UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
Annual Report Pursuant to Sec. 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended 12/31/01 Commission File Number 0-774
DANIEL GREEN COMPANY
(Name of Small Business Issuer in its Charter)
MASSACHUSETTS 15-0327010
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
450 NORTH MAIN STREET, OLD TOWN, ME 04468
(Address of principal executive offices) (Zip Code)
(207) 827-4431
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $2.50 PAR VALUE PER SHARE
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [_].
State issuer's revenues for its most recent fiscal year.
Net Sales of $46,900,000
Aggregate market value of the voting stock held by non-affiliates of the
registrant:
$6,561,105 as of March 8, 2002
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
CLASS ISSUED & OUTSTANDING AT MARCH 8, 2002
COMMON STOCK, $2.50 PAR VALUE 1,948,305 SHARES
List hereunder the following documents, if incorporated by reference, and the
part of the Form 10-KSB into which the document is incorporated:
Definitive Proxy Statement Dated March 29, 2002 Part III
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
1
Safe Harbor Statements Under the Private Securities Litigation Reform Act of
1995: The statements contained in this Form 10-KSB which are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding the new
credit facility. Investors are cautioned that forward-looking statements are
inherently uncertain, and that the closing of the new credit facility is subject
to several conditions, one or more of which may not be satisfied or waived and
that could result in the new credit facility not closing. Actual results and
timing of the events may differ materially from the future results, timing,
performance or achievements expressed or implied by such forward-looking
statements. Factors that might cause Daniel Green's financial performance to be
different include risks of changing consumer preference, inability to
successfully design, develop or market its brands, competition from other
footwear manufacturers, loss of key employees, general economic conditions and
adverse factors impacting the footwear industry, and the inability of the
Company to source its products due to political or economic factors or the
imposition of trade or duty restrictions. The Company assumes no duty to update
information contained in this Form 10-KSB at any time.
Part I
Item 1. Description of Business
GENERAL
Daniel Green Company (the "Company") has been engaged in the manufacture or
importation and sale of quality footwear since 1882. The Company designs,
develops and markets casual and dress footwear for women. The Company's current
brands include Trotters(R) and SoftWalk(R).
The Company competes in the women's casual and dress footwear market, which
emphasizes contemporary fashion, quality and value. The Company operates in only
one business segment.
In early 2000, the Company acquired certain inventory and trademarks from
L.B. Evans Company, predominantly a men's slipper company, and acquired
Penobscot Shoe Company which had been producing women's footwear for over sixty
years. In the course of consolidating its business, the Company decided to focus
its efforts on the two product lines which were experiencing growth, namely the
Trotters(R) and SoftWalk(R) brands. Thus, in December, 2001, the Company sold to
Elan Polo, an unaffiliated party, primarily the trademarks "Daniel Green(R)",
"L.B. Evans(R)" and "Woolrich(R)" and the inventory related thereto.
Prior to June 30, 1999, a portion of the footwear sold by the Company was
manufactured in its plants in Dolgeville, New York, while the remainder was
manufactured for the Company by foreign independent contract manufacturers.
Thereafter the Company outsourced entirely the production of its footwear while
continuing to distribute the footwear to its customers under the Company's
labels and certain private labels.
The Company does not expect its foreign manufacturing partners to have any
difficulty in obtaining the raw materials required for footwear production.
However, certain sources may experience some difficulty in obtaining leather
where there has been a drop in beef consumption related to concerns about
so-called "mad cow" disease and where there has been a destruction of livestock
as a result of "hoof and mouth" disease. The Company does not have a practice of
entering into long-term purchase commitments.
The Trotters(R) and SoftWalk(R) products retail at prices varying from
$50.00 to $129.00 per pair. In all the Company sells approximately 50 different
styles of footwear, many of which change year to year. The Company designs most
of its own products, having for many years maintained a style research and
development department. Research and development costs incurred by the Company
for the last three fiscal years was approximately $229,000 in 2001, $320,000 in
2000 and $125,000 in 1999.
The Company's products are sold directly to retailers through its own sales
force, which covers the entire United States. Approximately 5,000 stores carry
the Daniel Green Company products, including most of the major department stores
in the country. Sales to one customer in 2001 did account for 11% of
2
net sales; sales to any one customer in 2000 did not account for more than 10%
of net sales; sales to one customer in 1999 did account for 12% of net sales.
Ten major customers represented approximately 39% of net sales in 2001; most of
these same customers represented approximately 45% of net sales in 2000 and 52%
of net sales in 1999.
The Company advertises its products through a competitive necessity
advertising program. It avoids granting restricted or exclusive shoe sale
arrangements, believing that a profitable distribution of its products requires
the greatest number of outlets. Private label products are sold to a small
number of customers by the Company's sales management and several companies
account for a majority of this business.
The Company believes that a definitive competitive advantage attaches to
its ownership of the registered trademarks of Trotters and SoftWalk, which have
been used by the Company for many years.
The Company knows of no material effects that compliance with federal,
state and local provisions regulating the discharge of materials into the
environment may have upon its capital expenditures, earnings and competitive
position or upon it foreign manufacturing partners.
The Company has enjoyed a good relationship with its approximately 70
employees, all of whom are full time. The majority of the registrant's
employees, except for the field sales representatives and certain research and
development staff, are employed in Old Town, Maine.
The amount of the Company's backlog orders believed to be firm as of
December 31, 2001 was approximately $8,700,000, compared with approximately
$8,900,000 and $617,400 as of December 31, 2000 and 1999 respectively. All
backlog orders are expected to be filled within the next fiscal year.
On February 3, 2000 the Company acquired certain assets, consisting
primarily of inventory and trademarks, from L.B. Evans Company, predominantly a
men's slipper company. The purchase price for the assets consisted of $781,000
for the inventory and a royalty of 8% of the net invoice cost of products sold.
On February 10, 2000 the Company entered into a definitive stock purchase
agreement to acquire, for approximately $18,200,000, all of the outstanding
shares of Penobscot Shoe Company. The purchase closed on March 30, 2000.
Penobscot Shoe Company has been producing women's footwear for over 60 years and
is based in Old Town, Maine. During May, 2000 and pursuant to public
announcements made by the Company, the Company's headquarters and distribution
operation previously located in Dolgeville, New York, were relocated to Old
Town, Maine.
On December 28, 2001, the Company completed its previously announced sale
to Elan Polo of its Daniel Green(R) and L.B. Evans(R) slipper brands including
inventory and related assets and a related liability. The sale price was
approximately $4.7 million, including minimum royalty payments of approximately
$1.7 million to be received over the next four years. $1.5 million was paid in
cash at closing and $1.5 million will be paid in six months.
The Company competes primarily in the women's casual and dress footwear
segment, in the moderate to better price footwear classification. The women's
casual and dress footwear segment is generally characterized by a high level of
recognition of brand names and trademarks. Distinct identifying characteristics
create brand awareness among consumers and allow a positive reputation to be
transferred to new products. Many of the Company's competitors have greater
financial, distribution or marketing resources, as well as greater brand
awareness than the Company. In addition, the overall availability of overseas
manufacturing opportunities and capacity allow for introduction of competitors
with new products. The Company believes that it has been able to compete
successfully because of the reputation of the brand, the brand recognition, the
attention to quality and the distribution of its products. In addition, through
focused marketing, the Company continues to attract new consumers and motivates
them to try on the products in the retail environments. The Company's product
attributes include comfort, style, ease of wear, quality and durability.
3
BUSINESS STRATEGY
The Company's strategy is to leverage its existing strengths, to increase
profitably of its share of the women's footwear market by furthering its
existing brands and by expanding its brand portfolio through a combination of
acquisition and development of additional brands in the future.
Competitive Strengths: The Company has developed certain strengths which have
been significant sources of growth to date and which management believes will
help support further growth in the future. These strengths include:
o Portfolio of Current Brands. Through advertising and promotion, the
Company has built consumer and retailer recognition for its
Trotters(R) and SoftWalk(R) brands. The Company continues to seek
acquisition opportunities in order to expand its current portfolio of
brands.
o Manufacturing Relationships. The Company believes that one of the key
factors in its growth has been its strong relationships with overseas
manufacturers capable of meeting the Company's requirements for
quality and price in a timely fashion. The Company sources its
products primarily from Brazil.
o Emphasis on Better Segments of the Footwear Market. The Company
believes that its strategy of focusing on the better segments of the
women's footwear market and providing high-quality value-priced
products reduces the risks associated with changing fashion trends.
The Company also attempts to reduce the risks of changing trends and
product acceptance through reducing manufacturing lead times and
increasing inventory turns at its distribution facility. The Company
believes that this approach mitigates the risks of carrying obsolete
inventory and poor retail sell-through.
o Customer Relationships. The Company supports its customers by
maintaining an in-stock inventory position for selected styles in
order to minimize the time necessary to fill customers' orders. In
addition, the Company provides customers with electronic data
interchange (EDI) capability, co-op advertising, point of sale
displays and assistance in evaluating which products are likely to
appeal to their retail customers.
By leveraging the above strengths, the Company has pursued and will continue to
pursue growth through various opportunities, including, but not limited to, the
following:
Growth with Existing Brands. Management seeks to increase sales of the
Company's products under each of the existing brands by increasing the
assortment of products, by further expanding the existing retail opportunities
in current channels, by developing new retail channel opportunities, and by
increasing the use of advertising to strengthen brand awareness.
Adding Brands to the Company's Portfolio. Management believes that creating
or acquiring additional brands will enable the Company to increase its sales by
satisfying the needs of a wider range of customers. Management believes that
there are opportunities in the market place to expand the Company's portfolio
and appealing to different market segments of the footwear industry. The Company
believes it is well positioned to continue pursuing this strategy due to the
strength of its balance sheet.
Item 2. Description of Properties
The Company's executive offices and distribution facilities are situated in
two locations in Old Town, Maine. The sites comprise approximately 3 acres of
land with two buildings constructed of wood, brick and limestone between 1900
and 1920. Both buildings are owned by the Company and, in the opinion of
management, are sufficient for current plans and are adequately covered by
insurance. The Company uses certain office equipment under leases which expire
in the year 2002.
4
The facilities in Dolgeville, New York which the Company vacated in
mid-1999 are under a contingent contract of sale. The Company does not expect to
incur a loss on the sale of these facilities based on the sale price of the
current contract.
Item 3. Legal Proceedings.
The Company acquired Penobscot Shoe Company ("Penobscot") from Riedman
Corporation on March 30, 2000. Riedman Corporation had acquired Penobscot in a
cash tender offer of $11.75 per share which was concluded on November 16, 1999.
At that time, the holders of 253,026 shares of Penobscot stock exercised their
dissenters rights under Maine law applicable to Penobscot and demanded payment
of the fair value of their shares. On or about April 3, 2000, Penobscot filed
suit in the Superior Court in Maine, Penobscot County, to have the Court
determine the fair value of dissenter shares.
Subsequently , several dissenting shareholders withdrew from the
litigation, accepting the $11.75 per share offered. As a result, there are
currently only four persons remaining, dissenting as to 148,318 shares. One of
those dissenters requested the Court to compel Penobscot to post a bond of $2
million to assure payment of the fair value of his shares once that was
determined by the Court. The Court ordered Penobscot to post a bond for
approximately $1.56 million, being the product of the number of shares held by
that dissenter and $11.75, the amount of the tender offer. The Company believes
that a final determination of value will not be made by the Court until late
2002. The Company believes the decision will be $11.75 per share and has
arranged to finance the full amount.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the Company's fiscal year, no matter was
submitted to a vote of stockholders.
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Daniel Green Company's common stock is traded in the over-the-counter market and
is listed on the National Association of Securities Dealers Automated Quotation
system (NASDAQ) under the ticker symbol DAGR. The range of high and low bid per
share for the periods indicated is as follows:
2000 2001
Market Price Bid Market Price Bid
High Low High Low
---- --- ---- ---
1st Quarter $5.25 $3.75 $3.875 $3.4375
2nd Quarter 3.9375 3.125 3.5625 3.3125
3rd Quarter 3.50 3.125 3.796875 2.65625
4th Quarter 4.6875 3.25 4.59375 2.25
Based on records maintained by the Transfer Agent, Boston EquiServe, there were
450 registered shareholders as of the March 8, 2002 record date.
5
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Sales
2001 net sales of $46.9 million increased $13.7 million or 41% over the prior
year's net sales of $33.2 million, primarily related to sales associated with
the products bearing the Trotters and Softwalk labels. On a pro-forma basis,
assuming the Penobscot Shoe Company acquisition and the acquisition of the LB
Evans trademarks had occurred on January 1, 2000, the Company's net sales in
2000 would have been approximately $39.7 million.
From a sales mix standpoint, the increase in net sales on a pro-forma basis for
2001, of $6 million or 15.1%, over 2000 relates to the increase sales of the
Trotters and Softwalk brands.
Sales to one customer in 2001 did account for more than 10% of net sales. Sales
to any one customer in 2000 did not account for more than 10% of net sales. Ten
major customers represented approximately 37% of net sales in 2001; most of
these same customers represented 45% of net sales in 2000 and 52% of net sales
in 1999.
2000 net sales of $33.2 million increased $18.3 million or 123.2% over the prior
year's net sales of $14.9 million. This increase was a result of the Penobscot
Shoe Company acquisition which took place in 2000, and the sales associated with
products bearing the LB Evans label, which was also purchased in 2000. On a
pro-forma basis, assuming these acquisitions had occurred on January 1, 1999,
the Company's net sales in 2000 and 1999 would have been approximately
$39,693,000 and $36,532,000 respectively.
Expenses
Cost of goods sold, as a percentage of net sales, was 67.1% in 2001, compared to
67% in 2000 and 81% in 1999. Cost of goods sold reflects the direct costs of
footwear sold, sourced variances from pre-determined standards, and adjustments
to the value of the inventory on hand. The gross profit margin for 2001 was
32.9% compared to 33% for 2000 and 19% for 1999.
Selling and administrative expenses for 2001 were approximately $11,917,000 or
25.4% of net sales, as compared to $10,721,000 or 32.3% of net sales in 2000 and
$4,713,000 or 31.7% of net sales in 1999. The main reason for the decrease in
selling and administrative expenses as a % of net sales in 2001 as compared to
2000 relates to the non-recurring costs included in 2000 associated with the
closing of the Dolgeville, New York property and asset impairments which were in
excess of $1.2 million in 2000. Since the majority of these expenses are
variable in nature, much of the increase in 2000 expenses over 1999 expenses
relates directly to the increase in net sales in 2000.
Other net operating expenses were $375,465 in 2001. Of this amount, $1,713,710
relates to the costs associated with the termination of the Penobscot Shoe
Company defined benefit pension plan. On the date of the termination, the
Company received cash totaling $2,377,600, which was less than the carrying
value of the prepaid pension cost asset of $3,734,670, resulting in a loss of
$1,357,070. This loss was increased by an excise tax totaling $356,640, which
resulted in a total loss on this transaction totaling $1,713,710. On December
28, 2001, the Company sold its Daniel Green and L.B. Evans slipper brands to an
independent third party for approximately $4,755,000. The recorded value of the
net assets sold was approximately $3,559,000 which included inventory, related
other assets and a related liability. This transaction resulted in a gain of
approximately $1,196,000 which is included in other expense, net. The remaining
amount in other expense, net is a net gain on the sale of property of
approximately $142,000.
6
Operating Income/(Loss)
Operating Income/(loss) is directly related to the items discussed above.
Interest Expense
Interest expense in 2001 was $1,683,020, up from $1,362,770 in 2000 and $193,116
in 1999. The Company has a credit arrangement with Manufacturers and Traders
Trust Company (M&T bank), which provides the Company with a revolving line of
credit, a term loan, a mortgage/term loan, a supplemental loan facility and an
additional bridge loan (amendment to the revolver). The borrowing base for the
revolver is based on certain balances of accounts receivable and inventory, as
defined in the agreement. Borrowings under this credit arrangement totaled $14.1
million as of December 31, 2001 which resulted in the interest expense in 2001.
The borrowings under this arrangement were required to support the Penobscot
acquisition and working capital requirements. The maximum credit amount under
the revolver is $12,500,000.
In January, 2002, the Company received commitment on a new $19.7 million banking
and credit facility arranged by M&T bank, consisting of a $3 million term note,
a $1.5 million six-month bridge loan, a $2.7 million loan limit and a $12.5
million revolving credit facility to support working capital needs, which will
be reduced to $11 million in July, 2002 and which availability is subject to a
borrowing base. The cost of borrowing under this facility will be LIBOR plus a
2.25% margin for the revolver and bridge loan, and LIBOR plus a 2.5% margin for
the term loan. The revolver and the term loan agreements contain covenants
relative to average borrowed funds to earnings ratio, net income, current ratio,
and cash flow coverage. In addition, the payment or declaration of dividends is
prohibited unless a written consent form from the lender is received.
Income Tax Provision
The Company's income tax expense in 2001 was $66,791 or 4.6% of earnings before
taxes, compared to the income tax benefit of approximately $455,000 in 2000, and
the income tax benefit of approximately $482,000 in 1999.
The effective income tax rate was approximately 4.6% in 2001, compared to a
benefit of 40% in 2000 and a benefit of 24% in 1999. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities, for financial reporting purposes, and the
amounts used for income tax purposes. The effective income tax rate in 2001 of
4.6% as compared to the tax benefit in 2000 and 1999 resulted from the earnings
generated in 2001 before taxes and decreasing the deferred tax asset valuation
allowance as a result of the Company's evaluation of the realization of its
deferred tax assets.
At December 31, 2001, the Company has approximately $2,349,000 of federal net
operating loss carry-forwards, which begin to expire in 2019. The Company has an
AMT credit carry-forward of approximately $57,077, which will never expire. The
Company has approximately $3,919,000 of net operating loss carry-forwards
available for New York State tax purposes, which begin to expire in 2011.
Net Earnings
The net income for 2001 was approximately $1,370,403, or $.83 per diluted share,
compared with last year's net loss of approximately $682,000, or $.43 per share.
The Company had a net loss of approximately $1.5 million, or $.97 per share in
1999.
Other
The Company's bank indebtedness decreased $4,098,000 during 2001. Total debt
consists of notes payable, the line of credit and capital lease obligations. At
December 31, 2001, total debt was approximately $14.8 million, compared with
approximately $18.9 million at December 31, 2000.
7
Inventory levels decreased from $14.8 million in 2000 to $10.5 million in 2001,
primarily as a result of the sale of the slipper brands in 2001. Accounts
receivable decreased to $8.2 million in 2001 from $14.6 million in 2000.
Accounts receivable days decreased from 123 days in 2000 to 77 days in 2001,
reflective of decreased terms and stronger cash collections being experienced.
During 2001, the Company generated approximately $1.3 million in cash from
operating activities. In 2000, the Company used approximately $3.8 million in
cash from operating activities, and in 1999 the Company generated approximately
$.712 million in cash from operating activities. The principal components of
cash flow from operations were changes in accounts receivable, inventories and
accounts payable, and the termination of the defined benefit pension plan.
Working capital at the end of 2001 was approximately $5.4 million, compared to
negative $1.6 million at the end of 2000. The Company's current ratio, the
relationship of current assets to current liabilities, increased from 0.95 in
2000 to 1.32 in 2001.
Capital expenditures approximated $20,000 in 2001, as compared to $360,000 in
2000 and $169,000 in 1999.
Management is not aware of any known demands, commitments, or events that would
materially affect its liquidity. There are no material expenditures or
commitments, which would affect capital resources in a significant way. Cash
generated by operations, supplemented by borrowings, should cover planned
requirements.
Related Party Transactions
Riedman Corporation, a holding company which, until January, 2000, included a
commercial agency, obtained property and casualty insurance for the Company.
During 2000 and 1999, the company paid $162,569, and $234,700, respectively, for
such coverage.
In connection with the bank financing, the Company has required the guaranties
of Riedman Corporation. In consideration therefor, the Board of Directors (Mr.
Riedman abstaining) granted Riedman Corporation two options for 50,000 shares
each to purchase Daniel Green common stock for 10 years. The first was granted
on September 1, 1999 and has an exercise price of $4.75 per share, $1.00 per
share more than the market price on that date. The second was granted on January
19, 2001 and has an exercise price of $4.00 per share, the market price on that
date.
In order to assist the Company with its working capital requirements, Mr.
Riedman loaned the Company $750,000 on April 11, 2001. The note evidencing the
indebtedness is due in one year and is convertible into 203,804 shares of common
stock at $3.68, the market price of the stock on that date. (Mr. Riedman has
indicated his intention to exercise his conversion right.) At the same time, Mr.
Riedman was granted an option to purchase 25,000 shares for 10 years at $3.68
per share. The Company's continuing cash requirements necessitated an increase
in the Company's bank line and on June 1, 2001 Mr. Riedman guaranteed a portion
thereof for which he was granted an option to purchase 50,000 shares for 10
years at $3.50 per share, the market price of the stock on that date.
Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138. SFAS No. 133, as
amended, requires the Company to recognize all derivatives on the consolidated
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
8
recognized in earnings. The Company has not identified any derivatives that meet
the criteria for a derivative instrument and does not participate in any hedging
activities. As a result, there was no effect on the Company's consolidated
financial position, results of operations or cash flows resulting from the
adoption of SFAS No. 133, as amended, during 2001.
Effective April 1, 2001, the Company adopted SFAS No. 140, Accounting for
Transfers and Serving of Financial Assets and Extinguishment of Liabilities,
which replaces SFAS No. 125. The adoption of this standard did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
The Financial Accounting Standards Board issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These
standards make significant changes to the accounting for business combinations,
goodwill and intangible assets. SFAS No. 141 eliminates the pooling-of-interests
method of accounting for business combinations with limited exceptions for
combinations initiated prior to July 1, 2001. In addition, it further clarifies
the criteria for recognition of intangible assets separately from goodwill. This
statement is effective for business combinations completed after June 30, 2001.
The Company does not expect that the adoption of this standard will have any
impact on its consolidated financial statements.
SFAS No. 142 discontinues the practice of amortizing goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Goodwill amortization totaling $204,033 in 2001 will not be
recognized in 2002. Impairment would be examined more frequently if certain
indicators are encountered. Intangible assets with a determinable useful life
will continue to be amortized over their useful lives. SFAS No. 142 applies to
goodwill and intangible assets acquired after June 30, 2001. Goodwill and
intangible assets existing prior to July 1, 2001 will be affected when the
Company adopts the standard. The Company is currently evaluating the impact of
impairment, if any, that the adoption of this standard will have on its
consolidated financial statements.
9
Item 7. Selected Financial Data
Daniel Green Company
Consolidated Financial Statements as of
December 31, 2001 and 2000, and for Each
of the Three Years in the Period Ended
December 31, 2001 and Independent Auditors' Report
10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Daniel Green Company
We have audited the accompanying consolidated balance sheets of Daniel Green
Company and subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 the Company as of December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
February 13, 2002
11
DANIEL GREEN COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
-------------------------------------------------------------------------------------------------------------------------
ASSETS 2001 2000
CURRENT ASSETS:
Cash $ 1,161,101 $ 1,395
Accounts receivable (less allowances of $1,468,000 in 2001
and $2,249,000 in 2000) 8,197,086 14,601,499
Inventories 10,453,420 14,758,949
Note receivable 1,577,698 --
Other current assets 204,162 193,757
Deferred income tax asset - current 636,470 654,491
------------ ------------
Total current assets 22,229,937 30,210,091
PROPERTY - net 1,757,289 2,054,578
OTHER ASSETS:
Other assets, net 251,528 1,304,074
Goodwill, net 1,645,476 450,102
Other receivable 1,693,103 --
Deferred income tax asset -- 795,038
Prepaid pension costs -- 3,610,518
------------ ------------
Total other assets 3,590,107 6,159,732
------------ ------------
TOTAL ASSETS $ 27,577,333 $ 38,424,401
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - line of credit $ 8,200,365 $ 12,500,000
Accounts payable 1,586,384 9,158,314
Accrued expenses 1,248,407 1,038,078
Notes payable - current 4,016,485 6,416,743
Liability to former stockholders 1,805,951 1,805,951
Income taxes payable 15,447 898,364
------------ ------------
Total current liabilities 16,873,039 31,817,450
OTHER LIABILITIES:
Notes payable - noncurrent 2,611,645 9,320
Deferred income tax liability 641,090 --
Other liability -- 700,000
------------ ------------
Total other liabilities 3,252,735 709,320
------------ ------------
Total liabilities 20,125,774 32,526,770
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value; 6,000,000 and 4,000,000 shares authorized in
2001 and 2000, respectively; 2,089,626 and 1,698,329 shares issued
in 2001 and 2000, respectively 5,224,065 4,245,823
Additional paid-in-capital 2,088,977 815,940
Retained earnings 2,676,162 1,305,759
------------ ------------
9,989,204 6,367,522
Less: Treasury stock at cost, 523,575 and 120,601 shares in 2001
and 2000, respectively (2,537,645) (469,891)
------------ ------------
Total stockholders' equity 7,451,559 5,897,631
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,577,333 $ 38,424,401
============ ============
See notes to consolidated financial statements.
12
DANIEL GREEN COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
NET SALES $46,851,455 $ 33,179,232 $ 14,867,332
----------- ------------ ------------
OPERATING EXPENSES:
Cost of goods sold 31,438,955 22,232,692 11,971,909
Selling and administrative expenses 11,916,822 10,720,825 4,713,074
Other expense, net 375,464 -- --
----------- ------------ ------------
Total operating expenses 43,731,241 32,953,517 16,684,983
----------- ------------ ------------
OPERATING INCOME (LOSS) 3,120,214 225,715 (1,817,651)
INTEREST EXPENSE 1,683,020 1,362,770 193,116
----------- ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES 1,437,194 (1,137,055) (2,010,767)
INCOME TAX EXPENSE (BENEFIT) 66,791 (454,822) (482,570)
----------- ------------ ------------
NET EARNINGS (LOSS) $ 1,370,403 $ (682,233) $ (1,528,197)
=========== ============ ============
NET EARNINGS (LOSS) PER COMMON
SHARE:
Basic $ .87 $ (.43) $ (.97)
=========== ============ ============
Diluted $ .83 $ (.43) $ (.97)
=========== ============ ============
See notes to consolidated financial statements.
13
DANIEL GREEN COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Treasury Stock
----------------------------- Paid-In Retained ------------------------------
Shares Amount Capital Earnings Shares Amount Total
Balance, January 1, 1999 1,698,329 $4,245,823 $ 741,303 $ 3,516,189 (123,401) $ (592,323) $ 7,910,992
Purchases of treasury stock -- -- -- -- (65,704) (259,854) (259,854)
Allocation of shares in
Company sponsored
defined contribution plan -- -- -- -- 58,118 278,965 278,965
Issuance of common stock
options in consideration for
a debt guarantee -- -- 74,637 -- -- -- 74,637
Net loss, 1999 -- -- -- (1,528,197) -- -- (1,528,197)
--------- ---------- ---------- ----------- -------- ----------- -----------
Balance, December 31, 1999 1,698,329 4,245,823 815,940 1,987,992 (130,987) (573,212) 6,476,543
Purchases of treasury stock -- -- -- -- (47,732) (175,645) (175,645)
Allocation of shares in
Company sponsored
defined contribution plan -- -- -- -- 58,118 278,966 278,966
Net loss, 2000 -- -- -- (682,233) -- -- (682,233)
--------- ---------- ---------- ----------- -------- ----------- -----------
Balance, December 31, 2000 1,698,329 4,245,823 815,940 1,305,759 (120,601) (469,891) 5,897,631
Issuance of common stock 391,297 978,242 1,036,938 -- -- -- 2,015,180
Unallocated shares held in
the Company sponsored
defined contribution plan -- -- -- -- (391,297) (2,015,180) (2,015,180)
Purchases of treasury stock -- -- -- -- (11,677) (52,574) (52,574)
Issuance of common stock
options in consideration for
debt and debt guarantees -- -- 236,099 -- -- -- 236,099
Net earnings, 2001 -- -- -- 1,370,403 -- -- 1,370,403
--------- ---------- ---------- ----------- -------- ----------- -----------
Balance, December 31, 2001 2,089,626 $5,224,065 $2,088,977 $ 2,676,162 (523,575) $(2,537,645) $ 7,451,559
========= ========== ========== =========== ======== =========== ===========
See notes to consolidated financial statements.
14
DANIEL GREEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
-------------------------------------------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,370,403 $ (682,233) $(1,528,197)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 709,639 430,368 297,086
Loss on pension plan termination, net of excise tax 1,357,070 -- --
Noncash debt issuance expense 48,955 -- --
Allocation of shares in defined contribution plan -- 278,966 278,965
Loss on impairment of assets -- 208,066 --
Gain on sale of property and equipment (142,198) -- --
Gain on sale of slipper brands (1,196,048) -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable, net 6,404,413 (5,775,887) 38,367
Inventories 1,026,155 (5,292,694) 1,938,644
Other current assets (10,405) (56,032) (21,450)
Income taxes receivable -- -- 387,142
Other noncurrent assets 8,695 71,413 36,084
Deferred income tax asset/liability 46,047 (458,916) (484,776)
Prepaid pension credit (124,152) (194,517) --
Increase (decrease) in:
Accounts payable (7,571,930) 7,841,498 (284,361)
Accrued expenses 210,329 (150,305) 54,339
Income taxes payable (882,917) (22,543) --
----------- ------------ -----------
Net cash provided (used) by operating activities 1,254,056 (3,802,816) 711,843
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (18,627) (359,694) (169,588)
Proceeds from disposal of property and equipment 212,198 2,058 22,475
Proceeds from pension plan termination, net 362,420 -- --
Proceeds from sale of slipper brands 1,484,621 -- --
Acquisition of business, net of cash acquired -- (15,148,084) --
Proceeds from notes receivable -- 4,000,000 --
----------- ------------ -----------
Net cash provided (used) by investing activities 2,040,612 (11,505,720) (147,113)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on note payable - line of credit (4,299,635) 10,596,922 758,986
Proceeds from notes payable 3,850,000 6,000,000 7,950
Repayments of notes payable (3,647,933) (519,778) (390,894)
Issuance of common stock 2,015,180 -- --
Purchases of treasury stock (52,574) (175,645) (259,854)
Debt issuance and other costs -- (69,383) (463,139)
Other noncurrent liabilities -- (747,264) --
----------- ------------ -----------
Net cash (used) provided by financing activities (2,134,962) 15,084,852 (346,951)
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH 1,159,706 (223,684) 217,779
CASH, BEGINNING OF YEAR 1,395 225,079 7,300
----------- ------------ -----------
CASH, END OF YEAR $ 1,161,101 $ 1,395 $ 225,079
=========== ============ ===========
(Continued)
See notes to consolidated financial statements.
15
DANIEL GREEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
-------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,604,650 $1,381,752 $191,726
========== ========== ========
Income taxes $ 901,264 $ 2,469 $ 2,742
========== ========== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
OPERATING AND FINANCING ACTIVITIES:
During 2001, the Company sold slipper brand net assets for receivables of
$3,270,801. The Company issued common stock options valued at $236,099 in
consideration for debt and debt guarantees.
During 2000, the Company incurred a liability totaling $1,050,000 related to
an acquisition of assets.
During 1999, the Company issued common stock
options valued at $74,637 in consideration for a debt guarantee.
(Concluded)
See notes to consolidated financial statements.
16
DANIEL GREEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is engaged primarily in the import
and sale of leisure footwear. Sales are made principally to retailers in
the United States.
On December 28, 2001, the Company sold its Daniel Green and L.B. Evans
slipper brands to an independent third party for approximately $4,755,000.
The recorded value of the net assets sold was approximately $3,559,000
which included inventory, related other assets and a related liability.
The sale price includes guaranteed, minimum royalty payments at a present
value of approximately $1,693,000 to be received over the next four years
and is included in the other receivable balance in the accompanying 2001
consolidated balance sheet. The Company also recorded a note receivable
for approximately $1,578,000 which is due June 30, 2002 from the
purchaser. This transaction resulted in a gain of approximately $1,196,000
which is included in other expense, net in the accompanying 2001
consolidated statement of operations (see Note 8).
On March 30, 2000, the Company purchased all of the outstanding shares of
Penobscot Shoe Company ("Penobscot") from a related party for
approximately $18,218,000, including direct costs of the acquisition.
Penobscot is also engaged in the import and sale of footwear. The
acquisition of Penobscot has been accounted for under the purchase method
of accounting and accordingly, the operating results of Penobscot have
been included in the Company's consolidated financial statements since the
date of acquisition. The allocation of the purchase price to the fair
market value of assets and liabilities acquired was finalized in 2001 and
totalled approximately $20,387,000 and $4,031,000 respectively. The excess
of the aggregate purchase price over the estimated fair market value of
the net assets acquired ("goodwill") was approximately $1,862,000 which is
being amortized on a straight-line basis over 15 years.
The 2000 results of operations on a proforma basis, assuming the Penobscot
acquisition occurred at the beginning of 2000, are as follows:
2000
(Unaudited)
Net sales $ 39,693,000
============
Net loss $ (43,000)
============
Net loss per common share $ (0.03)
============
Principles of Consolidation - The consolidated financial statements
consist of Daniel Green Company and its wholly-owned subsidiary, Penobscot
Shoe Company. Intercompany accounts and transactions have been eliminated.
17
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories - Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis. Inventories consist of
finished goods.
Property and Accumulated Depreciation - Property is stated at cost, less
accumulated depreciation. Expenditures for maintenance and repairs are
charged to earnings as incurred. Replacements of significant items and
major renewals and betterments are capitalized. Depreciation is computed
using estimated useful lives under the straight-line method as follows:
Buildings 20 years
Machinery and equipment 10 years
Computers 4 years
Vehicles 4 years
Furniture and fixtures 8 years
Other Assets - Other assets consist primarily of deferred financing costs
as of December 31, 2001 and deferred financing costs and purchased
intangibles as of December 31, 2000. Deferred financing costs are being
amortized over the term of the related debt instruments. Accumulated
amortization as of December 31, 2001 and 2000 totalled $329,636 and
$216,060, respectively.
Goodwill - Goodwill is being amortized on a straight-line basis over 15
years.
Asset Impairments - The Company periodically reviews the carrying value of
its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of assets may not be
recoverable. Identification of any impairment would include a comparison
of estimated future operating cash flows anticipated to be generated
during the remaining life of the assets with their net carrying value. An
impairment loss would be recognized as the amount by which the carrying
value of the assets exceeds their fair value. The Company recorded an
impairment loss associated with property totaling approximately $208,000
in 2000 (see Note 8). The impairment loss in 2000 is included in selling
and administrative expenses.
Revenue Recognition - Revenues are recognized when products are shipped
since all risk of loss transfers to the Company's customer upon shipment.
Provisions for discounts, returns and other adjustments are provided for
in the same period the related sales are recorded.
Shipping and Handling Fees and Costs - Amounts billed to customers related
to shipping and handling are included in net sales. Related costs incurred
are included in cost of goods sold.
Research and Development Costs - Expenditures relating to the development
of new products and processes, including significant improvements and
refinements to existing products, are expensed as incurred. The amounts
charged to expense were approximately $229,000 in 2001, $320,000 in 2000
and $125,000 in 1999.
18
Income Taxes - Income taxes are provided on the earnings (losses) in the
consolidated financial statements. Deferred income taxes are provided to
reflect the impact of "temporary differences" between the amounts of
assets and liabilities for financial reporting purposes and such amounts
as measured by tax laws and regulations. Tax credits are recognized as a
reduction to income taxes in the year the credits are earned.
Per Share Data - Basic earnings (loss) per share is computed by dividing
net earnings (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share is
calculated by dividing net earnings (loss) and the effect of assumed
conversions by the weighted average number of common and, when applicable,
potential common shares outstanding during the period. A reconciliation of
the numerators and denominators of basic and diluted earnings per share is
presented below.
2001 2000 1999
Basic earnings (loss) per share:
Numerator:
Net earnings (loss) $1,370,403 $ (682,233) $(1,528,197)
---------- ----------- -----------
Denominator:
Weighted average common shares outstanding 1,568,844 1,570,595 1,569,086
---------- ----------- -----------
Basic earnings (loss) per share $ .87 $ (.43) $ (.97)
========== =========== ===========
Diluted earnings (loss) per share:
Numerator:
Net earnings (loss) $1,370,403 $ (682,233) $(1,528,197)
Interest on convertible debt 59,062 -- --
---------- ----------- -----------
Net earnings (loss) and effect of
assumed conversions 1,429,465 (682,233) (1,528,197)
---------- ----------- -----------
Denominator:
Weighted average common shares outstanding 1,568,844 1,570,595 1,569,086
Effect of stock options outstanding 324 -- --
Effect of convertible debt 152,853 -- --
---------- ----------- -----------
Weighted average common and potential
common shares outstanding 1,722,021 1,570,595 1,569,086
---------- ----------- -----------
Diluted earnings (loss) per share $ .83 $ (.43) $ (.97)
========== =========== ===========
Options to purchase shares of common stock which totalled 73,120, 140,500
and 75,000 in 2001, 2000 and 1999, respectively, were not included in the
computation of diluted earnings (loss) per share as the effect would be
anti-dilutive.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to credit risks consist primarily of accounts
receivable. Companies in the retail industry comprise a significant
portion of the accounts receivable balance; collateral is not required.
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
Fair Value of Financial Instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair
value of short-term instruments approximates their recorded values due to
the short-term nature of the instruments. The fair value of long-term debt
instruments approximates their
19
recorded values primarily due to interest rates approximating current
rates available for similar instruments.
Stock-Based Compensation - The Company accounts for stock-based
compensation in accordance with Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. As
permitted in that standard, the Company has elected to continue to follow
recognition provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for employee stock-based compensation. No employee stock-based
compensation expense was recorded for the years ended December 31, 2001,
2000 and 1999.
Segments - The Company operates in only one business segment. In addition,
the Company's internal reporting does not make it practicable to provide
information on net sales earned from different styles of footwear or from
different geographic locations. Long-lived assets are entirely located in
the United States. Sales to one customer in 2001 totalled approximately
$5,239,000, or 11 percent of the Company's net sales in 2001. Sales to any
one customer in 2000 did not exceed 10% of the Company's net sales in that
year. Sales to one customer totalled approximately $1,790,000 or 12
percent of the Company's net sales in 1999. Ten major customers
represented approximately 38% of net sales in 2001; most of these same
customers represented 45% of net sales in 2000, and 52% of net sales in
1999. Due to the uncertain nature of the retail industry, the loss of any
one or more of these customers could have a material adverse effect on the
Company's business.
Recent Accounting Pronouncements - Effective January 1, 2001, the Company
adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138. SFAS No. 133, as amended, requires
the Company to recognize all derivatives on the consolidated balance sheet
at fair value. Derivatives that are not hedges of underlying transactions
must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has
not identified any derivatives that meet the criteria for a derivative
instrument and does not participate in any hedging activities. As a
result, there was no effect on the Company's consolidated financial
position, results of operations or cash flows resulting from the adoption
of SFAS No. 133, as amended, during 2001.
Effective April 1, 2001, the Company adopted SFAS No. 140, Accounting for
Transfers and Serving of Financial Assets and Extinguishment of
Liabilities, which replaces SFAS No. 125. The adoption of this standard
did not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
The Financial Accounting Standards Board issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
These standards make significant changes to the accounting for business
combinations, goodwill and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations with
limited exceptions for combinations initiated prior to July 1, 2001. In
addition, it further clarifies the criteria for recognition of intangible
assets separately from goodwill. This statement is effective for business
combinations completed after June 30, 2001. The Company does not expect
that the adoption of this standard will have any impact on its
consolidated financial statements.
20
SFAS No. 142 discontinues the practice of amortizing goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Goodwill amortization totalling $204,033 in 2001 will not be
recognized in 2002. Impairment would be examined more frequently if
certain indicators are encountered. Intangible assets with a determinable
useful life will continue to be amortized over their useful lives. SFAS
No. 142 applies to goodwill and intangible assets acquired after June 30,
2001. Goodwill and intangible assets existing prior to July 1, 2001 will
be affected when the Company adopts the standard. The Company is currently
evaluating the impact of impairment, if any, that the adoption of this
standard will have on its consolidated financial statements.
Reclassifications - Certain reclassifications have been made to the 2000
financial statements to conform to the classifications used in 2001.
2. PROPERTY
Property as of December 31 consisted of the following:
2001 2000
Land and buildings $1,628,581 $1,698,581
Machinery and equipment 90,070 90,070
Computers 582,529 562,529
Vehicles 47,430 47,430
Furniture and fixtures 34,566 34,301
---------- ----------
2,383,176 2,432,911
Less accumulated depreciation 625,887 378,333
---------- ----------
Property - net $1,757,289 $2,054,578
========== ==========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
totalled $245,916, $166,642 and $237,561, respectively.
3. BENEFIT PLANS
Defined Benefit Pension Plan
During 2001, the Company completed the termination of the Penobscot
defined benefit pension plan. On the date of termination the Company
received cash totalling $2,377,600, which was less than the carrying value
of the prepaid pension cost asset on the termination date of $3,734,670,
resulting in a loss of $1,357,070. The loss was increased by an excise tax
totalling $356,640, which resulted in a total loss on this transaction
totalling $1,713,710. This amount is included in other expense in the 2001
consolidated statement of operations (see Note 8).
The Plan covered substantially all of its employees and it was the
Company's policy to fund retirement costs as accrued.
21
The following table sets forth the plan's funded status as of December 31,
2000:
2000
The change in the benefit obligation is:
Benefit obligation at date of Penobscot acquisition, March 30, 2000 $ 3,369,079
Service cost 14,602
Interest cost 171,032
Curtailment gain (322,869)
Actuarial loss 684,318
Benefits paid (252,143)
-----------
Benefit obligation at end of year $ 3,664,019
===========
The change in plan assets is:
Fair value of assets at date of Penobscot acquisition, March 30, 2000 $ 6,785,440
Actual return on plan assets 10,234
Benefits paid (252,143)
Administrative expenses (85,112)
-----------
Fair value of assets at end of year $ 6,458,419
===========
Reconciliation of funded status as of December 31, 2000:
Funded status $ 2,794,400
Unrecognized actuarial loss 816,118
-----------
Net prepaid pension costs recognized as of December 31, 2000 $ 3,610,518
===========
The discount rate and the expected long-term rate of return on plan assets
used in determining the actuarial present value of the projected benefit
obligation as of December 31, 2000 were 6% and 7.5%, respectively. The
discount rate and the expected long-term rate of return on plan assets
used in determining the actuarial present value of the project benefit
obligation as of March 30, 2000 were 7.5% and 7.5%, respectively.
The net pension income for 2001 and 2000 included the following
components:
2001 2000
Interest cost $(106,138) $(171,032)
Actual return on plan assets 237,463 379,791
Amortization of loss (7,173) --
Service cost -- (14,602)
--------- ---------
Net pension income $ 124,152 $ 194,157
========= =========
22
Defined Contribution Plan
The Company has a defined contribution 401(k) savings plan ("the Plan")
covering substantially all employees of the Company. Following the
termination of its defined benefit pension plan, the Company contributed
cash of $2,015,180 to the Plan. Subsequently, the Plan acquired 391,297
shares of the Company's common stock at a price per share of $5.15, which
was based on an independent appraisal. There were no allocated shares at
December 31, 2001. The unallocated shares in the Plan have been classified
as treasury stock in stockholders' equity. Compensation expense will be
recognized as the shares are allocated to the participants which is
expected to occur over a seven-year period. In addition, the Company's
matching contribution to the Plan totalled $26,705, $11,424 and $45,429 in
2001, 2000 and 1999, respectively.
4. DEBT
Notes Payable - Subsequent to December 31, 2001, the Company entered into
a new loan agreement with its existing bank. The new terms of the
agreement were used to determine the current and noncurrent portions of
its long-term debt as of December 31, 2001. The loan agreement consists of
a revolving line of credit ("revolver"), a term loan facility in the
amount of $3,000,000, a supplemental loan facility in the amount of
$969,048 and a bridge loan in the amount of $1,500,000. Under the terms of
the new agreement, the borrowing base for the revolver is based on certain
balances of accounts receivable and inventory, as defined in the
agreement. The maximum credit amount under the revolver is $12,500,000
minus a $1.7 million letter of credit available for the dissenting
Penobscot shareholders (see Note 6), and will be decreased to $11,000,000
on July 20, 2002. The revolver expires on December 20, 2005 and has an
interest rate of LIBOR plus 225 basis points (LIBOR was 1.87% on December
31, 2001). Effective January 1, 2003, the interest rate ranges from LIBOR
plus 175 to 300 basis points depending on the level of the Company's debt
to earnings ratio. The revolver is secured by accounts receivable,
inventory and equipment. The term loan is payable through December 20,
2005 and is also secured by accounts receivable, inventory and equipment.
The supplemental loan facility is due in 2002 and the bridge loan is due
in full on June 30, 2002. The term loan is subject to similar interest
rate ranges as the revolver.
The Company has a note payable to a major stockholder due April 11, 2002.
This note is convertible at the stockholder's option into 203,804 shares
of the Company's common stock.
The balance owed under the Company's revolving line of credit as of
December 31, 2001 and 2000 totaled $8,200,365 and $12,500,000,
respectively.
23
Long-term debt as of December 31 consisted of the following:
2001 2000
Term loan payable to bank in quarterly installments
of $187,500 through December 20, 2005, interest
due monthly at LIBOR plus 250 basis points $2,967,785 $5,625,000
Mortgage note payable to bank in monthly installments
of approximately $5,784, including interest, through
September 2009, secured by property 441,297 768,780
Note payable to bank in full in 2002, interest at LIBOR
plus 225 basis points 969,048 --
Note payable to bank in full on June 30, 2002, interest
due monthly at LIBOR plus 225 basis points 1,500,000 --
Convertible note payable to major stockholder in
full on April 11, 2002, interest due quarterly at 15% 750,000 --
Other -- 32,283
---------- ----------
6,628,130 6,426,063
Less: current portion 4,016,485 6,416,743
---------- ----------
Noncurrent portion $2,611,645 $ 9,320
========== ==========
The aggregate principal payments of notes payable are as follows:
2002 $4,016,485
2003 801,254
2004 803,552
2005 773,738
2006 58,461
Thereafter 174,640
----------
Total $6,628,130
==========
The line of credit and the note payable to bank contain certain financial
covenants relative to average borrowed funds to earnings ratio, net
income, current ratio, and cash flow coverage. In addition, the payment or
declaration of dividends and distributions is prohibited unless a written
consent from the lender is received. As of December 31, 2000, the Company
was not in compliance with its financial covenants. The Company has not
obtained a waiver from the lender and accordingly, has reclassified
$4,875,000 of debt from a long-term liability to a current liability as of
December 31, 2000.
Letter of Credit - During 2000, the Company routinely used letters of
credit when entering into inventory purchase transactions with foreign
vendors. At December 31, 2000, these outstanding letters of credit totaled
approximately $370,000.
24
5. INCOME TAXES
The income tax expense (benefit) consists of:
2001 2000 1999
Current:
Federal $ 8,003 $ -- $ --
State 12,741 4,094 2,206
--------- --------- ---------
20,744 4,094 2,206
--------- --------- ---------
Deferred:
Federal 40,144 (410,353) (385,799)
State 5,903 (48,563) (98,977)
--------- --------- ---------
46,047 (458,916) (484,776)
--------- --------- ---------
Total $ 66,791 $(454,822) $(482,570)
========= ========= =========
The difference between tax computed at the statutory U.S. federal income
tax rate and the Company's effective tax rate is as follows:
2001 2000 1999
Expense (benefit) at statutory rate $ 488,646 $(386,599) $(683,657)
State and other taxes, net of federal
tax benefit 12,305 (36,130) 1,456
Items not deductible 197,568 6,938
Reduction in state net operating loss -- 12,115
due to rate change
Change in valuation allowance (647,116) (80,127) 287,243
Other 15,388 28,981 (87,612)
--------- --------- ---------
Income tax expense (benefit) $ 66,791 $(454,822) $(482,570)
========= ========= =========
As of December 31, 2001, the Company has approximately $2,349,000 of
federal net operating loss carryforwards which begin to expire in 2019.
The Company has an alternative minimum tax (AMT) credit carryforward of
$57,077 which will never expire. The Company has approximately $3,919,000
of net operating loss carryforwards available for New York State tax
purposes, which begin to expire in 2011.
25
Components of the Company's deferred income tax asset (liability) as of
December 31, 2001 and 2000 are as follows:
2001
-------------------------
Current Noncurrent
Assets
Non-deductible bad debt reserves $ 572,650 $ --
Uniform capitalization of inventory 65,325 --
Other accruals 18,806 --
Net operating loss carryforwards -- 958,434
Compensation -- 55,279
AMT credit carryforward -- 57,077
Charitable contribution -- 212,571
Liabilities
Installment sale gain -- (551,070)
Pension -- (785,920)
Depreciation -- (547,773)
Valuation allowance (20,311) (39,689)
--------- ---------
Deferred income tax asset (liability) $ 636,470 $(641,091)
========= =========
2001
-------------------------
Current Noncurrent
Assets
Non-deductible bad debt reserves $ 691,470 $ --
Uniform capitalization of inventory 57,720 --
Non-deductible sales allowances 185,250 --
Other accruals 39,328 --
Net operating loss carryforwards -- 1,311,674
Compensation -- 58,885
AMT credit carryforward -- 49,074
Charitable contribution -- 262,603
Liabilities
Depreciation -- (499,359)
Valuation allowance (319,277) (387,839)
--------- -----------
Deferred income tax asset $ 654,491 $ 795,038
========= ===========
26
6. LIABILITY TO FORMER STOCKHOLDERS
The accompanying consolidated balance sheets as of December 31, 2000 includes an
obligation of approximately $1,806,000 to dissenting stockholders of Penobscot.
This liability arose prior to the Company's acquisition of Penobscot and was
assumed by the Company. The Company has a letter of credit totalling $1,700,000
which has been designated for this obligation.
27
7. STOCKHOLDERS' EQUITY
During 2001, the Company replaced its 1995 Stock Incentive Plan with the
2001 Long-Term Incentive Plan, although stock options outstanding under
the 1995 Stock Incentive Plan will still be honored by the Company. Under
the 2001 Plan, awards in the form of stock options, stock appreciation
rights or stock awards may be granted to employees of the Company,
including those that are also directors and officers, non-employee
directors and persons who provide consulting or other services to the
Company deemed by the Board of Directors to be of substantial value to the
Company. Options may also be granted as part of an employment offer. The
Company has reserved 300,000 shares of its common stock for issuance under
the Plan. Options can be exercised at the fair market value of the
Company's common stock on the date of grant. The Plan is administered by
the compensation committee of the Board of Directors.
The stock option activity for the years ended December 31, 2001, 2000 and
1999 is as follows:
2001 2000 1999
Options outstanding, beginning of year 65,500 75,000 87,000
Options granted 32,245 65,500 --
Options cancelled (8,500) (75,000) (12,000)
------- ------- -------
Options outstanding, end of year 89,245 65,500 75,000
======= ======= =======
Options exercisable, end of year 44,625 32,750 --
======= ======= =======
The outstanding options as of December 31, 2001 have an exercise price
ranging from $3.45-$3.56 per share and expire at various dates through
September 2011.
The Company follows the disclosures-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Pro forma information regarding
the Company's net earnings (loss) and related per share amounts as
required by SFAS No. 123 are as follows:
2001 2000 1999
Net earnings (loss):
As reported $ 1,370,403 $ (682,233) $ (1,528,197)
Pro forma $ 1,338,539 $ (754,534) $ (1,514,583)
Basic earnings (loss) per share:
As reported $ .87 $ (.43) $ (.97)
Pro forma $ .86 $ (.48) $ (.97)
Diluted earnings (loss) per share:
As reported $ .83 $ (.43) $ (.97)
Pro forma $ .81 $ (.48) $ (.97)
28
The weighted average fair value of options granted in 2001 and 2000 is
estimated as $1.08 and $1.10, respectively, and the weighted average fair
value of the options outstanding as of 2001, 2000 and 1999 is estimated as
$1.06, $1.10 and $1.33, respectively, using the Black-Scholes option
pricing model with the following weighted average assumptions:
2001 2000 1999
Expected life 8.4 years 9.0 years 5.5 years
Volatility 24.81% 28.70% 30.63%
Risk-free interest rate 4.96% 6.06% 6.50%
Dividend yield 0% 0% 0%
In addition to the options outstanding under the Plan, the Company has
granted options to two separate major stockholders in consideration for
debt or debt guarantees. Options outstanding and exercisable under these
arrangements totalled 200,000 as of December 31, 2001 and 75,000 as of
December 31, 2000 and 1999. The outstanding options at December 31, 2001
have an exercise-price ranging from $3.50-$4.75 per share and expire at
various dates through June 2011. The Company accounts for these options in
accordance with SFAS No. 123.
8. OTHER EXPENSE
Other expense, net consists primarily of the following for the year ended
December 31, 2001; the gain of $1,196,048 as a result of the sale of the
Company's slipper brands as described in Note 1; the loss of $1,713,710 as
a result of the termination of the Penobscot defined benefit pension plan
as described in Note 3; a net gain on the sale of property of $142,198.
Effective May 1, 2000, the Company's headquarters and distribution
operation relocated from Dolgeville, New York to the newly acquired
facilities in Old Town, Maine. Costs incurred in 2000 associated with this
relocation, including severance, moving expenses and closing facilities,
totalled approximately $808,000 which are included in selling and
administrative expenses. In addition, an impairment loss of $208,000 was
recognized in 2000 (see "Asset Impairments" in Note 1). As of December 31,
2000, all costs associated with this move have been paid, therefore, no
liability remains as of December 31, 2000.
Based on a formal restructuring plan, the Company ceased its manufacturing
operations completely during 1999. As a result, the Company's primary
business activity, subsequent to closing manufacturing operations, has
been to outsource entirely the production of its footwear and to
distribute the footwear to its customers under the Company's label and
certain private labels. As part of the restructuring, the Company incurred
severance costs of $311,153 in 1999, of which $67,248 are included in
selling and administrative expenses and $243,905 are included in cost of
goods sold. Raw material inventory write-offs of $589,177 are also
included in cost of goods sold in 1999 as part of the restructuring. As of
December 31, 2000, there was no remaining liability for severance costs.
* * * * * *
29
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
This information is contained in the Definitive Proxy Statement dated March
29, 2002, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Item 10. Executive Compensation.
This information is contained in the Definitive Proxy Statement dated March
29, 2002, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
This information is contained in the Definitive Proxy Statement dated March
29, 2002, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Item 12. Certain Relationships and Related Transactions.
This information is contained in the Definitive Proxy Statement dated March
29, 2002, which has been filed with the Commission, and is incorporated by
reference in this Form 10-KSB Annual Report.
Part IV
Item 13. Exhibits, List and Reports on Form 8-K.
(a). Exhibits
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
(24) Power of Attorney
(b). Reports on Form 8-K.
A Current Report on Form 8-K for the quarter ended December 31, 2001
was filed with the Commission on January 14, 2002.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DANIEL GREEN COMPANY
(Registrant)
DATE: March 29, 2002 By: /s/ James R. Riedman
-------------------------------------
James R. Riedman,
Chairman and Chief Executive Officer
By: /s/ Robert Pereira
-------------------------------------
Robert Pereira,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the date indicated.
DIRECTORS
/s/ Edward Bloomberg * /s/ Steven DePerrior *
-------------------------- ----------------------------
Edward Bloomberg Steven DePerrior
/s/ Gregory Harden * /s/ Gary E. Pflugfelder *
-------------------------- ----------------------------
Gregory Harden Gary E. Pflugfelder
/s/ James R. Riedman * /s/ Greg A. Tunney
-------------------------- ----------------------------
James R. Riedman Greg A. Tunney
/s/ Wilhelm Pfander *
--------------------------
Wilhelm Pfander
*By: /s/ James R. Riedman
-------------------------------------
James R. Riedman, as Attorney-in-Fact
DATE: March 29, 2002
31