<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Broadway, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 790-3900
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
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), Yes X No ___ and (2) has been the
subject to such filing requirements for the past 90 days. Yes X No ___.
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Common Stock $0.01 par value 3,617,417 .
---------------------------- --------------------------
(Class) (Outstanding at November 13, 2000)
<PAGE>
DONNKENNY, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-Q)
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Consolidated financial statements:
Independent Accountants' Report
Balance sheets as of September 30, 2000 (unaudited) and December 31, 1999 ...I-1
Statements of operations for the three and nine months ended
September 30, 2000 and 1999 (unaudited) ................................... II-1
Statements of cash flows the nine months ended
September 30, 2000 and 1999 (unaudited).................................. III-1
Notes to Consolidated Financial Statements (unaudited) .................. IV-1-4
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... V-1-5
PART II - OTHER INFORMATION
Legal Proceedings and Other Information................................... VI-1-2
Exhibits and Reports on Form 8-K.......................................... VI-3
Signatures................................................................ VI-4
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Donnkenny, Inc.
We have reviewed the accompanying consolidated balance sheet of Donnkenny, Inc.
and subsidiaries as of September 30, 2000, and the related consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 2000 and 1999 and cash flows for the nine-month periods ended
September 30, 2000 and 1999. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Donnkenny, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated March 22,
2000 (March 31, 2000 as to note 13 and April 13, 2000 as to note 6), we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1999 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
New York, New York
November 13, 2000
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash........................................................... $ 77 $ 180
Accounts receivable - net of allowances of
$214 and $382, respectively................................... 34,091 30,022
Recoverable income taxes....................................... 149 304
Inventories.................................................... 25,071 29,323
Deferred tax assets............................................ 2,178 2,865
Prepaid expenses and other current assets...................... 1,626 636
Assets held for sale........................................... 358 456
----------- -----------
Total current assets........................................... 63,550 63,786
PROPERTY, PLANT AND EQUIPMENT, NET.................................. 5,493 5,981
OTHER ASSETS........................................................ 523 546
INTANGIBLE ASSETS................................................... 31,402 31,524
----------- -----------
TOTAL............................................................... $100,968 $101,837
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............................ $ 1,133 $ 1,168
Accounts payable............................................. 11,393 10,351
Accrued expenses and other current liabilities............... 2,052 3,965
----------- -----------
Total current liabilities................................. 14,578 15,484
----------- -----------
LONG-TERM DEBT...................................................... 47,857 41,607
DEFERRED TAX LIABILITIES............................................ 2,178 2,865
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized 500
shares , issued none.......................................... -- --
Common stock, $.01 par value. Authorized 10,000
shares, issued and outstanding 3,617 and 3,557 shares
in 2000 and 1999, respectively.................................. 36 36
Additional paid-in capital...................................... 48,582 47,877
Issuable shares for litigation settlement....................... 1,875 1,875
Deficit......................................................... (14,138) (7,907)
----------- -----------
Total Stockholders' Equity....................................... 36,355 41,881
----------- -----------
TOTAL............................................................... $100,968 $101,837
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
I - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- --------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
NET SALES..................................................... $ 39,710 $ 44,965 $ 109,837 $ 130,724
COST OF SALES................................................. 31,777 35,758 89,850 102,658
---------- ---------- ---------- ----------
Gross profit............................................. 7,933 9,207 19,987 28,066
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 6,795 7,784 20,841 24,724
Provision for settlement of litigation.................... (519) 349 5,875
Amortization of goodwill and other related
acquisition costs........................................ 361 348 1,056 1,043
Restructuring charge...................................... -- -- 500 --
---------- ---------- ---------- ----------
Operating income (loss)............................... 777 1,594 (2,759) (3,576)
INTEREST EXPENSE.............................................. 1,262 812 3,384 2,910
---------- ---------- ---------- ----------
Income (loss) before income taxes..................... (485) 782 (6,143) (6,486)
INCOME TAXES.................................................. 5 150 88 167
---------- ---------- ---------- ----------
NET INCOME (LOSS)....................................... $ (490) $ 632 $ (6,231) $(6,653)
========== ========== ========== ==========
Basic earnings (loss) per common share....................... $ (0.11) $ 0.18 $ (1.63) $ (1.87)
========== ========== ========== ==========
Shares used in the calculation of basic earnings (loss)
per common share.......................................... 4,277,743 3,557,385 3,818,767 3,550,125
========== ========== ========== ==========
Diluted earnings (loss) per common share..................... $ (0.11) $ 0.17 $ (1.63) $ (1.87)
========== ========== ========== ==========
Shares used in the calculation of diluted earnings (loss)
per common share........................................... 4,277,743 3,624,938 3,818,767 3,550,125
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
II - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------------
September 30, September 30,
2000 1999
----------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $(6,231) $ (6,653)
Adjustments to reconcile net cash used in operating activities:
Provision for shares issuable on settlement of litigation........ -- 1,875
Depreciation and amortization of fixed assets.................... 587 599
Write down of fixed assets....................................... 200 -
Net loss on disposal of fixed assets............................. -- 5
Amortization of intangibles and other assets..................... 1,056 1,043
Provision for losses on accounts receivable...................... (11) 17
Changes in assets and liabilities:
Increase in accounts receivable.................................. (4,058) (4,544)
Decrease in recoverable income taxes............................. 156 338
(Increase) decrease in inventories............................... 4,802 (6,038)
(Increase) decrease in prepaid expenses and
other current assets............................................. (990) 527
Decrease in other non-current assets............................. 24 1,817
Increase in accounts payable..................................... 1,042 1,585
Decrease in accrued expenses and
other current liabilities...................................... (1,209) (1,911)
------- --------
Net cash used in operating activities........................ (4,632) (11,340)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF ACQUISITION:
Purchase of fixed assets......................................... (391) (441)
Proceeds from sale of fixed assets............................... 189 1,320
Acquisition of business ......................................... (1,485)
------- --------
Net cash (used in) provided by investing activities.................. (1,687) 879
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt...................................... (874) 2,636
Net borrowings for acquisition................................... 1,300 --
Net borrowings under revolving credit line....................... 5,790 7,414
------- --------
Net cash provided by financing activities.................... 6,216 10,050
------- --------
NET DECREASE CASH.................................................... (103) (411)
CASH, AT BEGINNING OF PERIOD......................................... 180 503
------- --------
CASH, AT END OF PERIOD............................................... $77 $ 92
======= ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid.................................................... $ 31 $ 208
======= ========
Interest paid........................................................ $ 3,104 $ 2,401
======= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Issuance of common stock............................................. $ 705 $ 176
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
III - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the Rules of the Securities and Exchange
Commission ("SEC") and, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
financial position, results of operations and cash flows. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance accounting principles generally accepted in the United States of
America ("generally accepted accounting principals") have been condensed or
omitted pursuant to such SEC rules. The Company believes the disclosures made
are adequate to make such financial statements not misleading. The results for
the interim periods presented are not necessarily indicative of the results to
be expected for the full year. These financial statements should be read in
conjunction with the Company's Report on Form 10-K for the year ended December
31, 1999. Balance sheet data as of December 31, 1999 have been derived from
audited financial statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2000 1999
---- ----
(In thousands)
Raw materials .............. $ 2,313 $ 1,548
Work-in-process ............ 1,087 2,742
Finished goods ............. 21,671 25,033
------ ------
$25,071 $29,323
======= =======
NOTE 3 - DEBT
On June 29, 1999, the Company and its operating subsidiaries signed a
three year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services. 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 originally bore interest at the
prime rate plus one half percent. 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 $0.25 million plus all accrued and unpaid interest beginning
September 30, 1999 through June 30, 2002. The Credit Agreement expires on June
30, 2002.
IV-1
<PAGE>
Collateral for the Credit Agreement 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.
The Credit Agreement contains several financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock and capital expenditures.
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 2000 were amended and
restated. Certain covenants were also amended for the respective quarter ends in
2000. A fee of $75,000 was paid on February 29, 2000 in connection with the
Third Amendment. On April 13, 2000, the Company entered into a Fourth Amendment
and Waiver Agreement to support the Company's 2000 business plan for the
remainder of the year. 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 2000 were amended. Certain covenants were also
amended for the respective quarter ends in 2000. A fee of $75,000 was paid for
the Fourth Amendment and Waiver. On July 6, 2000, the Company entered into a
Fifth Amendment to finance the acquisition of the Ann Travis business (see note
7) by the issuance of an additional $1.3 million term loan. The new term loan
bears interest at the prime rate plus 1.5 % (11.0% at September 30, 2000) and is
repayable over thirty six months commencing January 1, 2001. A fee of $100,000
was paid for the Fifth Amendment. On November 13, 2000, the Company entered into
a Sixth Amendment and Waiver to revise the loan covenants as of September 30,
2000 and for the remainder of the year. A fee of $39,990 will be paid in
connection with the Sixth Amendment.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission on the gross amount of sales, plus
certain customary charges. The factoring agreement expires on August 31, 2001.
As of September 30, 2000 and 1999, the borrowings under the Credit
Agreement amounted to $45.8 million and $39.1 million with interest rates of
11.0% and 8.75%, respectively. As of September 30, 2000, the term loan amounted
to $3.1 million.
Other debt consists of a secured term loan that was entered into on
June 30, 1998 in the amount of $0.483 million. As of September 30, 2000 the
principal balance of this loan amounted to $0.133 million. The interest rate is
fixed at 8.75% and the loan requires monthly principal and interest payments of
$0.015 million through June 2001. Software, machinery and equipment secure this
obligation.
NOTE 4 - REVERSE STOCK SPLIT
On February 15, 2000, the Company's Board of Directors adopted a
resolution to recommend to the Company's shareholders a one for four reverse
stock split as part of an effort to maintain continued listing of the Company's
common stock on the NASDAQ National Market.
IV-2
<PAGE>
The reverse stock split recommendation was approved by the Company's
shareholders at a special meeting held on April 18, 2000. The reverse split
became effective on April 20, 2000. As a result of the split, each four shares
of common stock applicable to shareholders on the effective date of the split
were converted into one share of stock. 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 during
fiscal 2000, the Company's bid price has fallen below $1.00.
Prior to the split, the Company had 14,229,540 shares outstanding. As a
result of the split, the Company had approximately 3,557,385 shares outstanding.
Earnings (loss) per share and share amounts have been restated to reflect the
reverse split for all periods presented.
By letter dated May 8, 2000, NASDAQ notified the Company that although
the Company had achieved compliance with the listing requirement of a closing
bid price of at least $1.00, the Company's market capitalization had fallen
below $5.0 million which was an additional requirement for listing on the NASDAQ
National Market. Accordingly, while the Company maintained its listing with
NASDAQ, the Company's securities were transferred from the NASDAQ National
Market to the NASDAQ SmallCap Market effective with the open of business on May
11, 2000.
By letter dated July 18, 2000, NASDAQ notified the company that the
Company's stock had failed to maintain the $1.00 minimum bid price over the last
30 consecutive trading days. Accordingly, the Company was given 90 days (until
October 16, 2000) to regain compliance. If the Company does not demonstrate
compliance for a minimum of 10 consecutive days on or before the October 16th
deadline, the Company's common stock would be delisted on October 18, 2000. The
Company petitioned the NASDAQ Board of Directors for continued listing and has
attended a hearing on Thursday, November 9, 2000. The outcome of that
hearing is still pending.
NOTE 5 - RESTRUCTURING CHARGE
On March 15, 2000 the Company announced that it would close all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. During the first quarter ended March 31, 2000, the
Company recorded a restructuring charge of $0.5 million which included the
following: (i) $0.2 million to write down property, plant and equipment; and
(ii) $0.3 million related to the cost of providing severance payments to
approximately 200 employees terminated as a result of the facility closures. As
of June 30, 2000, the $0.3 million has been paid out to the employees. The plant
closings were completed by the end of May 2000. The Company has put these
facilities up for sale.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
a. 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
IV-3
<PAGE>
share and the balance is payable by the Company's insurers; issue 3
million shares of the Company's common stock (which when issued will
be 750,000 shares as a result of the reverse split), and to pursue
litigation against two of the Company's insurers to recover under
its excess insurers' policies. A Settlement hearing was held by the
District Court and an order approving the settlement was signed on
July 12, 2000. As a result the earnings (loss) per share, ("EPS")
calculations for the three months and nine months ended September
30, 2000 reflect the effect of the settlement of 750,000 shares in
both basic and diluted EPS. 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 March 31, 2000; except for the cost of the litigation with two
of the Company's insurers, which is not expected to be material.
b. 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 the 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. Pre-trial discovery is now taking place.
c. The Company was a party to legal proceedings arising in the ordinary
course of its business involving a claim by a former supplier of the
Company. On July 1, 2000, a settlement of $220,000 was reached with
the Plaintiff in that proceeding. The settlement requires two lump
sum payments of $62,500 and $27,500 in July and August 2000,
respectively. Beginning September 1, 2000 the remaining balance will
be paid in equal monthly installments until September 1, 2001. Legal
costs associated with the settlement were approximately $129,000.
NOTE 7 - ANN TRAVIS ACQUISITION
On July 1, 2000 the Company acquired certain assets of Ann Travis
Inc. ("Ann Travis") for $1.5 million, including costs incurred in
the acquisition of $0.3 million. Ann Travis designs, imports, and
markets women's sportswear. Assets acquired included $0.5 million of
certain merchandise inventory, the Ann Travis and Decade Designs
trademarks and the license rights for sales of womens' apparel under
the Delta Burke trademark. The purchase was funded by CIT under a
new $1.3 million term loan which requires payment in equal
installments over three years commencing January 1, 2001. Goodwill
of $1.0 million was recorded in connection with this acquisition and
will be amortized over ten years. The acquisition was accounted for
as a purchase. The final assessment of the purchase accounting will
be completed by June 2001. The proforma net sales and results of
operations for this acquisition, had the acquisition occurred at the
beginning of 2000, are not significant, and accordingly, are not
presented.
IV-4
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales decreased by $20.9 million, or 16.0% from $130.7 million in
the nine months of 1999 to $109.8 million in the first nine months of 2000. The
decline in the Company's net sales was essentially due to decreases in the
Donnkenny line of $9.3 million (primarily due to the planned exit of the
coordinate business), the Victoria Jones line of $15.2 million, and the Casey &
Max line of $3.2 million. The decreases were partially offset by increases in
the Pierre Cardin line of $3.5 million and the sales of the recently acquired
Ann Travis lines of $3.3 million.
Gross profit for the nine months of 2000 was $20.0 million, or 18.2% of
net sales, compared to $28.1 million, or 21.5% of net sales, during the first
nine months of 1999. The decrease in gross profit dollars and as a percentage of
net sales was attributable to the Company's idle domestic plant capacity, the
reduced sales levels noted above and the continued sell off of inventory due to
the poor retail climate.
Selling, general and administrative expenses decreased from $24.7
million in the first nine months of 1999 to $20.8 million in the first nine
months of 2000. The decrease in selling, general and administrative expenses was
primarily due to reductions in headcount. These reductions were partially offset
by start up costs of approximately $1.4 million for a new Pierre Cardin line and
operating expenses of $0.5 million associated with the recently acquired Ann
Travis lines.
In the second quarter of fiscal 1999, the Company recorded an estimated
charge of $6.4 million to reflect the terms of a settlement for the Consolidated
Class Action lawsuit that were agreed to in principle by the attorneys for the
plaintiffs (see note 4 to the financial statements for further description). The
actual cost of the Settlement is $5.9 million, therefore $0.5 million of the
charge was reversed in the third quarter of 1999. The terms of settlement
involves a cash payment and the issuance of shares of the Company's common
stock.
On March 15, 2000, the Company announced that it would close all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. During the first quarter ended March 31, 2000, the
Company recorded a restructuring charge of $0.5 million which included the
following: (i) $0.3 million related to the cost of providing severance payments
to approximately 200 employees terminated as a result of the facility closures;
as of June 30, 2000, the $0.3 million has been paid out to the employees; (ii)
$0.2 million to write down property, plant and equipment. The plant closings
were completed by the end of May 2000. The Company has put these facilities up
for sale.
Net interest expense was $2.9 million during the first nine months of
1999 and $3.4 million during the first 9 months of 2000. The $.5 million
increase in interest expense was due to an increase in the average loan balance
and an increase in the effective interest rate.
V-1
<PAGE>
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales decreased by $5.3 million, or 11.8% from $45.0 million in the
third quarter of 1999 to $39.7 million in the third quarter of 2000. The decline
in the Company's net sales was primarily due to decreases in the Donnkenny line
of $1.7 million (primarily due to the planned exit of the coordinate business),
the Victoria Jones line of $7.2 million, and the Casey & Max line of $2.4
million. The decreases were partially offset by increases in the Pierre Cardin
line of $2.7 million and the sales of the recently acquired Ann Travis lines of
$3.3 million.
Gross profit for the third quarter of 2000 was $7.9 million, or 20.0%
of net sales, compared to $9.2 million, or 20.4% of net sales, during the third
quarter of 1999. The decrease in gross profit in dollars and as a percentage of
net sales was attributable to the Company's continued sell off of inventory due
to the poor retail climate.
Selling, general and administrative expenses decreased from $7.8
million in the third quarter of 1999 to $6.8 million in the third quarter of
2000. The decrease in selling, general and administrative expenses was primarily
due to reductions in headcount. These reductions were partially offset by start
up costs of approximately $0.5 million for a new Pierre Cardin line and
operating expenses of $0.5 million associated with the recently acquired Ann
Travis lines.
Net interest expense increased from $0.8 million during the third
quarter of 1999 to $1.3 million during the third quarter of 2000. The $.5
million increase in interest expense was due to an increase in the average loan
balance and an increase in the effective interest rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily accounts receivable and the interest and principal
payments related to certain indebtedness. The Company's borrowing requirements
for working capital fluctuate throughout the year.
On June 29, 1999, the Company and its operating subsidiaries signed a
three year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services. 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 originally bore interest at the
prime rate plus one half percent. 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 $0.25 million plus all accrued and unpaid interest beginning
September 30, 1999 through June 30, 2002. The Credit Agreement expires on June
30, 2002.
V-2
<PAGE>
Collateral for the Credit Agreement 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 Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures.
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 2000 were amended and
restated. Certain covenants were also amended for the respective quarter ends in
2000. A fee of $75,000 was paid on February 29, 2000 in connection with the
Third Amendment. 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 2000 were
amended. Certain covenants were also amended for the respective quarter ends in
2000. A fee of $75,000 was paid for the Fourth Amendment and Waiver. On July 6,
2000, the Company entered into a Fifth Amendment to finance the acquisition of
the Ann Travis business (see note 7) by the issuance of an additional $1.3
million term loan. The new term loan bears interest at the prime rate plus 1.5 %
(11.0% at September 30, 2000) and is repayable over thirty six months commencing
January 1, 2001. A fee of $100,000 was paid for the Fifth Amendment. On November
13, 2000, the Company entered into a Sixth Amendment and Waiver to revise the
loan covenants as of September 30, 2000 and for the remainder of the year. A
fee of $39,990 will be paid in connection with the Sixth Amendment.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission on the gross amount of sales, plus
certain customary charges.
As of September 30, 2000 and 1999, borrowings under the Credit
Agreement amounted to $45.8 million compared to $39.1 million with interest
rates of 11.0% and 8.75%, respectively. As of September 30, 2000, the term loan
amounted to $3.1 million.
During the nine months of 2000, the Company's operating activities used
cash principally as a result of increases in accounts receivable and decreases
in accrued expenses offset by decreases in inventory and increases in accounts
payable. During the nine months of 1999, the Company's operating activities used
cash principally a result of increases in accounts receivable, increases in
inventory, and decreases in accrued expenses partially offset by increases in
accounts payable. Cash used in investing activities in the first nine months of
2000 amounted to $1.7 million ($0.4 million primarily as the result of capital
purchases relating to the upgrades of the company's computer systems and the
acquisition of Ann Travis of $1.5 million partially offset by the sale of
machinery from the closed Virginia manufacturing facilities of $0.2 million.).
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Cash provided by investing activities in the first nine months of 1999
amounted to $0.9 million, primarily as the result of the sale of a closed
Virginia manufacturing facility ($1.1 million) and a manufacturing unit in New
York ($0.2 million) partially offset by $0.4 million for capital purchases
relating to the upgrades in the Company's computer systems.
The Company believes that cash flows from operations and amounts
available under the credit agreement will be sufficient for its operating needs
in the foreseeable future.
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.
REVERSE STOCK SPLIT
On February 15, 2000, the Company's Board of Directors adopted a
resolution to recommend to the Company's shareholders a one for four reverse
stock split as part of an effort to maintain continued listing of the Company's
common stock on the NASDAQ National Market. 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 during fiscal 2000, the Company's bid price has fallen below $1.00.
The reverse stock spilt recommendation was approved by the Company's
shareholders at a special shareholders meeting held on April 18, 2000. The
reverse spilt became effective on April 20, 2000. As a result of the reverse
spilt, each four shares of common stock on April 20, 2000 was converted into one
share of common stock.
Prior to the split, the Company had 14,229,540 shares outstanding. As a
result of the split, the Company had approximately 3,557,385 shares outstanding.
Earnings (loss) per share and share amounts have been restated to reflect the
reverse split for all periods presented.
By letter dated May 8, 2000, NASDAQ notified the Company that although
the Company had achieved compliance with the listing requirement of a closing
bid price of at least $1.00, the Company's market capitalization had fallen
below $5 million which was an additional requirement for listing on the National
Market. Accordingly, while the Company maintained its listing with NASDAQ, the
Company's securities were transferred from the NASDAQ National Market to the
NASDAQ SmallCap Market effective with the open of business on May 11, 2000.
By letter dated July 18, 2000, NASDAQ notified the company that the
Company's stock had failed to maintain the $1.00 minimum bid price over the last
30 consecutive trading days. Accordingly, the Company was given 90 days (until
October 16, 2000) to regain compliance. If the Company does not demonstrate
compliance for a minimum of 10 consecutive days on or before the October 16th
deadline, the Company's common stock would be delisted on October 18, 2000. The
Company petitioned the NASDAQ Board of Directors for continued listing and has
attended an oral hearing on Thursday, November 9, 2000. The outcome of that
hearing is still pending.
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ANN TRAVIS ACQUISITION
On July 1, 2000 the Company acquired certain assets of Ann Travis Inc.
("Ann Travis") for $1.5 million, including costs incurred in the acquisition of
$.3 million. Ann Travis designs, imports, and markets women's sportswear. Assets
acquired included $.5 million of certain merchandise inventory, the Ann Travis
and Decade Designs trademarks and the license rights for sales of womens'
apparel under the Delta Burke trademark. The purchase was funded by CIT under a
new $1.3 million term loan which requires payment in equal installments over
three years commencing January 1, 2001. Goodwill of $1.0 million was recorded in
connection with this acquisition and will be amortized over ten years. The
acquisition was accounted for as a purchase. The final assessment of the
purchase accounting will be completed by June 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement addresses
a limited number of issues causing implementation difficulties for entities
applying SFAS No. 133. SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in the balance sheet 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 an impact on its financial
statements or disclosures, as it does not engage in derivative or hedging
transactions.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". This bulletin summarizes certain of the SEC Staff's view in
applying generally accepted accounting principals to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases SAB
No. 101A and No. 101B, is effective for registrants no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company
does not expect the implementation of this bulletin to have a significant impact
on the results of operations or equity of the Company.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
a. 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 (which when
issued will be 750,000 shares as a result of the reverse split), and
to pursue litigation against two of the Company's insurers to recover
under its excess insurers' policies. A Settlement hearing was held by
the District Court and an order approving the settlement was signed on
July 12, 2000. As a result the earnings (loss) per share, ("EPS")
calculations for the three months and nine months ended September 30,
2000 reflect the effect of the settlement of 750,000 shares in both
basic and diluted EPS. In 1999, the Company recorded a charge of $5.9
million, which represented the cost of the Settlement. The Company
funded its required cash contribution to the settlement as of March
31, 2000; except for the cost of the litigation with two of the
Company's insurers, which is not expected to be material.
b. 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 the 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. Pre-trial discovery is now taking place.
c. The Company was a party to legal proceedings arising in the ordinary
course of its business involving a claim by a former supplier of the
Company. On July 1, 2000, a settlement of $220,000 was reached with the
Plaintiff in that proceeding. The settlement requires two lump sum
payments of $62,500 and $27,500 in July and August 2000, respectively.
Beginning September 1, 2000 the remaining balance will be paid in equal
monthly installments until September 1, 2001. Legal costs associated
with the settlement were approximately $129,000.
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ITEM 2. Changes in Securities and use of proceeds
See Item 4 below
ITEM 3. Not Applicable
ITEM 4. Not Applicable
ITEM 5. Other Information
On September 27, 2000, Richard Rusthoven was elected to the Board of
Directors of the Company to fill a vacancy on the Board.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following documents are filed as part of this report:
Exhibit No. Description of Exhibit
----------- ----------------------
10.59 Sixth Amendment to Credit Agreement
10.60 Lynn Siemers-Cross Employment Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements 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.
Donnkenny, Inc.
Registrant
Date __________, 2000 /s/ Daniel H. Levy
-------------------------------
Daniel H. Levy
Chairman of the Board,
Chief Executive Officer
Date: _________, 2000 /s/ Beverly Eichel
-------------------------------
Beverly Eichel
Executive Vice President
and Chief Financial Officer,
(Principal Financial Officer)
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