales,
these costs decreased from 19.3% in Fiscal 1998 to 19.0% in Fiscal 1999. The
$5.2 million decline in selling, general and administrative expense is due to
reductions in all expense categories. Included in Fiscal 1998 were charges
totaling $1.5 million related to the closing of the Company's outlet stores,
consolidating office facilities, cancellation of lease agreements and
professional fees associated with computer system installations.
9
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PROVISION FOR SETTLEMENT OF LITIGATION
Commencing November 1996, nine class action complaints were filed against
the Company in the United States District Court for the Southern District of
New York. Among other things, the complaints alleged violation of the federal
securities law. By order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and entities who purchased
publicly traded securities or sold put options of the Company between February
14, 1995 and November 1996.
On October 7, 1999, the Company entered into a stipulation of settlement
(the "Settlement") with the class action plaintiffs. In consideration for the
discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million is the Company's share, and the balance is
payable by the Company's insurers; issue 3 million shares of the Company's
common stock, and to pursue litigation against two of the Company's insurers to
recover under its excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all appeals and
reviews. A settlement hearing on the proposed settlement was held on March 31,
2000 and the court orally approved the settlement. A written order should be
signed in due course. In 1999, the Company recorded a charge of $5.9 million,
which represented the cost of the Settlement. The Company had funded its
required cash contribution to the settlement as of December 31, 1999 except for
a) the sum of $0.6 million, which the Company paid during the quarter ended
March, 31, 2000; and b) the cost of the litigation with two of the Company's
insurers which are not expected to be material.
INCOME FROM OPERATIONS
In Fiscal 1999, the Company reported a loss from operations of $5.3
million inclusive of the $5.9 million provision for the settlement of the
Consolidated Class Action, versus income from operations of $0.1 million in
Fiscal 1998.
PROVISION FOR INCOME TAXES
The Fiscal 1999 provision for income taxes of $87 reflects state and local
income taxes. The tax benefit in Fiscal 1998 of $644 or 13.7% of pre-tax losses
is lower than the Company's historical rate due to the recording of a valuation
allowance on a portion of deferred tax assets related to net operating loss
carryforwards.
NET LOSS
In Fiscal 1999 the Company reported a net loss of $9.4 million, or ($.66)
per share, versus a net loss of $4.1 million, or ($0.29) per share in Fiscal
1998.
COMPARISON OF FISCAL 1998 WITH FISCAL 1997
NET SALES
Net sales decreased by $48.1 million or 19.6% from $246.0 million in
Fiscal 1997 to $197.9 million in Fiscal 1998. The decline in net sales was
primarily the result of exiting the licensed character business, which
accounted for $37.9 million of the decline and decreases in Victoria Jones of
$18.8 million due to general softness in the sweater business resulting from
warmer weather during the winter of 1998. The decreases were partially offset
by increases in Casey & Max of $8.0 million and $5.6 million in Pierre Cardin.
GROSS PROFIT
Gross profit for Fiscal 1998 was $40.8 million, or 20.6% of net sales,
compared to $49.3 million, or 20.1% of net sales, for Fiscal 1997. Significant
factors that contributed to the decline in gross profit included the exiting of
the licensed character business and general softness in the sweater business
from the warm weather during the winter of 1998. Additionally, in the fourth
quarter of Fiscal 1998, the Company recorded inventory write offs of $0.7
million related to the sale of the West Hempstead Facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $45.4 million
in Fiscal 1997 to $38.2 million in Fiscal 1998. As a percentage of net sales,
these costs increased from 18.5% in Fiscal 1997 to 19.3% in Fiscal 1998.
Included in Fiscal 1998 were charges totaling $1.5 million related to the
closing of the Company's outlet stores, consolidating office facilities,
cancellation of lease agreements and professional fees associated with system
installations. Included in Fiscal 1997 are 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 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.
Excluding these charges, the balance of selling, general and
administrative expenses for Fiscal 1998 was $37.6 million or 19.0% of net sales
and for Fiscal 1997, $41.8 million, or 17.0% of net sales. The $4.2 million
decline in selling, general and
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administrative expense is due to reductions in all expense categories except
design and sample expense and administrative expenses.
RESTRUCTURING CHARGES
During Fiscal 1998, the Company's production requirements continued to
shift from domestically owned or leased facilities to out sourced suppliers.
During 1998 and into 1999 several domestic facilities were closed and sold by
the Company. In the fourth quarter of 1998, the Company recorded a pre-tax
charge of $1.2 million in connection with the sale of its West Hempstead
facility which occurred on February 2, 1999. The restructuring charge included
write-offs of property, plant, equipment, employee severance payments and other
incremental charges directly attributable to the sale of the manufacturing
facility.
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of the 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 1998, the Company reported income from operations of $0.1
million, versus income from operations of $1.0 million in Fiscal 1997.
PROVISION FOR INCOME TAXES
The Company's tax benefit in Fiscal 1998 amounts to 13.7% of pre-tax
losses, as compared to a benefit of 27.4% for Fiscal 1997. The benefit in
Fiscal 1998 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 net operating loss carryforwards.
NET LOSS
In Fiscal 1998 the Company reported a net loss of $4.1 million, or ($0.29)
per share, versus a net loss of $3.2 million, or ($0.23) per share in Fiscal
1997.
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 and capital expenditures.
The Company's borrowing requirements for working capital fluctuate throughout
the year.
Capital expenditures were $0.5 million for Fiscal 1999, compared to $2.5
million in Fiscal 1998. In Fiscal 1999, the Company was permitted to spend up
to $2.0 million on capital investments in accordance with the Revolving Credit
Agreement described below. As part of the 1999 capital expense budget, the
Company spent approximately $0.5 million for upgrading computer systems to
become Year 2000 compliant.
At the end of Fiscal 1999, direct borrowings under the revolving credit
facility were $40.0 million and the term loan amounted to $2.5 million.
Additionally, the Company had letters of credit outstanding of $17.6 million,
with unused facility of $17.4 million. At the end of Fiscal 1998, direct
borrowings and letters of credit outstanding under the prior credit facility
were $31.6 and $24.3 million, respectively.
On June 29, 1999, the Company and its operating subsidiaries signed a new
three year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services to replace the existing $75 million credit facility. The Credit
Agreement provides the Company with a $75 million facility comprised of a $72
million revolver with sublimits up to $52 million for direct borrowings, $35
million for letters of credit, certain overadvances and a $3 million term loan.
Borrowings under the Credit Agreement bear interest at the prime rate plus
one half percent (9.0% at December 31, 1999). The Credit Agreement provides for
advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60%
of eligible inventory plus (iii) up to 60% of the undrawn amount of all
outstanding letters of credit plus (iv) allowable overadvances. The term loan
requires quarterly payments of $250 plus all accrued and unpaid interest
beginning September 30, 1999 through June 30, 2002. The Credit Agreement
expires on June 30, 2002.
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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.
and Beldoch Industries Corporation.
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 net worth and comply with a maximum cumulative net
loss test and a minimum interest coverage ratio.
Subsequent to June 1999, the Company amended the Credit Agreement. On
February 29, 2000, the Company entered into a Third Amendment and Waiver
Agreement. The Third Amendment and Waiver waived any existing defaults as of
December 31, 1999 and for the End of Month Period for January 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1% above the prime rate effective
February 29, 2000 and the Overadvance Amounts for Fiscal 2000 were amended and
restated. Certain covenants were also amended for the respective quarter ends in
Fiscal 2000. A fee of $75,000 was paid on February 29, 2000. On April 13, 2000,
the Company entered into a Fourth Amendment and Waiver Agreement to support the
Company's 2000 business plan. The Fourth Amendment and Waiver waived any
existing defaults as of the End of Month Period for March 2000 with respect to
the Company's noncompliance with covenants related to Minimum Interest Coverage,
EBITDA and Tangible Net Worth. Pursuant to this amendment, the interest rate on
borrowings was increased to 1.5% above the prime rate effective April 13, 2000,
and the Overadvance Amounts for Fiscal 2000 were amended. Certain covenants
were also amended for the respective quarter ends in Fiscal 2000. A fee of
$75,000 is payable for the Fourth Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross amount of
sales, plus certain customary charges.
During Fiscal 1999, cash used in operating activities was $11.9 million,
principally as the result of increases in accounts receivable and inventory
(which relate primarily to inventory in transit and to first quarter fiscal
2000) and decreases to accounts payable and accrued expenses, partially offset
by decreases in other non-current assets. During Fiscal 1998, cash used in
operating activities was $1.4 million, principally as the result of the
increase in accounts receivable and other non-current assets, partially offset
by decreases in inventories and recoverable income taxes.
Cash provided by investing activities in Fiscal 1999 included proceeds
from the sale of fixed assets of $1.4 million offset by $0.5 for the purchase
of fixed assets. Cash used in Fiscal 1998 for investing activities of $3.4
million included $2.5 million for the purchase of fixed assets and the $1.8
million earnout payment related to the acquisition of Beldoch, which was
partially offset by proceeds from the sale of fixed assets of $0.8 million.
Cash provided by financing activities in Fiscal 1999 was $10.7 million,
which represented net borrowings of under the revolver of $8.4 million and net
borrowings of the term loan of $2.3 million. Cash provided by financing
activities in Fiscal 1998 was $5.0 million, which represented repayments of
$5.6 million on the Term Loan, offset by net borrowings under the Revolving
Credit Agreement of $10.1 million and the proceeds from an equipment loan of
$0.5 million.
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.
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.
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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 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 relationships 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 portion of the Company's products which it currently imports from Asia
is further 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 impact, if any, of these regional
events on the Company's business, and in particular its sources of supply,
cannot be determined at this time. Approximately 70% of the products sold by
the Company in Fiscal 1999 were manufactured in Asia.
Facility Closures
On March 15, 2000 the Company announced that it will be closing all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. The Company will incur a charge of approximately $0.3
million for employee severance payments and other incremental charges directly
attributable to the closing of the manufacturing facilities. The plant closings
are planned to be completed by May of Fiscal 2000.
Factors that May Affect Future Results and Financial Condition
The Company's future operating results and financial condition are
dependent upon its ability to successfully design, manufacture, import and
market apparel.
Proposed Reverse Stock Split
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to the Company's shareholders a four for one reverse stock split as
part of an effort to maintain continued listing of the Company's common stock on
the NASDAQ National Market. The reverse stock split recommendation will be put
before the Company's shareholders at a special meeting to be held on April 18,
2000. As a result of the proposed split, if the recommendation is approved by
the Company's shareholders, each four shares of common stock applicable to
shareholders on the effective date of the split will be converted into one share
of stock.
The Company's Board of Directors recommended this action to the Company's
shareholders in an effort to maintain NASDAQ National Market listing. One of
the requirements for continued listing on the NASDAQ National Market is the
maintenance of a bid price for the Company's shares of $1.00 or higher. During
the last quarter of 1999, and into 2000, the Company's bid price has fallen
below $1.00. While it is anticipated that following the reverse stock split,
the market value of the Company's shares will increase in inverse proportion to
the ratio of the reverse split, there can be no assurance that this will occur
or that the bid price of the Company's common stock will maintain a $1.00 or
higher price.
Recent Accounting Pronouncements
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, 2000. 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.
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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-K
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DANIEL H. LEVY, a director of the Company, has been a principal of and
consultant to LBK Consulting Inc., a retail consulting business, since January
1997 and during the period of 1994 to April 1996. From April 1996 through
January 1997, he served as Chairman of the Board and Chief Executive Officer of
Best Products, Inc., a retail sales company which filed for bankruptcy in
September 1996. From 1993 through 1994, Mr. Levy served as Chairman of the
Board and Chief Executive Officer of Conran's, a retail home furnishings
company. From 1991 to 1993, he was Vice Chairman and Chief Operating Officer of
Montgomery Ward, a retail sales company. Mr. Levy is a director of Whitehall
Jewelers, Inc. Mr. Levy is 56 years old. On January 1, 2000, Mr. Levy became
Chairman of the Board and Chief Executive Officer of the Company.
HARVEY A. APPELLE, a director of the Company, was Chairman of the Board
and Chief Executive Officer of the Company from December 19, 1996 until
December 31, 1999, when he resigned his office. Mr. Appelle had been the
President of HarGil Capital Associates Ltd., a private investment firm, since
1994. From 1983 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 54 years old.
LYNN SIEMERS-CROSS, a director of the Company, became President and Chief
Operating Officer of the Company on April 14, 1997. Prior thereto, for more
than five years, she was President of the Oak Hill Division of the Company. Ms.
Siemers-Cross is 41 years old.
BEVERLY EICHEL, has been Executive Vice President and Chief Financial
Officer of the Company since October 1998. Prior thereto, she was Executive
Vice President and Chief Financial Officer of Danskin, Inc. from June 1992 to
September 1998, and had been its Corporate Controller from October 1987 to June
1992. Ms. Eichel also serves as Secretary of the Company. Ms. Eichel is 42
years old.
SHERIDAN C. BIGGS, a director of the Company, is Executive-in-Residence at
the Graduate Management Institute at Union College. Prior to that, he was a
senior partner of Price Waterhouse, the accounting and consulting firm; he was
with that firm for thirty-one years until his retirement in 1994. During his
career at Price Waterhouse, Mr. Biggs served as a Vice Chairman and member of
the firm's management committee. Mr. Biggs is 65 years old.
HARVEY HOROWITZ, a director of the Company, served as Vice President, and
General Counsel of the Company from October 1, 1996 to February 28, 1998 when
he resigned his office. Mr. Horowitz is of counsel to the law firm of Mintz &
Gold LLP, which provides legal services to the Company. For more than five
years, prior to October 1, 1996, he was a partner of the law firm Squadron,
Ellenoff, Plesent & Sheinfeld, LLP. Mr. Horowitz is a director of The Gotham
Bank of New York, a financial institution. Mr. Horowitz is 57 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.,
international insurance brokers. Mr. Crystal is 62 years old. On February 28,
2000, Mr. Crystal resigned his position as a Director of the Company for
personal reasons.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1999, all
Section 16(a) reporting requirements applicable to the Company's officers,
directors and greater than ten percent shareholders were in compliance.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for the fiscal years
ended December 31, 1999, December 31, 1998, and December 31, 1997 to those
persons who were, at December 31, 1999 (i) the chief executive officer and (ii)
the other most
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highly compensated 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").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------------------------
RESTRICTED SECURITIES ALL OTHER
FISCAL STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS/SARS (1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Harvey A. Appelle (2)(4)(7) 1999 $473,806 $2,130
Chairman of the Board and 1998 402,652 100,000 2,880
Chief Executive Officer 1997 400,000 $174,000 440,625 200,000 2,880
Lynn Siemers-Cross (3)(5)(7)
President and Chief 1999 $502,652 $ 810
Operating Officer 1998 502,550 100,000 1,020
1997 500,000 $212,500 440,625 200,000 660
Beverly Eichel (6)
Executive Vice President and 1999 $275,000 $ 810
Chief Financial Officer 1998 63,462 $ 50,000 150,000 255
</TABLE>
(1) 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.
(2) This individual became an Executive Officer of the Company in 1996. This
individual resigned his office as Chief Executive Officer effective
12/31/99.
(3) This individual became an Executive Officer of the Company in 1997.
(4) Bonus for 1997 was paid in 69,600 shares of common stock; Bonus for 1998
included the grant of options to purchase 100,000 shares of common stock
(5) Bonus for 1997 was $150,000 cash payment and 25,000 shares of common
stock; Bonus for 1998 included the grant of options to purchase 100,000
shares of common stock.
(6) This individual became an Executive Officer of the Company in 1998. Annual
compensation represents prorated compensation from date of hire in October
1998 and a signing bonus paid in connection with the execution of her
employment agreement with the Company.
(7) Includes restricted stock awards of 150,000 shares of which 30,000 shares
were vested on March 31, 1999 and the remaining 120,000 shares will be
vested on March 31, 2000.
EMPLOYMENT AGREEMENTS
Daniel H. Levy
As of January 1, 2000, Mr. Levy entered into an employment agreement with
the Company to serve as its Chairman of the Board and Chief Executive Officer.
While the term of the employment agreement is for three years, the agreement
gives the Company and Mr. Levy the right to terminate the agreement at the end
of three, six and twelve months. In the event the Company exercises this
termination right, the Company agrees to pay Mr. Levy severance of three, six
and twelve months respectively.
The agreement provides for a base annual salary of $500,000, as well as a
discretionary performance bonus based on the achievement of goals to be set by
the Compensation Committee of the Company's Board of Directors, as well as
certain insurance benefits. The Company paid to Mr. Levy a relocation bonus of
$25,000, with a gross up for the tax effect of this bonus.
In connection with the execution of the employment agreement, the
Compensation Committee granted to Mr. Levy 150,000 restricted shares of the
Company's stock, which will vest December 31, 2002. The employment agreement
further provides for the issuance of another 150,000 restricted shares of the
Company's stock if Mr. Levy is employed by the Company on June 30, 2002, which
shares would also vest on December 31, 2002. Mr. Levy also was granted options
to purchase 150,000 shares of the Company's common stock, at a purchase price
of $0.6875 a share. 100,000 of these stock options vest on June 30, 2000 and
the balance of 50,000 will vest on December 31, 2000, if Mr. Levy is employed
by the Company on those dates. The employment agreement provides that the
restricted shares and the options granted would have accelerated vesting in the
event of a change in control of the Company.
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The agreement provides that in the event Mr. Levy's employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Mr. Levy will have the right to receive severance
benefits equal to three times the sum of his then annual salary inclusive of
any performance bonus.
Harvey Appelle
On April 12, 1997, Mr. Appelle entered into a three-year employment
agreement with the Company to serve as its Chairman of the Board and Chief
Executive Officer. The agreement provides for a base annual salary of $400,000
for the first two years of the term and of $500,000 for the third year of the
term, as well as a discretionary performance bonus based on the achievement of
goals to be set annually by the Compensation Committee of the Board, as well as
certain insurance benefits.
In addition, in connection with the execution of the employment agreement,
the Compensation Committee granted to Mr. Appelle 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
further provides 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. Mr.
Appelle resigned his position as Chief Executive Officer effective December 31,
1999.
Lynn Siemers-Cross
On June 12, 1997, Ms. Siemers-Cross entered into a four-year employment
agreement with the Company to serve as its President and Chief Operating
Officer. The agreement provides for a base annual salary of $500,000, a
discretionary performance bonus based on the achievement of goals to be 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 granted to Ms. Siemers-Cross 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 further provides 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 provides 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).
Beverly Eichel
On September 28, 1998, Ms. Eichel entered into a two-year employment
agreement the Company to serve as Executive Vice President and Chief Financial
Officer, providing for a base salary of $275,000 per annum and a one time
signing bonus of $50,000. The agreement provides for a discretionary
performance bonus based on the achievement of goals to be set annually by the
Compensation Committee of the Board, as well as certain insurance benefits. In
addition, in connection with the commencement dates the agreement provides for
the grant of options to purchase 150,000 shares of Common Stock at an exercise
price equal to the fair market value on the date of grant, vesting over three
years.
The agreement provides that in the event Ms. Eichel's employment is
terminated (except in certain limited circumstances) following a change in
control of the Company, Ms. Eichel will have the right to receive severance
benefits equal to one and one half times the sum of the last annual salary
inclusive of performance bonus.
Harvey Horowitz
On February 28, 1998, Mr. Horowitz entered into a two-year consulting
agreement with the Company, which agreement superseded Mr. Horowitz's
employment agreement with the Company dated September 5, 1996. Under the new
agreement, Mr. Horowitz agrees to provide certain consulting services to the
Company and its officers with respect to legal matters arising out of the
business affairs of the Company. The new agreement provides for monthly
payments to be made by the Company to Mr. Horowitz equal to $35,000 for March
1998, $30,000 per month thereafter for the balance of calendar year 1998, and
$25,000 per month throughout calendar year 1999. Mr. Horowitz will continue to
receive certain insurance and other benefits.
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1999 STOCK OPTIONS GRANTS
The Company strives to distribute stock option awards broadly throughout
the organization. Stock option awards are based on the individual's position
and contribution to the Company. The Company's long term performance ultimately
determines compensation from stock options because stock option value is
entirely dependent on the long term growth of the Company's common stock price.
The following table sets forth certain information concerning options
granted to the Chief Executive Officer and the Named Executive Officers and
Directors during Fiscal 1999, including information concerning the potential
realizable value of such options.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS OPTION TERM (1)
----------------------------------------------------- ----------------------
NUMBER OF
SECURITIES % OF TOTAL EXERCISE
UNDERLYING # OF OPTIONS PRICE (3) EXPIRATION
OPTION (#) GRANTED IN 1999 ($/Sh) DATE 5% ($) 10% ($)
---------- --------------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Harvey Appelle (4) 100,000 37.04% 1.1875 3/2/09 74,763 189,387
Lynn Siemers-Cross (4) 100,000 37.04% 1.1875 3/2/09 74,763 189,387
Sheridan C. Biggs (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
James W. Crystal (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
Harvey Horowitz (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
Daniel H. Levy (2) 5,000 1.85% 0.7190 11/11/09 2,261 5,730
</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) Represents options granted to Messrs. Biggs, Crystal, Horowitz and Levy as
directors pursuant to the Company's 1994 Non-Employee Director Option
Plan.
(3) All options were granted at an exercise price equal to the market value of
the Company's common stock on the date of grant.
(4) Options were granted as part of Fiscal 1998 compensation.
18
<PAGE>
AGGREGATE OPTION
EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR ENDED OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999 (2)
ON EXERCISE VALUE ----------------- -------------------------
(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey Appelle (3) 0 0 172,500 100,000 0 0
Lynn Siemers-Cross (4) 0 0 154,500 103,000 0 0
Herbert L. Ash 0 0 20,000 0 0 0
Sheridan C. Biggs 0 0 25,000 0 0 0
Robert H. Cohen 0 0 20,000 0 0 0
James W. Crystal 0 0 37,500 0 0 0
Harvey Horowitz 0 0 32,500 0 0 0
Daniel H. Levy 0 0 25,000 0 0 0
Robert H. Martinsen 0 0 20,000 0 0 0
Beverly Eichel (5) 0 0 60,000 90,000 0 0
</TABLE>
(1) All options were granted at an exercise price equal to market value of the
common stock on the date of grant.
(2) Amount reflects the market value of the underlying shares of common stock
at the closing sales price reported on the Nasdaq National Market on
December 31, 1999 ($.59) per share.
(3) Represents 22,500 options granted to him under the Company's 1994
non-employee director option plan, 150,000 options granted to him in
connection with the execution of his employment agreement and 100,000
options granted as part of his Fiscal 1998 compensation.
(4) Represents 7,500 options granted to her under the Company's 1992 Stock
Option Plan, 150,000 options granted in connection with the execution of
her employment agreement and 100,000 options granted as part of her Fiscal
1998 compensation.
(5) Represents 150,000 options granted in connection with the execution of her
employment agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 10, 2000,
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 who served as directors or executive officers of March 10,
2000 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. For purposes
of this table, beneficial ownership is defined in accordance with 13d-3 under
the Securities Exchange Act of 1934, as amended and means generally the power
to vote or dispose of the securities, regardless of any economic interest
therein.
<TABLE>
<CAPTION>
NAME AND ADDRESS COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED
------------------- --------------------- ---------------------
<S> <C> <C>
Amber Arbitrage LDC 2,322,450 (2) 16.3%
C/o Custom House Fund Management Limited
31 Kildare Sheet
Dublin 2, Ireland
Putnam Investments, Inc. 1,199,250 (3) 8.4%
1 Post Office Square
Boston, MA 02109
Harvey A. Appelle 547,100 (4) 3.7%
Lynn Siemers-Cross 353,200 (5) 2.4%
Sheridan C. Biggs 26,000 (6) *
James W. Crystal 38,500 (7) *
Beverly Eichel 60,000 (8) *
Harvey Horowitz 35,000 (9) *
Daniel H. Levy 30,000 (10) *
All directors and officers as a group (7 7.3%
persons)
</TABLE>
19
<PAGE>
- -------
* Less than 1%.
(1) Percentage to be based on the number of shares of Common Stock outstanding
as of March 10, 2000.
(2) Based on information contained in Schedule 13G filed with the Company on
May 13, 1998.
(3) Based on information contained in Schedule 13G/A filed with the Company on
February 4, 1999. Includes shares held by Putman Investment Management,
Inc. and Putman Advisory Company, Inc.
(4) Includes 22,500 shares underlying currently exercisable stock options
which have been granted to Harvey A. Appelle pursuant to the Company's
1994 Non-Employee Director Option Plan, 150,000 shares underlying
currently exercisable stock options which have been granted to Mr. Appelle
pursuant to his employment agreement, 150,000 restricted shares granted to
Mr. Appelle pursuant to his employment agreement and 69,600 shares of
stock issued to him as part of Fiscal 1997 compensation. The above
includes 20,000 options and excludes 80,000 options issued as part of
Fiscal 1998 compensation and will become exercisable on various dates
through the year 2004. Also includes 135,000 shares held by Mr. Appelle.
(5) Includes 6,000 shares of underlying options which have been granted on
April 19, 1996 to Lynn Siemers-Cross pursuant to the Company's 1992 Stock
Option Plan (excludes 1,500 options, which do not vest until April 19,
2001) and includes 150,000 shares underlying options which have been
granted pursuant to Ms. Siemers-Cross' employment agreement. Also includes
150,000 shares of restricted stock pursuant to Ms. Siemers-Cross'
employment agreement and 25,000 shares of stock issued as part of Fiscal
1997 compensation. The above includes 20,000 options, and excludes 80,000
options issued as part of Fiscal 1998 compensation which will become
exercisable on various dates through the year 2004. Also includes 2,200
shares held by Mrs. Siemers-Cross.
(6) Includes 25,000 shares underlying options which have been granted to
Sheridan C. Biggs pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable. Also includes 1,000
shares held by Mr. Biggs.
(7) Includes 37,500 shares underlying options which have been granted to James
W. Crystal pursuant to the Company's 1994 Non Employee Director Option
Plan. Such options are currently exercisable. Also includes 1,000 shares
held by Mr. Crystal.
(8) Includes 60,000 shares underlying options, which are vested, out of
150,000 underlying options, which have been granted to Beverly Eichel
pursuant to her employment agreement. Does not include 90,000 options of
which, 60,000 will vest in September 2000, and 30,000 will vest in
September 2001.
(9) Includes 32,500 shares underlying options which have been granted to
Harvey Horowitz pursuant to the Company's 1994 Non-Employee Director
Option Plan. Such options are currently exercisable. Also includes 2,500
shares held by Mr. Horowitz.
(10) Includes 25,000 shares underlying options which have been granted to
Daniel A. Levy pursuant to the Company's 1994 Non-Employee Director Option
Plan. Such options are currently exercisable. Also includes 5,000 shares
held by Mr. Levy. Does not include 150,000 shares underlying stock options
granted as of January 3, 2000 pursuant to the Company's 1992 Stock Option
Plan, 100,000 of which vest on June 30, 2000 and the balance of 50,000,
which will vest on December 31, 2000. Also does not include 150,000 shares
of the Company's Restricted Stock granted as of January 3, 2000 pursuant
to the Company's 1996 Restricted Stock Plan. These restricted shares vest
on December 31, 2002. The foregoing options issued under the Company's
1992 Stock Option Plan and the restricted stock were granted pursuant to
Mr. Levy's employment agreement.
20
<PAGE>
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 $130,000 in commissions during 1999 for services
rendered to the Company. Mr. Horowitz is of counsel to the law firm of Mintz &
Gold LLP, which provides legal services to the Company.
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, 1999 and 1998
Consolidated Statements of Operations for the Years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years ended December
31, 1999, 1998 and 1997
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
1999.
21
<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: MARCH 30, 2000
DONNKENNY, INC.
BY: /s/ DANIEL H. LEVY
---------------------------------------
DANIEL H. LEVY, 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: MARCH 30, 2000 BY: /s/ DANIEL H. LEVY
---------------------------------------
DANIEL H. LEVY, CHAIRMAN OF THE BOARD OF
DIRECTORS AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ LYNN SIEMERS-CROSS
---------------------------------------
DATED: MARCH 30, 2000 LYNN SIEMERS-CROSS, PRESIDENT AND
CHIEF OPERATING OFFICER
/s/ BEVERLY EICHEL
---------------------------------------
DATED: MARCH 30, 2000 BEVERLY EICHEL, CHIEF FINANCIAL OFFICER,
EXECUTIVE VICE PRESIDENT-FINANCE AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ HARVEY APPELLE
---------------------------------------
DATED: MARCH 30, 2000 HARVEY APPELLE, DIRECTOR
/s/ SHERIDAN C. BIGGS
---------------------------------------
DATED: MARCH 30, 2000 SHERIDAN C. BIGGS, DIRECTOR
/s/ HARVEY HOROWITZ
---------------------------------------
DATED: MARCH 30, 2000 HARVEY HOROWITZ, DIRECTOR
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Sequentially
No. 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)
10.28 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.(7)
10.29 Stock Purchase Agreement among Donnkenny Apparel, Inc. and all of the
Shareholders of Beldoch Industries Corporation, dated June 5, 1995.(6)
10.32 Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors.(8)
10.33 Donnkenny, Inc. 1996 Restricted Stock Plan.(9)
10.41 Employment Agreement between Harvey A. Appelle and the Company, dated
April 14, 1997.(10)
10.42 Employment Agreement between Lynn Siemers-Cross and the Company, dated
April 14, 1997.(10)
10.46 Employment Agreement between Beverly Eichel and the Company dated
September 28, 1998.(11)
10.48 Commission's Order Instituting Public Administrative Proceedings, Make
Findings and Instituting a Cease-and-Desist Order and Offer of
Settlement of Donnkenny, Inc. released on February 2, 1999.(12)
10.49 Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries
Corporation, the Guarantors Named therein, the Lenders Named therein
and the CIT Group / Commercial Services, Inc., dated as of June 29,
1999.(13)
10.50 TThe Waiver and First Amendment to Credit Agreement, dated as of
November 11, 1999 among the Company, the Lenders Named therein and the
CIT Group / Commercial Services, Inc.(14)
23
<PAGE>
10.51 The Second Amendment Agreement, dated as of December 23, 1999 among
the Company, the Lenders Named therein and the CIT Group / Commercial
Services, Inc.(15)
10.52 Employment agreement between Daniel H. Levy and the Company, dated
January 1, 2000.(15)
10.53 The Third Amendment and Waiver Agreement, dated as of February 29,
2000 among the Company, the Lenders Named therein and the CIT Group /
Commercial Services, Inc.(15)
10.54 The Fourth Amendment and Waiver Agreement, dated as of April 13, 2000
among the Company, the Lenders named therein and the CIT Group /
Commercial Services, Inc.(15)
21 Subsidiaries of the Company.
</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 August 8, 1995.
(8) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 2, 1995.
(9) Incorporated herein by reference to the Company's 1996 Proxy
Statement, filed March 22, 1996.
(10) Incorporated herein by reference to the Company's Report on Form 10-Q,
filed with the Commission on August 6, 1997.
(11) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 15, 1998.
(12) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
(13) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on August 15, 1999.
(14) Incorporated herein by reference to the Company's Report on Form 10-Q
filed with the Commission on November 15, 1999.
(15) Filed herewith.
24
<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, 1999 and December 31, 1998, 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,
1999. 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. at December 31,
1999 and December 31, 1998, and the results of their operations and cash flows
for each of the fiscal years in the three year period ended December 31, 1999
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, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
March 22, 2000
(March 31, 2000 as to Note 13 and
April 13, 2000 as to Note 6)
F-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- --------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................................ $ 180 $ 503
Accounts receivable, net of allowances for bad debts
of $382 and $620, respectively ........................... 30,022 29,363
Recoverable income taxes .................................... 304 655
Inventories ................................................. 29,323 21,972
Deferred tax assets ......................................... 2,865 3,080
Prepaid expenses and other current assets ................... 636 1,265
Assets held for sale ........................................ 456 1,799
--------- ---------
Total current assets ........................................ 63,786 58,637
PROPERTY, PLANT AND EQUIPMENT, NET .............................. 5,981 6,337
OTHER ASSETS .................................................... 546 2,327
INTANGIBLE ASSETS ............................................... 31,524 32,914
--------- ---------
TOTAL ........................................................... $ 101,837 $ 100,215
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................... $ 1,168 $ 154
Accounts payable ............................................ 10,351 8,391
Accrued expenses and other current liabilities .............. 3,965 7,431
--------- ---------
Total current liabilities ............................... 15,484 15,976
--------- ---------
LONG-TERM DEBT .................................................. 41,607 31,901
DEFERRED TAX LIABILITIES ........................................ 2,865 3,080
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 14,230 and
14,170, shares in 1999 and 1998 respectively ............. 142 142
Additional paid-in capital .................................. 47,771 47,595
Issuable shares for litigation settlement ................... 1,875
Retained earnings (deficit) ................................. (7,907) 1,521
--------- ---------
Total stockholders' equity .................................. 41,881 49,258
--------- ---------
TOTAL ........................................................... $ 101,837 $ 100,215
========= =========
</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 31,
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
NET SALES .............................................. $ 173,749 $ 197,861 $ 245,963
COST OF SALES .......................................... 138,816 157,069 196,633
------------ ------------ ------------
Gross Profit ................................... 34,933 40,792 49,330
OPERATING EXPENSES:
Selling, general and administrative expenses ...... 33,002 38,221 45,361
Amortization of goodwill and other related
acquisition costs .............................. 1,390 1,321 1,204
Provision for settlement of litigation ............ 5,875
Restructuring charge .............................. -- 1,180 1,723
------------ ------------ ------------
Operating income (loss) ........................ (5,334) 70 1,042
OTHER EXPENSE:
Interest expense (net of interest income of $0,
$10, and $500) .................................. 4,007 4,778 5,461
------------ ------------ ------------
(Loss) before income taxes ..................... (9,341) (4,708) (4,419)
INCOME TAX EXPENSE (BENEFIT) ........................... 87 (644) (1,210)
------------ ------------ ------------
NET (LOSS) ........................................ $ (9,428) $ (4,064) $ (3,209)
============ ============ ============
Basic and diluted (loss) per common share ......... $ (0.66) $ (0.29) $ (0.23)
============ ============ ============
Shares used in the calculation of basic and diluted
(loss) per common share ........................ 14,208,000 14,150,000 14,070,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUABLE
ADDITIONAL SHARES FOR RETAINED TOTAL
PREFERRED COMMON PAID-IN LITIGATION EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL SETTLEMENT (DEFICIT) EQUITY
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of Common Stock .................. -- 1 235 -- -- 236
Net Loss .................................. -- -- -- -- (4,064) (4,064)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ -- $ 142 $ 47,595 $ -- $ 1,521 $ 49,258
Issuance of Common Stock .................. -- -- 176 -- -- 176
Issuable shares for litigation settlement . -- -- -- 1,875 -- 1,875
Net Loss .................................. -- -- -- -- (9,428) (9,428)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 $ -- $ 142 $ 47,771 $ 1,875 $ (7,907) $ 41,881
-------- -------- -------- -------- -------- --------
</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 31,
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) .............................................................. $ (9,428) $ (4,064) $ (3,209)
Adjustments to reconcile net cash
(used in) provided by operating activities:
Provision for shares issuable on litigation settlement ............... 1,875 -- --
Deferred income taxes ................................................ (177) (1,247)
Depreciation and amortization of fixed assets ........................ 814 1,687 1,770
Loss on disposal of fixed assets ..................................... 5 506 --
Amortization of intangibles and other assets ......................... 1,390 1,321 1,204
Write down of fixed assets ........................................... -- 907 260
Provision for losses on accounts receivable .......................... (72) (46) 282
Changes in assets and liabilities, net of the effects of acquisitions and
disposals:
(Increase) decrease in accounts receivable ........................... (587) (4,864) 4,986
Decrease in recoverable income taxes ................................. 351 526 7,444
(Increase) decrease in inventories ................................... (7,351) 5,276 19,545
Decrease (increase) in prepaid expenses and other
current assets .................................................... 630 881 (513)
Decrease (increase) in other non-current assets ...................... 1,780 (2,327) --
Decrease in accounts payable ......................................... 1,960 (929) (10,156)
Decrease in accrued expenses and
other current liabilities ......................................... (3,290) (53) (335)
------ -------- --------
Net cash (used in) provided by operating activities ............... (11,923) (1,356) 20,031
------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ................................................ (501) (2,452) (516)
Proceeds from sale of fixed assets ...................................... 1,381 836 640
Increase in intangibles ................................................. -- (1,789) (1,200)
------ -------- --------
Net cash provided by (used in) investing activities ............... 880 (3,405) (1,076)
------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increases (repayments) of long-term debt ............................ 2,346 (5,580) (12,253)
Proceeds of long-term debt .............................................. -- 483 --
Net increases (repayments) under revolving credit line .................. 8,374 10,104 (11,460)
Issuance of Common Stock ................................................ -- -- 117
Tax benefit attributable to exercise of stock options ................... -- -- 900
------ -------- --------
Net cash provided by (used in) financing activities ............... 10,720 5,007 (22,696)
------ -------- --------
NET (DECREASE) INCREASE IN CASH .............................................. (323) 246 (3,741)
CASH, AT BEGINNING OF PERIOD ................................................. 503 257 3,998
------ -------- --------
CASH, AT END OF PERIOD ....................................................... $ 180 $ 503 $ 257
========= ======== ========
Supplemental Disclosures
Income Taxes paid ....................................................... $ 206 $ 72 $ --
========= ======== ========
Interest paid ........................................................... $ 3,438 $ 4,072 $ 5,692
========= ======== ========
Supplemental schedule of non-cash financing
activities
Issuance of common stock ................................................ $ 176 $ 236 $ 117
========= ======== ========
</TABLE>
F-5
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999,
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(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 operates in
one business segment. 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.
Inventories - Inventories are stated at the lower of cost or market using
the first-in, first-out method (FIFO) (see note 2).
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 3).
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)
Other Assets - Other assets at December 31, 1999 of $546 represent
deferred financing costs which are amortized over the term of the related debt
agreement. In connection with the Company's settlement of litigation, discussed
in Note 13, the Company agreed to pay $5,000 to the Company's insurance carrier
of which $4,375 was paid prior to December 31, 1999. At December 31, 1998,
$2,083 had been deposited and was included in other assets.
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 costs related to licenses acquired
by the Company, which are being amortized using the straight-line method over
20 years (see Note 4).
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.
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>
Advertising Expense - Advertising costs incurred to produce media
advertising for major new campaigns are expensed in the year in which the
advertising first takes place. Other advertising costs are expensed when
incurred. Net advertising expenses of $572, $606, and $668 were included in the
selling, general and administrative expenses in the Company's Consolidated
Statements of Operations for the years ended December 31, 1999, 1998, and 1997,
respectively.
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 7).
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, 1999 and
December 31, 1998 due to their short-term maturities. Long-term debt
approximates fair value due to either its variable interest rate or short term
maturities.
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, 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.
Reclassifications - Certain reclassifications have been made in the 1998
and 1997 financial statements to conform to the 1999 presentation.
2. INVENTORIES
Inventories consisted of the following at December 31, 1999 and December
31, 1998:
1999 1998
---- ----
Raw materials...................... $ 1,548 $ 2,155
Work in process.................... 2,742 4,235
Finished goods..................... 25,033 15,582
------- -------
$29,323 $21,972
======= =======
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31,
1999 and December 31, 1998:
1999 1998
---- ----
Land and land improvements ...... $ 409 $ 410
Buildings and improvements ...... 5,263 6,241
Machinery and equipment ......... 4,645 6,295
Furniture and fixtures .......... 1,727 1,719
------- -------
12,044 14,665
Less accumulated depreciation and
amortization ................. 6,063 8,328
------- -------
$ 5,981 $ 6,337
======= =======
F-7
<PAGE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1999 and
December 31, 1998:
1999 1998
---- ----
Goodwill .................... 35,274 $35,274
Licenses .................... 6,325 6,325
------- -------
41,599 41,599
Less accumulated amortization 10,075 8,685
------- -------
$31,524 $32,914
======= =======
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at December 31, 1999 and December 31, 1998:
1999 1998
---- ----
Accrued Salaries, Benefits and Bonus $1,809 $1,995
Accrued Litigation Settlement ...... 625 1,000
Due to Former Owners of Subsidiary -- 880
Accrued Restructuring Expenses -- 548
Other Accrued Expenses ............ 1,531 3,008
------ ------
Total .............................. $3,965 $7,431
====== ======
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1999 and
December 31, 1998:
1999 1998
---- ----
Revolving Credit Borrowings ............. 40,017 $31,644
Senior Term Loan ....................... 2,500 --
Other (a) ............................... 258 411
Total ................................... 42,775 32,055
------- -------
Less current maturities ................. 1,168 154
------- -------
$41,607 $31,901
------- -------
Annual maturities of debt are as follows:
2000 $ 1,168
2001 1,090
2002 40,517
---- ------
$42,775
=======
On June 29, 1999, the Company and its operating subsidiaries signed a new
three year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services to replace the existing $75 million credit facility. The Credit
Agreement provides the Company with a $75 million facility comprised of a $72
million revolver with sublimits up to $52 million for direct borrowings, $35
million for letters of credit, certain overadvances and a $3 million term loan.
Borrowings under the Credit Agreement bear interest at the prime rate plus
one half percent (9.0% at December 31, 1999). The Credit Agreement provides for
advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60%
of eligible inventory plus (iii) up to 60% of the undrawn amount of all
outstanding letters of credit plus (iv) allowable overadvances. The term loan
requires quarterly payments of $250 plus all accrued and unpaid interest
beginning September 30, 1999 through June 30, 2002. The Credit Agreement
expires on June 30, 2002.
F-8
<PAGE>
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.
and Beldoch Industries Corporation.
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 net worth and comply with a maximum cumulative net
loss test and a minimum interest coverage ratio.
Subsequent to June 1999, the Company amended the Credit Agreement. On
February 29, 2000, the Company entered into a Third Amendment and Waiver
Agreement. The Third Amendment and Waiver waived any existing defaults as of
December 31, 1999 and for the End of Month Period for January 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1% above the prime rate effective
February 29, 2000 and the Overadvance Amounts for the Fiscal 2000 were amended
and restated. Certain covenants were also amended for the respective quarter
ends in Fiscal 2000. A fee of $75,000 was paid on February 29, 2000. On April
13, 2000, the Company entered into a Fourth Amendment and Waiver Agreement to
support the Company's 2000 business plan. The Fourth Amendment and Waiver waived
any existing defaults as of the End of Month Period for March 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1.5% above the prime rate effective
April 13, 2000 and the Overadvance Amounts for Fiscal 2000 were amended.
Certain covenants were also amended for the respective quarter ends in Fiscal
2000. A fee of $75,000 is payable for the Fourth Amendment and Waiver.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross sales,
plus certain customary charges.
- --------
(a) Other debt consists of a secured term loan that was entered into on June
30, 1998 in the amount of $483. As of December 31, 1999 the principal
balance of this loan amounted to $258. The interest rate is fixed at 8.75%
and the loan requires monthly principal and interest payments of $15
through June 2001. Software, machinery and equipment secure this
obligation.
7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 is comprised of the following:
1999 1998 1997
---- ---- ----
Current:
Federal ....... $ -- $ -- $(1,537)
State and local 87 (310) 35
Deferred .......... -- (334) 292
------- ------- -------
$ 87 $ (664) $(1,210)
======= ======= =======
A reconciliation of the statutory Federal tax rate and the effective
rate is as follows:
1999 1998 1997
---- ---- ----
Federal statutory tax rate ........................... (34)% (34)% (34)%
State and local taxes, net of federal
income tax benefit ............................... (3) (2) (3)
Losses not providing state and local
tax benefit ...................................... 0 (8) 4
Nondeductible items .................................. 4 7 5
Losses not providing federal tax benefit ............. 2 0 --
Increase of valuation allowance ...................... 32 23 --
Other -- -- 1
--- --- ---
1% (14)% (27)%
=== === ===
F-9
<PAGE>
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,
1999 1998
---------------- ------------
Deferred tax assets:
Accounts receivable allowances ......... $ 141 $ 232
Inventory valuation .................... 1,139 874
Accrued expenses ....................... 1,449 1,118
Restructuring charges .................. -- 720
State operating loss carryforwards ..... 1,177 848
Federal operating loss carryforwards ... 4,783 2,570
Other .................................. 136 136
------- -------
Total gross deferred tax assets .... 8,825 6,498
------- -------
Deferred tax liabilities:
Property, plant and equipment .......... (1,159) (1,738)
Intangibles ............................ (3,037) (3,182)
------- -------
Total gross deferred tax liabilities (4,196) (4,920)
------- -------
Net deferred tax asset ..................... 4,629 1,578
Less valuation allowance ................... (4,629) (1,578)
------- -------
Net deferred taxes ......................... $ -- $ --
======= =======
As of December 31, 1999 and 1998, the Company recorded a valuation
allowance against the net deferred tax assets due to uncertainty of the
realization of certain net operating loss carryforwards.
As of December 31, 1999, the following Federal and State net operating
loss carryforwards were available:
Net Operating Losses
----------------------------
Expiration Dates Federal State
------- -----
2011 .... $ -- $6,071
2012 .... -- 5,409
2013 .... -- 4,388
2014 .... -- 7,447
2015-2017 -- 1,006
2018 .... 4,463 --
2019 .... 8,599 --
2020-2022 1,006 --
During the years ended December 31, 1999 and 1998, the Company recorded
interest income of $0 and $10 related to prior year carry back claims.
8. COMMITMENTS AND CONTINGENCIES
a. Rental expense for operating leases for the years ended December 31, 1999,
1998, and 1997 approximated $3,223, $4,557, and $4,505, respectively.
Minimum future rental payments as of December 31, 1999 for operating
leases with initial noncancelable lease terms in excess of one year, are
as follows:
Year Ending December 31, Amount
------------------------ ------
2000............................................ $3,123
2001............................................ 2,683
2002............................................ 2,331
2003............................................ 2,191
2004............................................ 2,182
Thereafter...................................... 2,174
-----
$ 14,684
========
F-10
<PAGE>
b. At December 31, 1999, the Company was contingently liable for outstanding
letters of credit issued amounting to $17,624.
c. The Company is also party to legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution
of these proceedings will not, in the aggregate, have a material adverse
effect on the financial condition, results of operations, liquidity or
business of the Company.
9. 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 matched
the employee contributions for fiscal 1999 in the amount of $55. The Company
did not make contributions to the Plan in fiscal 1998 and 1997 except for the
payment of administrative expenses.
10. EARNINGS PER SHARE
Basic EPS excludes 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 (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.
In the years ended December 31, 1999, 1998 and 1997, the incremental
shares under stock plans of 293,254, 431,250, and 305,000 were not considered
for the diluted earnings per share calculation due to their antidilutive
effect. As such, the amounts reported for basic and diluted earnings per share
are the same.
11. STOCK BASED COMPENSATION
a. 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>
1999 1998 1997
---------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE WEIGHTED- AVERAGE
EXERCISE AVERAGE EXERCISE
OPTIONS PRICE OPTIONS EXERCISE PRICE OPTIONS PRICE
----------- -------------- ---------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year ............. 1,740,150 $ 4.04 1,660,650 $ 5.42 658,800 $ 10.51
Granted ..................... 250,000 1.26 500,000 1.13 1,300,500 3.73
Exercised ................... -- -- -- -- -- --
Cancelled ................... (457,250) 4.52 (420,500) 6.04 (298,650) 9.26
---------- ---------- ---------- ----------- ---------- -----------
Outstanding at end of year .. 1,532,900 3.14 1,740,150 4.04 1,660,650 5.42
========== ========== =========== ========== ===========
Exercisable at end of year .. 685,940 484,160 234,800
========== ========== ==========
Available for grant at
year end .................... 467,100 259,850 339,350
========== ========== ==========
</TABLE>
F-11
<PAGE>
The options outstanding at December 31, 1999 range in price as follows:
# OF
OPTIONS EXERCISE PRICE
--------- --------------
597,500 $ 0.0000 - 1.8063
424,000 $ 1.8064 - 3.6125
432,500 $ 3,6126 - 5.4188
17,000 $ 7.2251 - 9.0313
61,900 $16.2564 - 18.0625
------
1,532,900
=========
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 SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share for the years ended December 31,
1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated
below:
1999 1998 1997
---- ---- ------
Net (loss)
As reported ........................... $(9,428) $(4,064) $(3,209)
======= ======= =======
Pro forma ............................. $(9,675) $(4,777) $(3,834)
======= ======= =======
Basic and diluted net (loss) per share:
As reported ........................... $ (0.66) $ (0.29) $ (0.23)
======= ======= =======
Pro forma ............................. $ (0.68) $ (0.34) $ (0.27)
======= ======= =======
The weighted average Black-Scholes value of the options granted during
1999, 1998 and 1997 were $1.13, $0.83, and $2.37, respectively. The following
weighted-average assumptions were used in the Black-Scholes option-pricing
model for grants in 1999, 1998 and 1997 respectively: dividend yield of 0% for
all periods, volatility of 119%, 71%, and 55%, risk-free interest rate of
5.35%, 4.82%, and 6.51%, and an expected life of 10, 7 and 7 years.
b. 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 vested and were issued March 31, 1999; 240,000 shares
vest on March 31, 2000. Compensation cost recorded in 1999, 1998 and 1997 were
$261, $328 and $233, respectively, which represents the amortization of the
value of the restricted stock award at the date of grant over the vesting
period.
c. 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.
d. Stock Bonus
The Company issued 94,600 shares of common stock to certain key employees
during 1998 as payment for 1997 bonuses, which were accrued and recorded as
compensation expense of $236 in the year ended December 31, 1997.
F-12
<PAGE>
e. Stock Appreciation Rights
In 1997, the Company awarded stock appreciation rights to two Executive
Officers. These officers will be paid an amount equal to the appreciation over
5 years of 100,000 shares of stock. No compensation expense was recorded for
these stock appreciation rights in 1999, 1998 or 1997.
12. RESTRUCTURING CHARGES
In the fourth quarter of 1998, the Company recorded a restructuring charge
related to the sale of its West Hempstead facility that occurred on February 2,
1999. The charge included $1.2 million related to losses on the sale of
property, plant and equipment, employee severance payments and other incremental
charges directly attributable to the sale of the manufacturing facility. An
additional $0.7 million was charged to cost of goods sold for the write down of
inventory. The $0.6 million accrued restructuring expense balance at December
31, 1998 was utilized in fiscal 1999. At December 31, 1998, assets held for sale
included three facilities, two were sold in Fiscal 1999. At December 31, 1999
assets held for sale included one facility.
In the fourth quarter of 1997, the Company decided to discontinue the
manufacture and sale of the 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 $1.7 million
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.
13. PROVISION FOR SETTLEMENT OF LITIGATION
Commencing November 1996, nine class action complaints were filed against
the Company in the United States District Court for the Southern District of
New York. Among other things, the complaints alleged violation of the federal
securities law. By order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and entities who purchased
publicly traded securities or sold put options of the Company between February
14, 1995 and November 1996.
On October 7, 1999, the Company entered into a stipulation of settlement
(the "Settlement") with the class action plaintiffs. In consideration for the
discontinuance of the lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million is the Company's share, and the balance is
payable by the Company's insurers; issue 3 million shares of the Company's
common stock, and to pursue litigation against two of the Company's insurers to
recover under its excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all appeals and
reviews. A settlement hearing on the proposed settlement was held on March 31,
2000 and the court orally approved the settlement. A written order should be
signed in due course. In 1999, the Company recorded a charge of $5.9 million,
which represented the cost of the Settlement. The Company had funded its
required cash contribution to the settlement as of December 31, 1999 except for
a) the sum of $0.6 million, which the Company paid during the quarter ended
March, 31, 2000; and b) the cost of the litigation with two of the Company's
insurers which are not expected to be material.
14. 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
11%, 13%, and 16% of the Company's sales in 1999, 1998 and 1997, respectively
and accounts receivable from this customer was $3,048 at December 31, 1999.
Sales to one wholesale club were 17%, 15% and 8% in 1999, 1998 and 1997,
respectively and accounts receivable from this customer was $9,914 at December
31, 1999. No other customers accounted for more than eight percent of the
Company's sales in 1999, 1998 and 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.
15. 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-13
<PAGE>
Each right will entitle stockholders to buy one one-hundredth 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.
16. FACILITY CLOSURES
On March 15, 2000 the Company announced that it will be closing all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. The Company will incur a charge of approximately $0.3
million for employee severance payments and other incremental charges directly
attributable to the sale of the manufacturing facilities. The plant closings
are planned to be completed by mid May of Fiscal 2000.
F-14
<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 Years ended
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
BALANCE OF CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF PERIOD
- ---------------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Reserve for bad debts ............. $ 602,000 (173,000) (64,000) $ 365,000
Reserve for discounts ............. 18,000 1,583,000 (1,584,000) 17,000
----------- -----------
Subtotal for accounts receivable $ 620,000 $ 382,000
=========== ===========
Reserve for inventory markdowns ... 1,935,000 1,786,000 (1,800,000) $ 1,921,000
=========== ===========
Year ended December 31, 1998:
Reserve for bad debts ............. $ 511,000 45,000 (46,000) $ 602,000
Reserve for discounts ............. 209,000 1,190,000 1,381,000 18,000
----------- -----------
Subtotal for accounts receivable $ 720,000 $ 620,000
=========== ===========
Reserve for inventory markdowns ... 3,384,000 1,909,000 (3,358,000) $ 1,935,000
=========== ===========
Year ended December 31, 1997:
Reserve for bad debts ............. $ 968,000 (175,000) 282,000 $ 511,000
Reserve for discounts ............. 1,272,000 3,872,000 4,935,000 209,000
----------- -----------
Subtotal for accounts receivable $ 2,240,000 $ 720,000
=========== ===========
Reserve for inventory markdowns ... 11,715,000 6,093,000 (14,424,000) $ 3,384,000
=========== ===========
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made as of January 1,
2000, by and among Daniel H. Levy (the "Executive"), Donnkenny Apparel, Inc., a
Delaware corporation (the "Company"), and Donnkenny, Inc., a Delaware
corporation which is the parent corporation of the Company ("Donnkenny").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company (the "Board") expects that
the Executive will make substantial contributions to the growth and prospects
of Donnkenny, the Company and its subsidiaries; and
WHEREAS, the Board desires to obtain for the Company the services of the
Executive, and the Executive desires to be employed by the Company, all on the
terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, the Company and the Executive agree as follows:
1. EMPLOYMENT.
a. Position. On the terms and subject to the conditions set forth
herein, the Company hereby employs the Executive as its Chairman of the
Board and Chief Executive Officer throughout the Employment Term (as
defined below). In addition, the Company shall immediately cause each of
its subsidiaries to designate Executive to the offices of Chairman of the
Board and Chief Executive Officer throughout the Employment Term.
Donnkenny hereby designates Executive as its Chief Executive Officer
throughout the
<PAGE>
Employment Term and agrees that during the Employment Term, it shall
(i) nominate the Executive for election to its Board of Directors
at each annual meeting of shareholders and use its best efforts to cause
the Executive to be duly elected to the Board at each such meeting, and
(ii) elect the Executive to the position of Chairman of the Board.
b. Duties and Responsibilities. The Executive shall have such duties
and responsibilities consistent with his position as the Board determines
and shall perform such duties and carry out such responsibilities to the
best of his ability for the purpose of advancing the business of the
Company and its subsidiaries and Donnkenny. Subject to the provisions of
Section 1.c. below, and excluding any periods of vacation and sick leave
to which Executive is entitled, during the Employment Term the Executive
shall devote his full business time, skill and attention to the business
of the Company and its subsidiaries and Donnkenny, and, except as
specifically approved by the Board, shall not engage in any other business
activity or have any other business affiliation. During the Employment
Term, Executive shall report directly to the Board and all other executive
officers of Donnkenny, the Company or any of its subsidiaries shall report
to the Executive.
c. Other Activities. Notwithstanding anything else to the contrary
set forth herein, Executive shall have the right to manage his personal
investments and, as part of the Executive's business efforts and duties on
behalf of Donnkenny, the Company or any of its subsidiaries, Executive may
participate fully in social, charitable and civic activities and may serve
on the boards of directors of other companies provided that such
activities do not unreasonably and materially interfere with the
performance of and do not involve a conflict of interest with his duties
or responsibilities hereunder. Donnkenny and the Company each
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acknowledge that Executive serves as of the date hereof as a director of
Whitehall Jewellers, Inc. and Domain Home Fashions, Inc., which service is
hereby approved.
2. EMPLOYMENT TERM. Subject to the termination provisions of Section 5
hereof, the "Employment Term" hereunder shall be a period of three (3) years,
commencing on January 1, 2000, and expiring at the close of business on
December 31, 2002.
3. COMPENSATION. During the Employment Term, the Company will pay and/or
otherwise provide the Executive with compensation and related benefits as
follows:
a. Relocation Payment. In consideration of Executive's execution of
this Agreement and Executive's temporary relocation to New York City to
perform his services hereunder, the Company, on or before January 31,
2000, shall pay to the Executive (i) the sum of Twenty Five Thousand
Dollars ($25,000) (the "Relocation Payment"); and (ii) the federal, state
and local income taxes for which Executive is liable on account of the
Relocation Payment, together with an amount sufficient to satisfy any
additional federal, state or local income taxes for which Executive is
liable on account of the amounts received pursuant to this Section
3.a.(ii). The parties hereto agree that the amounts provided for in this
Section 3.a. have been earned by the Executive and that the Company shall
not be entitled to any refund or repayment of any portion thereof
notwithstanding any termination of the Executive's employment for any
reason whatsoever.
b. Base Salary. During the Employment Term, the Company agrees to pay
the Executive, for services rendered hereunder, a base salary at the
annual rate of Five Hundred Thousand Dollars ($500,000) or such higher
rate as the Compensation Committee of the Board (the "Compensation
Committee") may designate in its sole and absolute discretion (the
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"Base Salary"). The Base Salary shall be payable in equal periodic
installments, not less frequently than monthly, less any sums which may be
required to be deducted or withheld under applicable provisions of law. The
Base Salary for any partial year shall be prorated based upon the number of
days elapsed in such year.
c. Bonus. As soon as practicable after the date hereof, the Company
shall adopt a bonus plan for its senior executives in which Executive
shall participate on the terms generally set forth in such plan from time
to time, or in any plan substituted therefor or in addition thereto,
during the Employment Term.
d. Restricted Stock and Stock Options. In addition to the payments
provided above, on Monday, January 3, 2000, the Compensation Committee
granted to the Executive, subject to the execution of this Agreement, (i)
an award of 150,000 restricted shares of the Common Stock of Donnkenny
pursuant to Donnkenny's Restricted Stock Plan (the "Restricted Stock
Plan") at a purchase price equal to the aggregate par value of such shares
(i.e., $.01 per share); and (ii) options to purchase 150,000 shares of
Donnkenny Common Stock pursuant to Donnkenny's Incentive Stock Option Plan
(the "Stock Option Plan"), with the purchase price upon exercise of such
options equal to $11/16 (i.e. $0.6875) per share i.e. the closing price of
the Common Stock on the date of such grant.
The shares of restricted stock and options shall vest as follows: (A)
100,000 options are deemed fully vested, exercisable and nonforfeitable on
June 30, 2000, and the remaining 50,000 options will become fully vested,
exercisable and nonforfeitable on December 31, 2000, and (B) 150,000
shares of restricted stock shall vest on December 31, 2002 and, with
respect to the options, such options shall remain exercisable during the
remainder of their
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respective terms notwithstanding any termination of the Executive's
employment except as otherwise provided in the grant agreements referred to
below; provided, however, that, anything herein or in the grant agreements
to the contrary notwithstanding, the vesting of such shares of restricted
stock and options shall be accelerated in the event of a Change in Control
(as defined herein), a termination of Executive's employment by the Company
without Cause (as defined below), a termination of Executive's employment
for Good Reason (as defined below), or a termination of Executive's
employment as a result of the death or disability of Executive and, in the
case of certain of the options, in certain other circumstances set forth in
the grant agreement referred to below. With respect to the options, such
options shall be incentive stock options to fullest extent permitted by
applicable law and the Stock Option Plan. The grant of the shares of
restricted stock and options has been made by the Compensation Committee
pursuant to the grant agreements attached hereto as Annexes A, B-1 (with
respect to incentive stock options) and B-2 (with respect to non-qualified
stock options), respectively.
Anything herein to the contrary notwithstanding, in the event a
Change of Control shall not be consummated on or before June 30, 2000
then, no later than July 5, 2000, (i) in addition to the aforesaid 150,000
shares of restricted stock granted to Executive pursuant to the Restricted
Stock Plan Executive shall be awarded an additional 150,000 restricted
shares of the Common Stock of Donnkenny pursuant to the Restricted Stock
Plan (subject to the same vesting provisions as is described above with
respect to the initial award of restricted shares); and (ii) Donnkenny and
the Company shall take whatever steps are required to amend the Restricted
Stock Plan, and shall take any other required corporate action, to permit
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the award and issuance of the additional restricted shares hereunder and
pursuant to the Restricted Stock Plan.
All shares of common stock of Donnkenny issued to Executive as
restricted shares or pursuant to stock options upon the vesting thereof
from time to time shall be duly registered and fully and freely tradeable
by Executive without restriction. In the event Executive shall require a
resale prospectus in connection with any intended sale of shares,
Donnkenny and the Company shall promptly furnish such resale prospectus to
Executive at the Company's expense.
e. Automobile Allowance. During the Employment Term the Company shall
pay to Executive the sum of One Thousand Two Hundred Dollars ($1,200) per
month for Executive's automobile expenses including, without limitation,
gasoline, tolls, insurance, parking, maintenance, repairs and similar
expenses.
f. Reimbursement of Expenses and Administrative Support. The Company
shall pay or reimburse the Executive, upon the presentation of appropriate
documentation of such expenses, for all reasonable travel and other
expenses incurred by the Executive in performing his obligations under
this Agreement. The Company further agrees to furnish the Executive with
office space and administrative support, and any other assistance and
accommodations as shall be reasonably required by the Executive in the
performance of his duties under this Agreement.
g. Vacation. Executive shall be entitled to four (4) weeks paid
vacation in each calendar year. Any vacation not taken in any calendar
year shall accrue and shall increase the paid vacation to which Executive
is entitled in subsequent calendar years until such excess
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shall be taken or paid for by the Company, as the case may be. Any
vacation to which Executive is entitled and which has not been fully taken
by Executive at the time his employment with the Company shall terminate
for any reason, shall be fully paid to Executive within thirty (30) days
after the effective date of Executive's termination of employment.
h. 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.
i. Change in Control. For purposes of this Agreement, a "Change in
Control" of the Company or Donnkenny shall be deemed to have occurred upon
any of the following events:
(A) A person or entity or group of persons or entities, acting
in concert, shall become the direct or indirect beneficial owner
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended), of securities of the Company or Donnkenny
representing more than fifty percent (50%) of the combined voting
power of the issued and outstanding common stock of Donnkenny or the
Company; or
(B) The majority of the Board, or the majority of the board of
directors of Donnkenny, is no longer comprised of the incumbent
directors who constitute such board on the date of this Agreement and
any other individual(s) who becomes a director subsequent to the date
of this Agreement whose initial election or nomination for election
as a director, as the case may be, was approved by at least a
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majority of the directors who comprised the incumbent directors as of
the date of such election or nomination; or
(C) The Board shall approve a sale of all or substantially all
of the assets of the Company, or the board of directors of Donnkenny
shall approve a sale of all or substantially all of the assets of
Donnkenny; or
(D) The Board, or the board of directors of Donnkenny, shall
approve any merger, consolidation, or like business combination or
reorganization of the Company, or of Donnkenny, the consummation of
which would result in the occurrence of any event described in clause
(A) or (B) above, and such transaction shall have been consummated.
4. Participation in Benefit Plans. The Executive shall be entitled to
participate, during the term of this Agreement, in the Company's and
Donnkenny's benefit programs, including but not limited to qualified or
non-qualified pension plans, other qualified or nonqualified retirement plans,
supplemental pension plans, group hospitalization, health, dental care, death
benefit, post-retirement welfare plans, or other present or future group
employee benefit plans or programs of the Company or Donnkenny for which key
executives are or shall become eligible (collectively, the "Benefit Plans"), on
the same terms as other key executives of the Company or Donnkenny, as the case
may be. If participation in any of such Benefit Plans is subject to or based on
length of service, the Executive, upon execution of this Agreement, shall be
credited with whatever number of years or period of service shall be required
in order for Executive to immediately commence participation therein. In
addition to and without limiting the generality of the foregoing, (i) the
Company (x) may obtain and maintain a "key man" life insurance policy under
which the Company is the named
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beneficiary in the amount of $2,500,000, and (y) in the event Executive
shall be in the employ of the Company on December 31, 2000, shall promptly
obtain and maintain a term life insurance policy in the amount of $2,500,000,
which policy shall be owned by the Executive, in each case from a
nationally-recognized insurance carrier reasonably acceptable to the Executive,
and (ii) 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
until the Executive reaches age 65. Upon termination of the employment of the
Executive with the Company or on or after December 31, 2000 for any reason other
than for Cause or the death of Executive, the Company shall continue to pay the
premiums on any of such policies, when due, for a period of five (5) years after
the effective date of termination and, at the expiration of such five (5) year
term, the Executive shall be entitled to purchase from the Company any life
insurance policy then owned by the Company on the life of the Executive and the
aforementioned disability insurance policy (if permitted under the terms of such
policy) for a purchase price equal to the cash surrender value of each policy,
if any.
5. TERMINATION OF EMPLOYMENT.
a. By the Company For Cause. The Company may terminate the
Executive's employment under this Agreement at any time for Cause (as
defined below) by delivery of written notice of termination to the
Executive (which notice shall specify in reasonable detail the basis upon
which such termination is made and the specific provision(s) of the
Agreement upon which it relies, and further stating the date, time and
place of the special meeting of the Board or the Board of Directors of
Donnkenny at which the issue of Cause
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shall be addressed) at least ten days prior to the termination date
set forth in such notice. No such termination shall become effective until
the Executive, after receipt of such notice, shall have been offered the
opportunity to attend a meeting of the Board of Directors of the Company
(or the Board of Directors of Donnkenny, whichever is applicable) at which
a quorum is present (with the Executive's counsel present and
participating, if desired by the Executive) regarding such termination
notice and the allegations set forth therein and, based upon such meeting,
such Board of Directors shall have elected to proceed with such
termination. Except as provided for in Section 23 below, in the event the
Executive's employment is terminated for Cause, all provisions of this
Agreement and the Employment Term shall be terminated; provided, however,
that such termination shall not divest the Executive of any previously
vested benefit or right. In addition, the Executive shall be entitled only
to payment of his earned and unpaid Base Salary to the date of termination,
earned and unpaid bonus for the prior fiscal year, additional salary
payments in lieu of the Executive's accrued and unused vacation,
unreimbursed business and entertainment expenses in accordance with the
Company's policy, and unreimbursed medical, dental and other employee
benefit expenses incurred, and other vested and accrued benefits payable in
accordance with the Company's or Donnkenny's employee benefit plans
(hereinafter referred to as the "Standard Termination Payments"). For
purposes of this Agreement, "Cause" means (x) the conviction of the
Executive for the commission of (A) any felony, or (B) a misdemeanor
involving moral turpitude, or (y) willful misconduct by the Executive that
results in material and demonstrable damage to the business or reputation
of the Company. No act or failure to act on the part of the Executive shall
be considered "willful" unless it is done, or omitted to be done, by the
Executive in bad faith or without reasonable belief that
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the Executive's action or omission was in the best interests of the
Company. Any act or failure to act that is based upon authority given
pursuant to a resolution duly adopted by the Board or the Board of
Directors of Donnkenny, or the advice of counsel for the Company or
Donnkenny, shall be conclusively presumed to be done, or omitted to be
done, by the Executive in good faith and in the best interests of the
Company.
b. Upon Death or Disability. If the Executive dies, all provisions of
this Agreement (other than rights or benefits arising as a result of such
death) and the Employment Term shall be automatically terminated;
provided, however, that the Standard Termination Payments and pro rata
Bonus for the fiscal year during which such death occurs shall be paid to
the Executive's surviving spouse or, if none, his estate, and the death
benefits under the Company's and Donnkenny's employee benefit plans shall
be paid to the Executive's beneficiary or beneficiaries as properly
designated in writing by the Executive. If the Executive is unable to
perform his responsibilities under this Agreement by reason of physical or
mental disability or incapacity and such disability or incapacity shall
have continued for six consecutive months or any period aggregating six
months within any 12 consecutive months (a "Disability'), the Company may
terminate this Agreement and the Employment Term at any time thereafter.
In such event, the Executive shall be entitled to receive his normal
compensation hereunder during said six (6) month period, and shall
thereafter be entitled to receive the Standard Termination Payments and
the pro rata Bonus for the fiscal year during which such disability
occurs. Pro rata Bonus, in the event of the Executive's death or
disability, shall be an amount equal to the Bonus at the amount payable
upon fully achieving the figure targeted in the annual business plan or
other documents relating to the Bonus approved by the Board, the
Compensation Committee or any other duly
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authorized designee of the Board for such year (the "Target Amount")
(regardless of the company's actual performance) for the fiscal year during
which such death or disability occurs, prorated by a fraction, the
numerator of which is the number of days of employment elapsed during the
fiscal year prior to termination of employment and the denominator of which
is 365. A termination of the Executive's employment by the Company for
Disability shall be communicated to the Executive by written notice, and
shall be effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), unless the Executive returns
to full-time performance of the Executive's duties before the Disability
Effective Date.
In the event Executive shall become disabled or shall die on or after
December 31, 2000, then the Company shall continue to provide the
Executive and the spouse and dependents of the Executive, at the expense
of the Company, with the medical insurance then provided generally to
dependents of employees of the Company, for a period of five (5) years
following the termination of the employment of the Executive, which
medical insurance coverage shall be included as part of any required COBRA
Coverage; provided, however, that the COBRA Coverage shall terminate with
respect to the Executive, the spouse and/or dependents of the Executive as
of the date that any such individual receives equivalent coverage and
benefits under any plans, programs and/or arrangements of a subsequent
employer. The rights and benefits of the Executive under the benefit plans
and programs of the Company shall be determined in accordance with the
provisions of such plans and programs. The rights and benefits of the
Executive with respect to the shares of restricted stock and options
referred to in Section 3.c. above shall be determined in accordance with
the
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provisions of this Agreement and the plans and grant agreements
governing such shares and options. Except as otherwise specified in this
Agreement, neither the Executive nor the Company shall have any further
rights or obligations under this Agreement.
c. By the Company Without Cause.
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i. The Company may terminate the Executive's employment under
this Agreement without Cause, and other than by reason of his death
or disability, at March 31, 2000 ("March Termination Date"), June 30,
2000 ("June 30, 2000 ("June Termination Date") or December 31, 2000
("December Termination Date") by sending written notice of
termination to the Executive, which notice shall specify a date
within 30 days after the date of such notice as the effective date of
such termination (the "Termination Date"). Subsequent to December 31,
2000 the Company may only terminate the employment of the Executive
for Cause or upon the death or disability of the Executive. From the
date of such notice through the Termination Date, the Executive shall
continue to perform the normal duties of his employment hereunder,
and shall be entitled to receive when due all compensation and
benefits applicable to the Executive hereunder. Thereafter, and
within thirty (30) days after the Termination Date, the Company shall
pay the Executive, by wire transfer of immediately available funds,
an amount equal to the Base Salary that he would have been entitled
to receive (A) for a period of 3 months following such termination,
in the event of a termination as of the March Termination Date, or
(B) for a period of 6 months following such termination, in the event
of a termination as of the June Termination Date; or (c) for a period
of 12 months following such termination, in the event of a
termination as of the December Termination Date. The Executive shall
have no obligation whatsoever to mitigate any damages, costs or
expenses suffered or incurred by the Company or Donnkenny with
respect to the severance obligations set forth in this Section,
5.c.i., and no such severance payments
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received or receivable by the Executive shall be subject to any
reduction, offset, rebate or repayment as a result of any subsequent
employment or other business activity by the Executive including,
without limitation, self employment.
ii. In the event of a termination of Executive's employment by
the Company without Cause on or after December 31,2000, the Company
shall continue to provide the Executive and the spouse and dependents
of the Executive, at the expense of the Company, with the medical
insurance then provided generally to dependents of employees of the
Company, for a period of five (5) years following the termination of
the employment of the Executive, which medical insurance coverage
shall be included as part of any required COBRA Coverage; provided,
however, that the COBRA Coverage shall terminate with respect to the
Executive, the spouse and/or dependents of the Executive as of the
date that any such individual receives equivalent coverage and
benefits under any plans, programs and/or arrangements of a
subsequent employer. The rights and benefits of the Executive under
the benefit plans and programs of the Company or Donnkenny shall be
determined in accordance with the provisions of such plans and
programs. The rights and benefits of the Executive with respect to
the shares of restricted stock and options referred to in Section
3.c. above shall be determined in accordance with the provisions of
this Agreement and the plans and grant agreements governing such
shares and options. Except as otherwise specified in this Agreement,
neither the Executive nor the Company or Donnkenny shall have any
further rights or obligations under this Agreement. The Company shall
also be obligated to pay to the Executive the
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Standard Termination Payments and pro rata Bonus for the fiscal
year during which such termination of employment occurs. Pro rata
Bonus, in the event the Executive's employment is terminated by the
Company without Cause, shall be an amount equal to the Bonus at Target
Amount (regardless of the Company's actual performance) for the fiscal
year during which such termination of employment occurs, pro rated by
a fraction, the numerator of which is the number of days of employment
elapsed during the fiscal year prior to termination of employment and
the denominator of which is 365.
d. By the Executive.
i. The Executive may terminate his employment, and any further
obligations which Executive may have to perform services on behalf of
Donnkenny or the Company and any of its subsidiaries hereunder at any
time after the date hereof, (i) without Good Reason (as defined
below) by sending written notice of such termination to the Company
not less than sixty (60) days prior to the effective date of such
termination (during such sixty (60) day period, the Executive shall
continue to perform the normal duties of his employment hereunder and
shall be entitled to receive when due all compensation and benefits
applicable to the Executive hereunder); or (ii) for Good Reason
pursuant to the procedure set forth in Section 5(d)iii below).
ii. For purposes of this Agreement, "Good Reason" shall be
defined as any of the following:
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A. failure by the Company or Donnkenny to re-elect the
Executive as a director, Chairman of the Board and Chief
Executive Officer, or the assignment to the Executive of any
duties or responsibilities inconsistent in any respect with
those customarily associated with the positions to be held by
the Executive pursuant to this Agreement, or any other action by
the Company that results in a diminution in the Executive's
position, authority, duties or responsibilities, other than an
isolated, insubstantial and inadvertent action that is not taken
in bad faith and is remedied by the Company promptly after
receipt of notice thereof from the Executive;
B. any failure by the Company or Donnkenny to comply with
any provision of Section 3 of this Agreement, other than an
isolated, insubstantial and inadvertent failure that is not
taken in bad faith and is remedied by the Company or Donnkenny,
as the case may be, promptly after receipt of notice thereof
from the Executive;
C. Any requirement by the Company that the Executive's
services be rendered primarily at a location or locations other
than that provided for in New York City;
D. any purported termination of the Executive's employment
by the Company or Donnkenny for a reason or in a manner not
expressly permitted by this Agreement;
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E. any failure by the Company or Donnkenny to comply with
paragraph (c) of Section 14 of this Agreement;
F. any Change in Control of the Company or Donnkenny;
G. the institution of bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings by or against
the Company or Donnkenny (which proceedings, if instituted
against the Company or Donnkenny, have been consented to by the
Company or Donnkenny, as the case may be, or have remained
undismissed for a period of sixty (60) days after the filing
date thereof); or
H. any other material breach of this Agreement by the
Company or Donnkenny that either is not taken in good faith or
is not remedied by the Company or Donnkenny, as the case may be,
within five (5) business days after receipt of notice thereof
from the Executive.
iii. A termination of employment by the Executive for Good
Reason shall be effectuated by giving the Company written notice
("Notice of Termination for Good Reason") of the termination, setting
forth in reasonable detail the specific conduct of the Company or
other event(s) that constitutes Good Reason and the specific
provision(s) of this Agreement on which the Executive relies. A
termination of employment by the Executive for Good Reason shall be
effective on the fifth business day following the date when the
Notice of Termination for Good Reason is given, unless the notice
sets forth a later date (which date shall in no event be later than
thirty (30) days after the notice is given.
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iv. The Executive shall elect to terminate his employment
hereunder (other than as a result of his death or disability) without
Good Reason, then the Executive shall remain vested in all vested
benefits provided for hereunder or under any benefit plan of the
Company in which Executive is a participant and shall be entitled to
receive the Standard Termination payments, but the Company shall have
no further obligation to make payments or provide benefits to the
Executive.
v. Subject to the provisions of Section 5.d.vi. below, if the
Company terminates the Executive's employment, other than for Cause
(except as permitted pursuant to Section 5.c. above), death or
Disability, or the Executive terminates employment for Good Reason,
the Company shall, at the option of the Company, (i) continue to pay
to the Executive, until the expiration of the Employment Term then in
effect, the Base Salary then in effect (but in no event less than one
year of Base Salary) plus the pro rata Bonus (calculated in the
manner described in Section 5.b. above) or (ii) pay the Executive a
lump sum amount equal to the present value of the amount referred to
in 5.d.v(i) above. In addition to the foregoing, the Company shall
also be obligated to pay to the Executive the Standard Termination
Payments as and when they shall become due. Furthermore, if such
termination occurs on or after December 31, 2000, the Company shall
continue to provide the Executive and the spouse and dependents of
the Executive, at the expense of the Company, with the medical
insurance then provided generally to dependents of employees of the
Company, for a period of five (5) years following the termination of
the employment of the Executive, which medical insurance coverage
shall be included as part of any
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required COBRA Coverage; provided, however, that the COBRA
Coverage shall terminate with respect to the Executive, the spouse
and/or dependents of the Executive as of the date that any such
individual receives equivalent coverage and benefits under any plans,
programs and/or arrangements of a subsequent employer. The rights and
benefits of the Executive with respect to the shares of restricted
stock and options referred to in Section 3.c. above shall be
determined in accordance with the provisions of this Agreement and the
plans and grant agreements governing such shares and options. Except
as otherwise specified in this Agreement, neither the Executive nor
the Company shall have any further rights or obligations under this
Agreement. Except as is provided for in Section 5.d.vi. below, the
payments and benefits provided pursuant to this Section 5.d.v. are
intended as liquidated damages for a termination of the Executive's
employment by the Company other than for Cause or Disability or for
the actions of the Company leading to a termination of the Executive's
employment by the Executive for Good Reason and shall be the sole and
exclusive remedy therefor. Executive shall have no obligation
whatsoever to mitigate any damages, costs or expenses suffered or
incurred by the Company with respect to any payments made pursuant to
this Section 5.d..v., and no such payment shall be subject to any
reduction, offset, rebate or repayment as a result of any subsequent
employment or other business activity by the Executive including,
without limitation, self employment.
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vi. If, during the Employment Term and upon or after the
occurrence of a Change in Control other than a Change in Control
proposed, sponsored or supported by the Executive, the Executive's
employment is terminated by the Company or the Executive for any or
no reason other than by the Company for Cause, death or Disability,
the Company shall pay to the Executive, by wire transfer of
immediately available funds within ten (10) days after the
Termination Date, an amount equal to three times the sum of (x) the
Executive's Base Salary in effect on the Date of Termination, and (y)
the Bonus, if any, paid to the Executive with respect to the calendar
year immediately preceding the calendar year in which the Date of
Termination occurs. In addition to the foregoing, the Company shall
also be obligated to pay to the Executive the Standard Termination
Payments as and when they shall become due. Furthermore, if no Bonus
is included in the calculation of the amount referred to in the
preceding sentence, then, in addition to the payment provided for
therein, the Company shall pay to Executive, contemporaneously with
the payment provided for in the prior sentence, and in the same
manner, an amount equal to the Bonus at Target Amount (regardless of
the Company's actual performance) for the entire year in which the
Termination Date occurs (which shall not be reduced pro rata for less
than a full year's service). The Company shall continue to provide
the Executive and the spouse and dependents of the Executive, at the
expense of the Company, with the medical insurance then provided
generally to dependents of employees of the Company, for a period of
five (5) years following the termination of the employment of the
Executive, which medical insurance coverage
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shall be included as part of any required COBRA Coverage;
provided, however, that the COBRA Coverage shall terminate with
respect to the Executive, the spouse and/or dependents of the
Executive as of the date that any such individual receives equivalent
coverage and benefits under any plans, programs and/or arrangements of
a subsequent employer. The rights and benefits of the Executive under
the benefit plans and programs of the Company shall be determined in
accordance with the provisions of such plans and programs. The rights
and benefits of the Executive with respect to the shares of restricted
stock and options referred to in Section 3.c. above shall be
determined in accordance with the provision of this Agreement and the
plans and grant agreements governing such shares and options. Except
as otherwise specified in this Agreement, neither the Executive nor
the Company shall have any further rights or obligations under this
Agreement. The payments and benefits provided pursuant to this Section
5.d.vi. are intended as liquidated damages for a termination of the
Executive's employment by the Company other than for Cause or
Disability or for the actions of the Company leading to a termination
of the Executive's employment by the Executive for Good Reason, in
each case on or after the occurrence of a Change in Control, and shall
be the sole and exclusive remedy therefor. Executive shall have no
obligation whatsoever to mitigate any damages, costs or expenses
suffered or incurred by the Company with respect to any payments made
pursuant to this Section 5.d.vi., and no such payment shall be subject
to any reduction, offset, rebate or repayment as a result of any
subsequent employment or
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other business activity by the Executive including, without
limitation, self employment.
e. Upon the Expiration of the Employment Term. In the event the
employment of Executive hereunder shall terminate as a result of the
expiration of the Employment Term (or any extension period mutually agreed
upon by Donnkenny, the Company and the Executive), then Executive shall be
entitled to receive from the Company and Donnkenny the same amounts and
benefits, upon the same terms and conditions, as are applicable to a
termination by the Company without Cause as of the December Termination
Date, as are more particularly set forth in Section 5.c. above, but
calculated and determined as of Executive's actual Date of Termination (as
defined below).
f. No Waiver. The failure to set forth any fact or circumstance in a
Notice of Termination for Cause or a Notice of Termination for Good Reason
shall not constitute a waiver of the right to assert, and shall not
preclude the party giving notice from asserting, such fact or circumstance
in an attempt to enforce any right under or provision of this Agreement.
g. Date of Termination. The "Date of Termination" means the date of
the Executive's death, the Disability Effective Date, the date on which
the termination of the Executive's employment by the Company for Cause or
without Cause or by the Executive for Good Reason is effective, the date
on which the Executive gives the Company notice of a termination of
employment without Good Reason, or the date upon which the Employment Term
(or any mutually agreed extension thereof shall expire) as the case may
be.
23
<PAGE>
6. TAX INDEMNIFICATION. If the compensation, benefits, payment
accelerations, share option acceleration, appreciation rights or loan
forgiveness received by Executive from Donnkenny or the Company hereunder, or
otherwise, (the "Payments") will be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code and any successor provision, or any
comparable provision of state or local tax law (collectively, "Section 4999"),
or any interest, penalty or addition to tax will be incurred by Executive with
respect to such excise tax (such excise tax, together with any such interest,
penalty or addition to tax being referred to herein as the "Excise Tax"), then
Executive shall receive an additional cash payment (a "Gross-Up Payment") in an
amount such that after the payment by Executive of all taxes, interest,
penalties, and additions to tax imposed with respect to the Gross-Up Payment
(including, without limitation, any income tax, employment tax payable by
Executive and Excise Tax imposed upon the Gross-Up Payment), Executive retains
an amount of the Gross-Up Payment equal to the Excise Tax imposed upon such
Payments. In calculating the Gross-Up Payment, Executive will be deemed to pay
Federal income taxes at the highest marginal rate of Federal income taxation as
of the year in which the Gross-Up Payment is to be made and state and local
taxes at the highest marginal rate of taxation in the state or locality of the
Gross-Up Payment recipient's state of residence as of the date the tax
obligation is incurred, net of the maximum reduction in Federal income taxes
which could be obtained from deducting the state and local taxes if paid in the
year in which the tax obligation is incurred.
7. Representations and Warranties of the Company and Donnkenny. Each of
the Company and Donnkenny represents and warrants to the Executive as follows:
i. the options have been duly granted to the Executive by the Company
or Donnkenny, as the case may be, at the opening of business on Monday,
January 3, 2000,
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pursuant to the express provisions of the Stock Option Plan, and all
necessary corporate action with respect thereto has been duly taken;
ii. the shares of restricted stock of Donnkenny have been granted to
the Executive by the Company or Donnkenny, as the case may be, pursuant to
the express provisions of the Restricted Stock Plan, and all necessary
corporate action with respect thereto has been duly taken;
iii. the Option Plan and the Restricted Stock Plan are in full force
and effect in accordance with their respective terms, and the options and
shares of restricted stock granted to the Executive under each such Plan
were available for grant thereunder;
iv. the aforesaid grant of the options and shares of restricted stock
to the Executive does not violate or breach any provision of the Articles
of Incorporation or Bylaws of Donnkenny or the Company or any agreement to
which Donnkenny or the Company is subject or by which it is bound, and no
shareholder approval of such grant or the exercise of any options or
shares of restricted stock thereunder is required; and
v. the options, the shares of restricted stock and all agreements
related thereto to be entered into by the Company or Donnkenny shall be
duly executed and delivered by the Company or Donnkenny and shall
constitute valid and binding obligations of the Company or Donnkenny,
enforceable against the Company, as the case may be, in accordance with
their terms (except as the enforceability thereof may be limited or
otherwise affected by bankruptcy, insolvency, reorganization,
25
<PAGE>
moratorium or other similar laws generally affecting the rights of
creditors and subject to general equity principles, whether considered at
law or in equity).
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan,, program,
policy or practice provided by the Company or any of its affiliated companies
for which the Executive may qualify, nor shall anything in this Agreement limit
or otherwise affect such rights as the Executive may have under any contract or
agreement with the Company or any of its affiliated companies. Vested benefits
and other amounts that the Executive is otherwise entitled to receive under the
Restricted Stock Plan, the Stock Option Plan, or any other plan, policy,
practice or program of, or any contract of agreement with, the Company or any
of its affiliated companies on or after the Date of Termination shall be
payable in accordance with the terms of each such plan, policy, practice,
program, contract or agreement, as the case may be.
9. INVENTIONS. Any and all inventions, innovations or improvements
("inventions") made, developed or created by the Executive (whether at the
request or suggestion of the Company (which, as used in this Section 9, shall
be deemed to include the Company and each of its subsidiaries) or otherwise,
whether alone or in conjunction with others, and whether during regular hours
of work or otherwise) during the period of his employment with the Company
which may be directly or indirectly useful in, or relate to, the business of
the Company, shall be promptly and fully disclosed by the Executive to the
Board and shall be the Company's exclusive property as against the Executive,
and the Executive shall promptly deliver to an appropriate representative of
the Company as designated by the Board all papers, drawings, models, data and
other material relating to any inventions made, developed or created by him as
aforesaid. The Executive shall, at the request of the
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<PAGE>
Company and without any payment therefor, execute any documents necessary
or advisable in the opinion of the Company's counsel to direct issuance of
patents or copyrights to the Company with respect to such inventions as are to
be the Company's exclusive property as against the Executive or to vest in the
Company title to such inventions as against the Executive. The expense of
securing any such patent or copyright shall be borne by the Company.
10 CONFIDENTIAL INFORMATION. The Executive shall hold in strict confidence
all secret or confidential information, knowledge or data relating to the
Company or any of its affiliated companies and their respective businesses that
the Executive obtains during the Executive's employment by the Company or any
of its affiliated companies; provided, however, that Executive's obligations
under this Section 10 with respect to any specific Confidential Information
shall cease when that specific Confidential Information becomes public
knowledge (other than as a result of the Executive's violation of this Section
10) ("Confidential Information") or when it is disclosed by any person, firm,
corporation or business entity which is not bound by the terms of a
confidentiality agreement with the Company which contains substantially
identical provisions as the terms hereof. Except as is otherwise provided for
herein, the Executive shall not communicate, divulge or disseminate
Confidential Information at any time during or after the Executive's employment
with the Company, except with the prior written consent of the Company or as
otherwise required by law or regulation or by legal process. If the Executive
is requested pursuant to, or required by, applicable law or regulation or by
legal process to disclose any Confidential Information, the Executive shall
provide the Company, as promptly as the circumstances reasonably permit, with
notice of such request or requirement and, unless a protective order or other
appropriate relief is previously obtained, the Confidential Information,
subject to such request, may be disclosed pursuant to and in
27
<PAGE>
accordance with the terms of such request or requirement, provided that the
Executive, at the Company's expense, shall use his best efforts to limit any
such disclosure to the precise terms of such request or requirement.
11 NON-COMPETITION. The Executive acknowledges that the services to be
rendered by him to the Company (which, as used in this Section 11 shall be
deemed to include the Company and each of its subsidiaries) are of a special
and unique character. In consideration of his employment hereunder, the
Executive agrees, for the benefit of the Company, that he will not, during the
term of this Agreement and (except in a case where the Executive's employment
is terminated (x) by the Company other than for Cause, (y) by the Executive for
Good Reason, or (z) by the Executive or the Company for any or no reason
following the occurrence of a Change in Control) thereafter until the
expiration of a period of twelve (12) months commencing on the date of
termination of his employment with the Company (a) engage, directly or
indirectly, whether as principal, agent, distributor, representative,
consultant, employee, partner, stockholder, limited partner or other investor
(other than an investment of not more than (i) five percent (5%) of the stock
or equity of any corporation the capital stock of which is publicly traded or
(ii) five percent (5%) of the ownership interest of any limited partnership or
other entity) or otherwise, within the United States of America, in any apparel
business which is competitive with the business now, or at any time during the
term of this Agreement, conducted by the Company, (b) solicit or entice to
endeavor to solicit or entice away from the Company any person who was an
officer, employee or sales representative of the Company, either for his own
account or for any individual, firm or corporation, whether or not such person
would commit any breach of his contract of employment by reason of leaving the
service of the Company, and the Executive agrees not to employ, directly or
indirectly, any person who was an
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<PAGE>
officer, employee or sales representative of the Company or who by reason
of such position at any time is or may be likely to be in possession of any
confidential information or trade secrets relating to the businesses or products
of the Company; provided, however, that nothing herein shall be deemed to
restrict or prohibit the solicitation and hiring of any individual who responds
to general solicitation or advertising of employment which is not specifically
directed or targeted to employees of the Company or its subsidiaries, or (c)
solicit or entice or endeavor to solicit or entice away from the Company any
customer or prospective customer of the Company, either for his own account or
for any individual, firm or corporation with respect to the business of the
Company. In addition, the Executive shall not, at any time during the term of
this Agreement or at any time thereafter, engage in the business which uses as
its name, in whole or in part, Donnkenny, Kenny Classics or any other tradename
or trademark or corporate name used by Donnkenny, the Company or any of their
subsidiaries during the Employment Term.
12 INDEMNIFICATION.
a The Company and Donnkenny shall indemnify the Executive to the
fullest extent permitted by Delaware law in effect as of the date
hereof against all costs, expenses, liabilities and losses (including,
without limitation, attorneys' fees, judgments, fines, penalties,
ERISA excise taxes, penalties and amounts paid in settlement)
reasonably incurred by the Executive in connection with a Proceeding.
For the purposes of this Section 12, a "Proceeding" shall mean any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, in which the Executive is made, or is threatened to be
made, a party to, or a witness in, such action, suit or proceeding by
reason of the fact that he is or was an officer, director or employee
of the Company or Donnkenny, or is or was serving as an
29
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officer, director, member, employee, trustee or agent of any
other entity at the request of the Company or Donnkenny, whether or
not the basis of such Proceeding arises out of or in connection with
the Executive's alleged action or omission in an official capacity.
b The Company and Donnkenny shall advance to the Executive all
reasonable costs and expenses incurred by him in connection with a
Proceeding within 20 days after receipt by the Company or Donnkenny,
as the case may be, of a written request for such advance. Such
request shall include an itemized list of the costs and expenses and
an undertaking by the Executive to repay the amount of such advance
if it shall ultimately be determined that he is not entitled to be
indemnified against such costs and expenses. Upon a request under
subsection (b), the Executive shall be deemed to have met the
standard of conduct required for such indemnification unless the
contrary shall be established by a court of competent jurisdiction.
c The Executive shall not be entitled to indemnification under
this Section 12 unless he meets the standard of conduct specified in
the Delaware General Corporation Law. Any indemnification under
subsection a. (unless ordered by a court) shall be made by the
Company or Donnkenny only as authorized in the specific case upon a
determination that indemnification of the Executive is proper in the
circumstances because he has met the applicable standard of conduct
set forth in the Delaware Corporation Law. Such determination shall
be made (1) by the Board or the Board of Directors of Donnkenny, as
the case may be, by a majority vote of a quorum consisting of
directors who were not parties to such Proceeding, or (2) if such a
quorum is not obtainable, or, even if obtainable a quorum of
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disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
d Neither the Company nor Donnkenny shall settle any Proceeding
or claim in any manner which would impose on the Executive any
penalty or limitation without his prior written consent. Neither the
Company nor Donnkenny nor the Executive will unreasonably withhold
its or his consent to any proposed settlement.
e The indemnification in this Section 12 shall inure to the
benefit of the Executive's heirs, executors and administrators.
f The Company and Donnkenny agree to use their respective best
efforts to obtain, continue and maintain an adequate directors and
officers' liability insurance policy and shall cause such policy to
cover the Executive to the extent the Company or Donnkenny provides
such coverage for its other executive officers. Upon request by
Executive, the Company and Donnkenny shall furnish Executive with
written evidence that such coverage is in full force and effect.
g Donnkenny and the Company agree to indemnify and hold
Executive harmless from all losses, costs, fees and expenses
including, without limitation, reasonable legal fees and litigation
expenses, which Executive shall suffer, sustain or incur as a result
of, in connection with or arising from any breach of this Agreement
by Donnkenny or the Company.
13 ATTORNEYS' FEES. The Company agrees to pay, as incurred, all legal fees
and expenses incurred by the Company and the Executive in connection with the
preparation of this Agreement. The Company further agrees to pay, as incurred,
to the fullest extent permitted by law, all legal fees
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and expenses that the Executive may reasonably incur as a result of any
contest (regardless of the outcome) by Donnkenny, the Company, the Executive or
others of the validity or enforceability of or liability under, or otherwise
involving, any provision of this Agreement, together with interest on any
delayed payment at the applicable federal rate provided for in Section
7872(f)(2)(A) of the Code.
14 SUCCESSORS; BENEFICIARIES.
a This Agreement is personal to the Executive and, without the
prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall insure to the benefit of and be
enforceable by the Executive's legal representatives.
b This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
c The Company or Donnkenny, as the case may be, shall require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company or Donnkenny expressly to assume
and agree to perform this Agreement in the same manner and to the same
extent that Donnkenny or the Company would have been required to
perform it if no such succession had taken place; provided, however,
that no such assignment or transfer shall have the effect of releasing
or relieving Donnkenny or the Company of any liability or obligation
to the Executive hereunder or in any other agreement, plan or document
contemplated herein. As used in this Agreement, "Company" shall mean
both the Company as defined above and any such successor that assumes
and agrees to perform this Agreement, by operation of law or otherwise
and "Donnkenny" shall mean both Donnkenny as defined above and any
such
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successor that assumes and agrees to perform this Agreement by
operation of law or otherwise.
d The Executive shall be entitled, to the extent permitted under
any applicable law, to select and change the beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder
following the Executive's death by giving the Company written notice
thereof. In the event of the Executive's death or a judicial
determination of his incompetence, reference in this Agreement to the
Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
15 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given by hand delivery to the other party or
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Mr. Daniel H. Levy
3332 Sabal Cove Lane
Longboat Key, Florida 34228
With a copy to:
Piper Marbury Rudnick & Wolfe
Suite 1800
203 North LaSalle Street
Chicago, Illinois 60601-1293
Attn: Stephen A. Landsman, Esq.
If to Donnkenny or the Company:
Donnkenny Apparel, Inc.
1411 Broadway
New York, New York 10018
Attention: President
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or to such other address as either party furnishes to the other in writing
in accordance with this Section 15. Notices and communications shall be
effective when actually received by the addressee.
16 MODIFICATION OR WAIVER. No amendment, modification, waiver, termination
or cancellation of this Agreement shall be binding or effective for any purpose
unless it is made in a writing signed by the party against whom enforcement of
such amendment, modification, waiver, termination or cancellation is sought. No
course of dealing between or among the parties to this Agreement shall be
deemed to affect or to modify, amend or discharge any provision or term of this
Agreement. No delay on the part of Donnkenny, the Company or the Executive in
the exercise of any of their respective rights or remedies shall operate as a
waiver thereof, and no single or partial exercise by Donnkenny, the Company or
the Executive of any such right or remedy shall preclude other or further
exercises thereof. A waiver of a right or remedy on any one occasion shall not
be construed as a bar to or waiver of any such right or remedy on any other
occasion.
17 GOVERNING LAW; JURISDICTION. This Agreement and all rights, remedies
and obligations hereunder, including, but not limited to, matters of
construction, validity and performance shall be governed by the laws of the
State of Delaware without regard to its conflict of laws principles or rules.
18 SEVERABILITY. Whenever possible each provision and term of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision or term of this Agreement shall be
held to be prohibited by or invalid under such applicable law, then such
provision or term shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating or affecting in any manner whatsoever the
remainder of such provisions or term or the remaining provisions or terms of
this Agreement.
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19 COUNTERPARTS. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same Agreement.
20 HEADINGS. The headings of the Sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute a part hereof and
shall not affect the construction or interpretation of this Agreement.
21 ENTIRE AGREEMENT. This Agreement (together with all documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and undertakings, both written and oral, among the
parties with respect to the subject matter hereof.
22 ARBITRATION. If any controversy or dispute shall arise between the
parties hereto in connection with, arising from, or in respect to this
Agreement, any provision hereof, or any provision of any instrument, document,
agreement or other writing delivered pursuant hereto, or with respect to the
validity of this Agreement or any such document, agreement or other writing,
and if such controversy or dispute shall not be resolved within thirty (30)
days after the same shall arise, then such dispute or controversy shall be
submitted for arbitration to the New York, New York office of the American
Arbitration Association in accordance with its commercial arbitration rules
then in effect. Any such dispute or controversy shall be determined by one (1)
arbitrator. Such arbitrator may award any relief which such arbitrator shall
deem proper in the circumstances, without regard to the relief which would
otherwise be available to either party hereto in a court of law or equity,
including, without limitation, an award of money damages (including interest on
unpaid amounts, calculated from the due date of any such amount, at a rate per
annum determined by said arbitrator), specific performance and injunctive
relief. The award and findings of such arbitrator shall be conclusive and
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binding upon the parties thereto, and judgment upon such award may be entered
in any court of competent jurisdiction. Any party against whom an arbitrator's
award shall be issued shall not, in any manner, oppose or defend against any
suit to confirm such award, or any enforcement proceedings brought against such
party, whether within or outside of the United States of America, with respect
to any judgment entered upon the award, and such party hereby consents to the
entry of a judgment against such party, in the full amount thereof, or other
relief granted therein, in any jurisdiction in which such enforcement is
sought.
23 SURVIVAL. The respective obligations of Donnkenny and the Company and
the Executive under Sections 5 (with respect to amounts owing as a result of
any termination), 6, 8 (with respect to amounts owing), 9, 10, 11, 12, 13,
14.c., 22 or this Section 23 shall survive any termination of Executive's
employment; provided, however, that the Executive's obligations under Section
11 (Non-Competition) shall terminate and shall not survive in the event (i) the
Executive's employment is terminated by the Company other than for Cause or by
the Executive for Good Reason, or (ii) the Executive's employment is terminated
for any or no reason following a Change in Control.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
DONNKENNY, INC., a Delaware
corporation
By:
--------------------------------
Name:
Title:
DONNKENNY APPAREL, INC., a
Delaware corporation
By:
--------------------------------
Name:
Title:
EXECUTIVE
--------------------------------
DANIEL H. LEVY
<PAGE>
THIRD AMENDMENT TO CREDIT AGREEMENT, WAIVER AND CONSENT
THIRD AMENDMENT TO CREDIT AGREEMENT, WAIVER AND CONSENT, dated as of
February __, 2000 (this "Amendment"), to the Credit Agreement dated as of June
29, 1999 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement") among DONNKENNY APPAREL, INC. a Delaware corporation
("DKA"), BELDOCH INDUSTRIES CORPORATION, a Delaware corporation ("BIC";
together with DKA, and severally, the "Borrowers"), the Guarantors party
thereto, the lenders party thereto (collectively, the "Lenders") and THE CIT
GROUP/COMMERCIAL SERVICES, INC. as agent for the Lenders (in such capacity, the
"Agent").
The Borrowers, the Guarantors, the Lenders and the Agent are parties to
the Credit Agreement.
The Borrowers have requested that (a) the Lenders waive certain existing
Events of Default under the Credit Agreement, (b) (i) Lenders consent to
certain action taken by Parent which is prohibited by the Credit Agreement and
(ii) Required Lenders consent to the closing by Borrowers of certain
manufacturing facilities, and (c) amend certain provisions of the Credit
Agreement.
The Lenders are willing to waive such existing Events of Default, give
such consent and make such amendments to the Credit Agreement upon the terms
and subject to the conditions set forth in this Amendment.
Accordingly, in consideration of the mutual agreements set forth herein,
and for good and other valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Initially capitalized terms used and not otherwise
defined herein shall have their respective meanings as defined in the Credit
Agreement.
2. Waiver of Events of Default. Borrowers have exceeded the Overadvance
Amount permitted under the terms of the Credit Agreement during the End of
Month Period for January 2000 and have defaulted under Sections 7.10 (Minimum
Interest Coverage Ratio), 7.11 (EBITDA) and 7.12(A) (Tangible Net Worth) of the
Credit Agreement (collectively, the "Subject Covenants"), as a result of their
breach of such financial covenants for the quarterly period ending December 31,
1999. As a result of the foregoing, Events of Default (collectively, the
"Covenant Defaults") have occurred under Article VIII(d) of the Credit
Agreement. In response to the Borrowers' request for a waiver of the Covenant
Defaults, Lenders hereby waive the Covenant Defaults, provided, however, that
nothing contained in this Amendment shall be construed to limit, impair or
otherwise affect any rights of Lenders in respect of future noncompliance with
respect to any Overadvance Amount, the Subject Covenants or any other covenant,
term or provision of the Credit Agreement or of any of the other Loan
Documents.
<PAGE>
3. Consents. (a) Subsection (n) of Article VIII of the Credit Agreement
provides that an Event of Default shall have occurred if Harvey Appelle ceases
to be the Chairman of the Parent (i.e. Donnkenny, Inc.), unless a replacement
reasonably satisfactory to the Required Lenders is found within 180 days. The
Borrowers have advised the Lenders that as of January 1, 2000, Daniel Levy was
appointed Chairman of Donnkenny, Inc., succeeding Harvey Appelle. The Lenders
hereby confirm that Daniel Levy is satisfactory as Chairman of Donnkenny, Inc.
and, therefore, no Event of Default occurred as a result of such retirement by
Harvey Appelle and such successor appointment.
(b) Borrowers have advised Lenders that Borrowers propose to close the
following three manufacturing facilities ("Subject Facilities") and to transfer
the manufacturing operations presently conducted at the Subject Facilities to
manufacturing facilities located outside of the United States that are owned by
Borrowers and/or other Persons (the "Subject Facilities Closing"):
(1) Fabric Cutters
326 West Oxford Street
Floyd, Virginia 24091
(2) Skyline
326 West Oxford Street
Floyd, Virginia 24091
and
(3) Grayson
116 Grayson Avenue
Independence, Virginia 24348
In response to Borrowers' request, Required Lenders hereby waive the
application of Sections 6.02 and 7.13 of the Credit Agreement and hereby
consent to the Subject Facilities Closing, provided that, (i) nothing contained
herein shall be deemed or constitute Required Lenders' consent to the sale,
lease or other disposition of the Subject Facilities and (ii) Borrowers shall
comply with all laws applicable to the Subject Facilities Closing, including,
without limitation, the Worker Adjustment and Retraining Notification Act, 29
U.S.C. ss. 2101 et. seq.
4. Amendment of Section 1.01. Section 1.01 of the Credit Agreement is
amended as follows:
(a) Interest Rate. The initial portion of the definition of "Interest
Rate" that precedes the parenthetical based on the Eurodollar Rate...)" is
hereby amended in its entirety to read as follows:
" 'Interest Rate' shall mean as to Prime Rate Loans, a rate of one
(1.00%) percent in excess of the Prime Rate and, as to Eurodollar Rate
Loans, a rate of three (3.00%) percent per annum in excess of the Adjusted
Eurodollar Rate..."
2
<PAGE>
(b) Overadvance Amount. The definition of "Overadvance Amount" is amended
and restated in its entirety to read as follows:
" 'Overadvance Amount' shall mean, during any Intramonth Period and
End of Month Period, the amounts set forth below as correspond to the
Intramonth Period and the End of Month Period during the months set forth
below:
OVERADVANCE AMOUNT
OVERADVANCE AMOUNT DURING THE DURING THE
MONTH INTRAMONTH PERIOD OF MONTH PERIOD
-------------------- ----------------------------- ---------------
January 2000 $ 8,200,000 $4,200,000
February 2000 $ 8,000,000 $4,000,000
March 2000 $ 7,800,000 $2,800,000
April 2000 $10,300,000 $5,300,000
May 2000 $13,700,000 $8,700,000
June 2000 $14,200,000 $9,200,000
July 2000 $13,300,000 $8,300,000
August 2000 $10,200,000 $5,200,000
September 2000 $ 8,000,000 $3,000,000
October 2000 $ 7,000,000 $2,000,000
November 2000 $ 7,000,000 $2,000,000
December 2000 $ 7,000,000 $2,000,000
; provided, however, that, if following receipt of a mutually acceptable
monthly operating plan by November 30, 2000 the Borrowers and the Lenders
have not agreed on Overadvance Amounts for January, 2001 and thereafter,
the Overadvance Amount during the End of Month Period and during the
Intramonth Period End for January, 2001 and thereafter shall be zero
dollars ($0); provided, further, that each of the foregoing amounts shall
be reduced by the aggregate amount of cash proceeds received by the Parent
and/or any of its Subsidiaries (i) as tax refunds
3
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and (ii) as proceeds (net of taxes due and any reasonable expenses of
sale) from the sale or other disposition of any assets of the Parent
and/or any of its Subsidiaries (excluding sales of inventory in the
ordinary course of business consistent with past practices). The foregoing
shall not be deemed to be a consent by the Agent or any Lender to any sale
of assets.
For purposes of this paragraph, (i) the term 'End of Month Period'
shall mean the period commencing on the last Business Day of a month and
ending on the fifth day of the immediately following month and (ii) the
term `Intramonth Period' shall mean the period commencing on the sixth day
of a month and ending on the day immediately preceding the last Business
Day of the same month."
5. Amendment of Section 2.01(b). Section 2.01(b) of the Credit Agreement
is hereby amended by inserting into the first paragraph thereof a new sentence,
which shall be the second to last sentence thereof and shall immediately follow
the sentence ending with "$75,000,000", as follows:
"In addition to and not in limitation of the foregoing limitations
with respect to Revolving Credit Loans outstanding at any time to
Borrowers, and notwithstanding anything to the contrary contained in this
Section 2.01(b), the aggregate principal amount of Revolving Credit Loans
outstanding at any time to Borrowers solely with respect to Eligible
Receivables and Eligible Inventory shall not exceed an amount equal to the
total amount of Revolving Credit Loans then available based upon the
immediately preceding clauses (B)(i) and (B)(ii)(I)."
6. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is
amended in its entirety to read as follows:
"Section 7.10 Minimum Interest Coverage Ratio. Permit the Interest
Coverage Ratio of the Parent and its Subsidiaries on a Consolidated basis
for each four consecutive fiscal quarter period ending on the last day of
each of the fiscal quarters set forth below to be less than the ratio set
forth below opposite such fiscal quarter:
4
<PAGE>
Quarterly Period Ending Minimum Interest Coverage Ratio
----------------------- -------------------------------
March 31, 2000 .30 to 1.00
June 30, 2000 0 to 1.00
September 30, 2000 .40 to 1.00
December 31, 2000 1.50 to 1.00"
7. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is
hereby amended in its entirety to read as follows:
"Section 7.11 EBITDA. Permit EBITDA of the Parent and its
Subsidiaries (in each case computed and calculated in accordance with
GAAP) on a Consolidated basis for each four consecutive fiscal quarter
period ending on the last day of each of the fiscal quarters set forth
below to be less than the amount set forth below opposite each such fiscal
quarter:
Quarterly Period Ending EBITDA
---------------- -------------
March 31, 2000 $1,109,000
June 30, 2000 $ 83,700
September 30, 2000 $1,445,000
December 31, 2000 $5,130,000"
8. Amendment of Section 7.12A. Section 7.12A of the the Credit Agreement
is hereby amended in its entirety to read as follows:
"Section 7.12A Tangible Net Worth. Permit the Tangible Net Worth of
the Parent and its Subsidiaries (in each case computed and calculated in
accordance with GAAP) on a Consolidated basis as of the end of each of the
fiscal quarters set forth below to be less than the amount set forth below
opposite each such fiscal quarter:
Quarterly Period Ending Tangible Net Worth
----------------------- ------------------
March 31, 2000 $10,000,000
June 30, 2000 $ 7,500,000
September 30, 2000 $ 9,450,000
December 31, 2000 $11,500,000"
5
<PAGE>
9. Overadvance Amount Clean-Up. Section 6.16 of the Credit Agreement is
hereby amended in its entirety to read as follows:
"SECTION 6.16 Payment of Revolving Credit Loans with respect to
Overadvance Amount. Notwithstanding anything to the contrary otherwise
contained in this Agreement, including, without limitation, Section
2.01(b), during the quarterly period ending December 31, 2000, Borrowers
shall pay and satisfy in full, on any one (1) day as may be selected by
Borrowers during such quarterly period (such day, the "Overadvance
Clean-up Date"), Revolving Credit Loans in an aggregate amount equal to
(x) that amount of Revolving Credit Loans which would otherwise be
permitted to be outstanding under Section 2.01(b) on the Overadvance
Clean-up Date, less (y) the Overadvance Amount as of the Overadvance
Clean-up Date. Subject to the terms and conditions of this Agreement,
Borrowers may at any time after the Overadvance Clean-up Date re-borrow
such Revolving Credit Loans repaid to Lenders on the Overadvance Clean-up
Date."
1. Amendment Fee. In consideration of the waiver of the Covenant Defaults
and the amendments to the Credit Agreement as set forth herein, Borrowers shall
pay to Agent, for the benefit of Lenders, or Agent, at its option, may charge
the account(s) of Borrowers maintained by Agent an amendment fee in the amount
of $75,000, which fee is fully earned and payable as of the date hereof and
shall constitute part of the Obligations.
10. Representations and Warranties. Borrowers hereby represent and warrant
to Lenders that the representations and warranties set forth in Article IV of
the Credit Agreement are true on and as of the date hereof, as if made on and
as of the date hereof, after giving effect to this Amendment, except to the
extent that any such representation or warranty expressly relates to a prior
date, and breach of any of the representations and warranties made in this
paragraph 11 shall constitute and Event of Default under Article VIII(a) of the
Credit Agreement. Borrowers further represent and warrant that, after giving
effect to this Amendment, no Event of Default or event which, with the lapse of
time or the giving of notice or both, would become an Event of Default has
occurred and is continuing.
11. Effectiveness. This Amendment shall become effective on the date Agent
shall have received counterparts of this Amendment duly executed and delivered
by each of the parties hereto.
12. Continuing Effect of Credit Agreement. This Amendment shall not
constitute a waiver or amendment of any provision of the Credit Agreement not
expressly referred to herein and shall not be construed as a consent to any
further or future action on the part of either of the
6
<PAGE>
Borrowers that would require consent of Lenders. Except as expressly amended by
this Amendment, the provisions of the Credit Agreement are and shall remain in
full force and effect.
13. Applicable Law. This Amendment shall be construed in accordance with
and governed by the laws of the State of New York (other than the conflicts of
law principles thereof).
14. Counterparts; Facsimile Signature. This Amendment may be executed in
counterparts, each of which shall constitute and original and all of which when
taken together shall constitute but one contract. Delivery of an executed
counterpart of the signature page of this Amendment by facsimile shall be
effective as delivery of a manually executed signature page hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective authorized officers as of the
day and year first above written.
DONNKENNY APPAREL, INC., as a Borrower and a Guarantor
By: /s/ Beverly Eichel
--------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: Executive Vice President, Chief Financial Officer
-----------------------------------------------------
BELDOCH INDUSTRIES CORPORATION, as a Borrower and a
Guarantor
By: /s/ Beverly Eichel
--------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: Executive Vice President, Chief Financial Officer
-----------------------------------------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
CHRISTIANSBURG GARMENT COMPANY, INCORPORATED
as a Guarantor
By: /s/ Beverly Eichel
--------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: Executive Vice President, Chief Financial Officer
-----------------------------------------------------
7
<PAGE>
H SQUARED DISPOSITIONS, INC., as a Guarantor
By: /s/ Beverly Eichel
--------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: Executive Vice President, Chief Financial Officer
-----------------------------------------------------
THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent
By: /s/ Lisa Murakami
--------------------------------------------------------
Name: Lisa Murakami
------------------------------------------------------
Title: Vice President
-----------------------------------------------------
THE CIT GROUP/COMMERCIAL SERVICES, INC., as a Lender
By: /s/ Lisa Murakami
--------------------------------------------------------
Name: Lisa Murakami
------------------------------------------------------
Title: Vice President
-----------------------------------------------------
8
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER
FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER, dated as of April 13,
2000 (this "Amendment"), to the Credit Agreement dated as of June 29, 1999 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement") among DONNKENNY APPAREL, INC. a Delaware corporation ("DKA"),
BELDOCH INDUSTRIES CORPORATION, a Delaware corporation ("BIC"; together with
DKA, and severally, the "Borrowers"), the Guarantors party thereto, the Lenders
party thereto and THE CIT GROUP/COMMERCIAL SERVICES, INC. as agent for the
Lenders (in such capacity, the "Agent").
The Borrowers, the Guarantors, the Lenders and the Agent are parties to
the Credit Agreement.
The Borrowers have requested that the Lenders waive existing Events of
Default under the Credit Agreement and amend certain provisions of the Credit
Agreement.
The Lenders are willing to waive such existing Events of Default and
make such amendments to the Credit Agreement upon the terms and subject to the
conditions set forth in this Amendment.
Accordingly, in consideration of the mutual agreements set forth
herein, and for good and other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Defined Terms. Initially capitalized terms used and not otherwise
defined herein shall have their respective meanings as defined in the Credit
Agreement.
2. Waiver of Events of Default. The Borrowers have failed to: (a)
prepay, as required by Section 2.09(c) of the Credit Agreement, the amount by
which the Revolving Credit Loans exceeded Availability during the End of Month
Period for March 2000, and (b) perform the negative covenant set forth in
Sections 7.10 (Minimum Interest Coverage Ratio), 7.11 (EBITDA) and 712A
(Tangible Net Worth) of the Credit Agreement for the quarterly period ending
March 31, 2000; as a result of which Events of Default (collectively, the
"Subject Defaults") have occurred and are continuing under Articles VIII(b) and
VIII(d)of the Credit Agreement. In response to the Borrowers' request for a
waiver of the Subject Defaults, Lenders hereby waive the Subject Defaults,
provided, however, that nothing contained in this Amendment shall be construed
to limit, impair or otherwise affect any rights of Lenders in respect of future
noncompliance with any covenant, term or provision of the Credit Agreement or of
any of the other Loan Documents.
3. Amendment of Section 1.01. Section 1.01 of the Credit Agreement is
amended as follows:
(a) Availability Reserves. The following is added as a defined
term:
<PAGE>
"'Availability Reserves'" shall mean, as of any date of
determination, such amounts as Agent may from time to time
establish and revise in good faith reducing the amount of
Revolving Credit Loans and Letters of Credit which would
otherwise be available to Borrowers under the Borrowing Base
provided for herein: (a) to reflect events, conditions,
contingencies or risks which, as determined by Agent in good
faith, do or may affect either (i) the Collateral or any other
property which is security for the Obligations or its value,
(ii) the assets, business or prospects of either Borrower or
any other Loan Party or (iii) the security interests and other
rights of Lenders in the Collateral (including the
enforceability, perfection and priority thereof) or (b) to
reflect Agent's good faith belief that any collateral report
or financial information furnished by or on behalf of
Borrowers is or may have been incomplete, inaccurate or
misleading in any material respect or (c) in respect of any
state of facts which Agent determines in good faith
constitutes a Default or an Event of Default."
(b) Interest Rate. The definition of "Interest Rate" is
amended as follows:
(i) the initial portion of the definition of
"Interest Rate" that precedes "and, as to Eurodollar Rate
Loans..." is hereby amended in its entirety to read as
follows:
""Interest Rate" shall mean as to Prime Rate Loans, a
rate of one and one-half (1.5%) percent in excess of the Prime
Rate...", and
(ii) the initial portion of the proviso contained in
such definition is hereby amended by adding thereto,
immediately after "provided that", the following:
"(x) if no Overadvance exists during the period
commencing November 1, 2000 through and including December 31,
2000, then, from and after January 1, 2000, the Interest Rate
shall mean as to Prime Rate Loans a rate of one (1.00%)
percent in excess of the Prime Rate, and (y)[the Interest Rate
shall be increased by two (2.00%) percent...]"
(c) Overadvance. "Overadvance" shall have the meaning assigned
to such term in Section 2.01(c) hereof.
(d) Overadvance Amount. The definition of "Overadvance Amount"
is deleted in its entirety.
4. Elimination of Eurodollar Rate Loan Option. Notwithstanding anything
to the contrary contained in the Credit Agreement or in any of the other Loan
Documents, from and after the date this Amendment becomes effective pursuant to
Section 14 below, Borrowers shall have no right to request or receive, and Agent
and Lenders shall not make, any Eurodollar Rate Loans.
2
<PAGE>
5. Amendment of Schedules 2.01(a) and 2.01(b). Schedule 2.01(a) Term
Loan Commitment and Schedule 2.01(b) Revolving Credit Commitments are hereby
amended and restated in their entirety effective October 6, 1999 as set forth in
the form of Schedule 2.01(a) and Schedule 2.01(b) attached hereto.
6. Amendment of Section 2.01(b). Section 2.01(b) of the Credit
Agreement is hereby amended as follows:
(a) The phrase "plus (iii) the Overadvance Amount as of the
date of determination" is deleted from the second sentences of the first
paragraph thereof.
(b) The phrase "except as otherwise set forth in Section
2.01(c)", is inserted in the fourth line of the second paragraph thereof after
"that" and before "no".
(c) As a result of the amendments to Section 2.01(b) made by
clauses (a) and (b) immediately above, Section 2.01(b) is amended and restated
in its entirety to read as follows:
"(b) Subject to the terms and conditions and relying
upon the representations and warranties herein set forth, each
Lender, severally and not jointly, agrees to make Revolving
Credit Loans to, and through the Agent open Letters of Credit
for the benefit of, the Borrowers, at any time and from time
to time from the date hereof to the Revolving Credit
Termination Date, in an aggregate principal amount at any time
outstanding not to exceed the amount of such Lender's
Revolving Credit Commitment set forth opposite its name in
Schedule 2.01(b) annexed hereto. Notwithstanding the
foregoing, the aggregate principal amount of Revolving Credit
Loans outstanding at any time to the Borrowers shall not
exceed (1) the lesser of (A) the Total Revolving Credit
Commitment and (B) an amount equal to the total of (i) up to
ninety percent (90%) of the Net Amount of Eligible Receivables
plus (ii) the sum of (I) up to sixty percent (60%) of the Net
Amount of Eligible Inventory plus (II) up to sixty percent
(60%) of the undrawn amount of all outstanding Letters of
Credit for the importation of finished goods inventory
consigned to the Agent as of the date of determination (not to
exceed $37,000,000 at any time) minus (iii) any Availability
Reserves (the amount determined pursuant to this clause (B)
referred to herein as the "Borrowing Base"), minus (2) the
Letter of Credit Usage at such time (not to exceed $35,000,000
at any time). In no event, however, shall the sum of (i) the
principal amount of the Term Loan outstanding at any time plus
(ii) the aggregate principal amount of Revolving Credit Loans
outstanding at any time exceed $75,000,000. In addition to and
not in limitation of the foregoing limitations with respect to
Revolving Credit Loans outstanding at any time to Borrowers,
and notwithstanding anything to the contrary contained
in this Section 2.01(b), the aggregate principal amount of
Revolving
3
<PAGE>
Credit Loans outstanding at any time to Borrowers solely with
respect to Eligible Receivables and Eligible Inventory shall
not exceed an amount equal to the total amount of Revolving
Credit Loans then available based upon the immediately
preceding clauses (B)(i) and (B)(ii)(I). The Borrowing Base
will be computed daily and a compliance certificate from a
Responsible Officer of the Borrowers presenting its
computation will be delivered to the Agent in accordance with
Section 6.05 hereof.
Subject to the foregoing and within the foregoing
limits, the Borrowers may borrow, repay (or, subject to the
provisions of Section 2.09 hereof, prepay) and reborrow
Revolving Credit Loans, on and after the date hereof and prior
to the Revolving Credit Termination Date, subject to the
terms, provisions and limitations set forth herein, including
without limitation, the requirement that, except as set forth
in Section 2.01(c), no Revolving Credit Loan shall be made
hereunder if the amount thereof exceeds the Availability
outstanding at such time."
The Agent has reviewed the business plan of Borrowers, dated April 6,
2000, as delivered by Borrowers to Agent in contemplation of the making of this
Amendment, including the amounts of the Overadvances detailed therein which are
necessary to achieve such business plan, and the Agent has been advised by
Borrowers that, in order to achieve the business plan, Borrowers will require
Overadvances pursuant to Section 2.01(c), as detailed in such business plan.
7. Addition of Section 2.01(c). The Credit Agreement is hereby amended
by adding Section 2.01(c) thereto immediately following Section 2.01(b), as
follows:
"(c) Notwithstanding anything to the contrary
contained in this Agreement or any of the other Loan Documents
(including, without limitation, the last paragraph of Section
6(c) of the Fourth Amendment and Waiver, dated as of April 3.
2000, executed among Borrowers, Guarantors, Agent and
Lenders), at the request of the Borrowers, the Agent may, in
its sole discretion, subject to the Total Revolving Credit
Commitment, make Revolving Credit Loans and issue Letter of
Credit Guarantees to the Borrowers on behalf of the Lenders in
excess of the Availability ("Overadvance"), which Overadvance
shall be repayable on demand, provided, that, the aggregate
amount of any such Overadvance which the Agent may make
without the consent of all of the Lenders shall not exceed
$9,700,000. Each Lender shall be obligated to pay the Agent
the amount of its ratable share of any such additional
Revolving Credit Loans or Letter of Credit Guaranties. Any
Overadvance not repaid on demand shall, without waiving any
Event of Default which has
4
<PAGE>
occurred thereby, bear interest at the applicable Interest
Rate. The making of an Overadvance by the Agent shall in no
way limit, waive or otherwise affect the Agent's right with
respect to the making of any additional Overadvance."
8. Amendment of Schedule 2.02. Schedule 2.02 Domestic Lending Offices
is hereby amended and restated in its entirety as set forth in the form of
Schedule 2.02 attached hereto.
9. Amendment of Section 2.09(c). The first sentence of Section 2.09(c)
is amended and restated in its entirety to read as follows:
"(c) In addition to and not in limitation of the
provisions contained in Section 2.01(c), upon demand by the
Agent, the Borrowers shall make prepayments of the Revolving
Credit Loans such that the Availability equals or exceeds
zero."
10. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is
amended in
its entirety to read as follows:
"Section 7.10 Minimum Interest Coverage Ratio. Permit
the Interest Coverage Ratio of the Parent and its Subsidiaries
on a Consolidated basis for each four consecutive fiscal
quarter period ending on the last day of each of the fiscal
quarters set forth below to be less than the ratio set forth
below opposite such fiscal quarter:
Quarterly Period Ending Minimum Interest Coverage Ratio
----------------------- -------------------------------
June 30, 2000 N/A
September 30, 2000 0 to 1.00
December 31, 2000 1.35 to 1.00"
11. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is
hereby amended in its entirety to read as follows:
"Section 7.11 EBITDA. Permit EBITDA of the Parent and
its Subsidiaries (in each case computed and calculated in
accordance with GAAP) on a Consolidated basis for each four
consecutive fiscal quarter period ending on the last day of
each of the fiscal quarters set forth below to be less than
the amount set forth below opposite each such fiscal quarter:
Quarterly Period Ending EBITDA
----------------------- ------
June 30, 2000 ($1,650,000)
September 30, 2000 $130,000
December 31, 2000 $4,330,000
5
<PAGE>
12. Amendment of Section 7.12A. Section 7.12A of the Credit Agreement
is hereby amended in its entirety to read as follows:
"Section 7.12A Tangible Net Worth. Permit the
Tangible Net Worth of the Parent and its Subsidiaries (in each
case computed and calculated in accordance with GAAP) on a
Consolidated basis as of the end of each of the fiscal
quarters set forth below to be less than the amount set forth
below opposite each such fiscal quarter:
Quarterly Period Ending Tangible Net Worth
----------------------- ------------------
June 30, 2000 $6,000,000
September 30, 2000 $8,000,000
December 31, 2000 $10,200,000
13. Amendment Fee. In consideration of the waiver of the Subject
Defaults and the amendments to the Credit Agreement as set forth herein,
Borrowers shall pay to Agent, for the benefit of Lenders, or Agent, at its
option, may charge the account(s) of Borrowers maintained by Agent an amendment
fee in the amount of $75,000, which fee is fully earned and payable as of the
date hereof and shall constitute part of the Obligations.
14. Representations and Warranties. Borrowers hereby represent and
warrant to Lenders that the representations and warranties set forth in Article
IV of the Credit Agreement are true on and as of the date hereof, as if made on
and as of the date hereof, after giving effect to this Amendment, except to the
extent that any such representation or warranty expressly relates to a prior
date, and breach of any of the representations and warranties made in this
paragraph 13 shall constitute and Event of Default under Article VIII(a) of the
Credit Agreement. Borrowers further represent and warrant that, after giving
effect to this Amendment, no Event of Default or event which, with the lapse of
time or the giving of notice or both, would become an Event of Default has
occurred and is continuing.
15. Effectiveness. This Amendment shall become effective on the date
Agent shall have received counterparts of this Amendment duly executed and
delivered by each of the parties hereto.
16. Continuing Effect of Credit Agreement. This Amendment shall not
constitute a waiver or amendment of any provision of the Credit Agreement not
expressly referred to herein and shall not be construed as a consent to any
further or future action on the part of either of the
Borrowers that would require consent of Lenders. Except as expressly amended by
this Amendment, the provisions of the Credit Agreement are and shall remain in
full force and effect.
17. Applicable Law. This Amendment shall be construed in accordance
with and governed by the laws of the State of New York (other than the conflicts
of law principles thereof).
6
<PAGE>
18. Counterparts; Facsimile Signature. This Amendment may be executed
in counterparts, each of which shall constitute and original and all of which
when taken together shall constitute but one contract. Delivery of an executed
counterpart of the signature page of this Amendment by facsimile shall be
effective as delivery of a manually executed signature page hereto.
[SIGNATURE PAGES FOLLOW.]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective authorized officers as of the
day and year first above written.
DONNKENNY APPAREL, INC., as a Borrower and a Guarantor
By: /s/ Beverly Eichel
------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: EVP, CFO
------------------------------------------------------
BELDOCH INDUSTRIES CORPORATION, as a Borrower and a
Guarantor
By: /s/ Beverly Eichel
------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: EVP, CFO
------------------------------------------------------
CHRISTIANSBURG GARMENT COMPANY, INCORPORATED
a Guarantor
By: /s/ Beverly Eichel
------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: EVP, CFO
------------------------------------------------------
H SQUARED DISPOSITIONS, INC., as a Guarantor
By: /s/ Beverly Eichel
------------------------------------------------------
Name: Beverly Eichel
------------------------------------------------------
Title: EVP, CFO
------------------------------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
8
<PAGE>
[SIGNATURES CONTINUE FROM PREVIOUS PAGE]
THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent
By: /s/ Kevin J. Winsch
------------------------------------------------------
Name: Kevin J. Winsch
------------------------------------------------------
Title: Vice President
------------------------------------------------------
THE CIT GROUP/COMMERCIAL SERVICES, INC., as a Lender
By: /s/ Kevin J. Winsch
------------------------------------------------------
Name: Kevin J. Winsch
------------------------------------------------------
Title: Vice President
------------------------------------------------------
CENTURY BUSINESS CREDIT CORPORATION, as a Lender
By: /s/ Steven A. Stone
------------------------------------------------------
Name: Steven A. Stone
------------------------------------------------------
Title: Senior Vice President
------------------------------------------------------
9
<PAGE>
SCHEDULE 2.01(a)
Term Loan Commitments
Term Loan Percentage of Total Term
Lender Commitment(1) Loan Commitment
------ ---------- --------------------
The CIT Group/Commercial $2,200,000 73.33%
Services, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attn: Lisa Murakami
Century Business Credit Corporation $800,000 26.66%
119 West 40th Street
New York, New York 10018
Attn: Steven Stone
- --------
1 Based on outstanding principal balance of the Term Loan as of the Closing
Date.
10
<PAGE>
SCHEDULE 2.01(b)
Revolving Credit Commitments
Percentage of Total
Revolving Credit Revolving Loan
Lender Commitment Commitment
------ ---------- ----------
The CIT Group/Commercial $55,000,000 73.33%
Services, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attn: Lisa Murakami
Century Business Credit Corporation $20,000,000 26.66%
119 West 40th Street
New York, New York 10018
Attn: Steven Stone
11
<PAGE>
SCHEDULE 2.02
Domestic Lending Offices
Lender Domestic Lending Office
------ -----------------------
The CIT Group/Commercial Service, Inc. The CIT Group/Commercial Service, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attn: Lisa Murakami
Century Business Credit Corporation Century Business Credit Corporation
119 West 40th Street
New York, New York 10018
Attn: Steven Stone
12
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Subsidiary Jurisdiction of Incorporation
- -------------- -----------------------------
Christiansburg Garment Company Delaware
Donnkenny Apparel, Inc. Delaware
Beldoch Industries Corporation Delaware
H Squared Dispositions, Inc. New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 180,075
<SECURITIES> 0
<RECEIVABLES> 36,707,311
<ALLOWANCES> 6,685,490
<INVENTORY> 29,323,131
<CURRENT-ASSETS> 63,785,587
<PP&E> 12,044,517
<DEPRECIATION> 6,063,482
<TOTAL-ASSETS> 101,836,561
<CURRENT-LIABILITIES> 15,484,044
<BONDS> 0
0
0
<COMMON> 142,409
<OTHER-SE> 41,738,331
<TOTAL-LIABILITY-AND-EQUITY> 101,836,561
<SALES> 173,748,509
<TOTAL-REVENUES> 173,748,509
<CGS> 138,815,837
<TOTAL-COSTS> 138,815,837
<OTHER-EXPENSES> 40,266,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,006,634
<INCOME-PRETAX> (9,340,834)
<INCOME-TAX> 87,165
<INCOME-CONTINUING> (9,427,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,427,999)
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.66
</TABLE>
