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 June 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 August 9, 2000)
<PAGE>
DONNKENNY, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-Q)
PART I - FINANCIAL INFORMATION Page
----
Consolidated financial statements:
Independent Accountants' Report
Balance sheets as of June 30, 2000 (unaudited) and
December 31, 1999 .......................................... I-1
Statements of operations for the three and six months ended
June 30, 2000 and 1999 (unaudited) ......................... II-1
Statements of cash flows for the three and six months ended
June 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-1-4
PART II - OTHER INFORMATION
Legal Proceedings and Other Information .................... VI-1-2
Exhibits and Reports on Form 8-K ........................... VI-3
Signatures ................................................. VI-4
<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 June 30, 2000, and the related consolidated
statements of operations for the three-month and six-month periods ended June
30, 2000 and 1999 and cash flows for the six-month periods ended June 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
August 9, 2000
<PAGE>
DONNKENNY, INC AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash ...................................................... $ 45 $ 180
Accounts receivable - net of allowances of
$413 and $382, respectively ............................... 21,871 30,022
Recoverable income taxes 189 304
Inventories ............................................... 21,864 29,323
Deferred tax assets ....................................... 2,178 2,865
Prepaid expenses and other current assets ................. 1,099 636
Assets held for sale ...................................... 358 456
----------- ----------
Total current assets ...................................... 47,599 63,786
PROPERTY, PLANT AND EQUIPMENT, NET ............................. 5,518 5,981
OTHER ASSETS ................................................... 513 546
INTANGIBLE ASSETS .............................................. 30,829 31,524
----------- ----------
TOTAL ......................................................... $ 84,459 $ 101,837
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ...................... $ 1,175 $ 1,168
Accounts payable ....................................... 10,174 10,351
Accrued expenses and other current liabilities ......... 1,634 3,965
----------- ----------
Total current liabilities ........................... 12,983 15,484
----------- ----------
LONG-TERM DEBT ................................................ 32453 41,607
DEFERRED TAX LIABILITIES ...................................... 2,178 2,865
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.O1 par value; authorized 500
shares , issued none .................................... _ -
Common stock, $.O1 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 (13,648) (7,907)
---------- ----------
Total Stockholders' Equity ................................. 36,845 41,881
---------- ----------
TOTAL.......................................................... $ 84,459 $ 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 Six Months Ended
--------------------------------- --------------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET SALES ......................................... $ 27,733 $ 34,708 $ 70,127 $ 85,759
COST OF SALES ..................................... 22,262 27,898 58,073 66,900
---------- ---------- ----------- ----------
Gross profit .................................... 5,471 6,810 12,054 18,859
OPERATING EXPENSES:
Selling, general and administrative expenses .... 6,224 7,667 14,395 16,940
Provision for settlement of litigation .......... - 6,394 - 6,394
Amortization of goodwill and other related
acquisition costs .............................. 347 347 695 695
Restructuring charge ............................ - 500 -
---------- ---------- ----------- ----------
Operating loss ............................. (1,100) (7,598) (3,536) (5,170)
INTEREST EXPENSE .................................. 1,081 1,298 2,122 2,098
---------- ---------- ----------- ----------
Loss before income taxes ................... (2,181) (8,896) (5,658) (7,268)
INCOME TAXES (BENEFIT) ............................ 58 (83) 83 17
---------- ---------- ----------- ----------
NET LOSS ................................... $ (2,239) $ (8,813) $ (5,741) $ (7,285)
========== ========== =========== ==========
Basic earnings (loss) per common share .......... $ (0.62) $ (2.48) $ (1.60) $ (2.05)
========== ========== =========== ==========
Shares used in the calculation of basic (loss)
per common share ............................. 3,616,098 3,550,475 3,586,758 3,546,450
========== ========== =========== ==========
Diluted earnings (loss) per common share $ (0.62) $ (2.48) $ (1.60) $ (2.05)
========== ========== =========== ==========
Shares used in the calculation of diluted (loss)
per common share ............................. 3,616,098 3,550,475 3,586,758 3,546,450
========== ========== =========== ==========
</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>
-------------------------------
June 30, June 30,
2000 1999
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (5,741) $ (7,285)
Adjustments to reconcile net cash provided by
operating activities:
Provision for shares issuable on settlement of litigation ... - 2,394
Depreciation and amortization of fixed assets ............... 399 405
Write down of fixed assets .................................. 200 -
Net loss on disposal of fixed assets ........................ - 5
Amortization of intangibles and other assets ................ 695 695
Provision for losses on accounts receivable ................. 10 17
Changes in assets and liabilities:
Decrease in accounts receivable ............................. 8,140 5,334
Decrease in recoverable income taxes ........................ 115 338
Decrease (increase) in inventories .......................... 7,459 (387)
(Increase) decrease in prepaid expenses and
other current assets ........................................ (459) 84
Decrease in other non-current assets ........................ 33 2,135
(Decrease) increase in accounts payable ..................... (177) 798
Decrease in accrued expenses and
other current liabilities ................................... (1,626) (877)
---------- ---------
Net cash provided by operating activities .............. 9,048 3,656
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ............................... (218) (243)
Proceeds from sale of fixed assets ..................... 181 1,320
---------- ---------
Net cash (used in) provided by investing activities ......... (37) 1,077
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayment) of long-term debt ........... (582) 2,924
Net repayments under revolving credit line ............. (8,564) (7,803)
---------- ---------
Net cash used in financing activities .................. (9,146) (4,879)
---------- ---------
NET DECREASE IN CASH ........................................ (135) (146)
CASH, AT BEGINNING OF PERIOD ................................ 180 503
---------- ---------
CASH, AT END OF PERIOD ...................................... $ 45 $ 357
========= ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid ........................................... $ 23 $ 31
========= ========
Interest paid ............................................... $ 1,953 $ 1,666
========= ========
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 with generally accepted accounting
principles 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:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Raw materials ............................................ $ 1,477 $ 1,548
Work-in-process ......................................... 1,547 2,742
Finished goods ........................................... 18,840 25,033
-------- --------
$ 21,864 $ 29,323
</TABLE>
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. 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.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to 0.45% of gross amount
of sales, plus certain customary charges.
As of June 30, 2000 and 1999, the borrowings under the Credit
Agreement amounted to $31.5 million and $23.8 million with an interest rate of
11.0% and 8.25%, respectively. As of June 30, 2000, the term loan
amounted to $2.0 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 June 30, 2000 the
principal balance of this loan amounted to $0.175 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.
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 had fallen below $1.00.
IV-2
<PAGE>
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 has been given 90
days (until October 16, 2000) to regain compliance. If the Company cannot
demonstrate compliance for a minimum of 10 consecutive days on or before the
October 16th deadline, the Company's common stock will be delisted on October
18, 2000.
NOTE 5 - RESTRUCTURING CHARGE
On March 15, 2000 the Company announced that it will be closing all
of its domestic manufacturing plants. These facilities are located in Floyd
and Independence, Virginia. 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 as of June 2000.
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 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. 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.
IV-3
<PAGE>
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.
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, respectively. Beginning September 1, 2000 the remaining
balance will be paid in equal monthly installments until September
1, 2001.
NOTE 7 - SUBSEQUENT EVENT
On July 1, 2000 the Company acquired certain assets of Ann Travis
Inc. ("Ann Travis") for $1.15 million. Assets acquired included
certain merchandise inventory, the ANN TRAVIS and DECADE DESIGNS
trademarks and the license rights for sales of womens' apparel
under the DELTA BURKE trademark. Ann Travis designed, imported,
and marketed women's sportswear. The purchase was funded by CIT
under a new $1.3 million term loan which requires principal
payment in equal installments over three years commencing January
1, 2001. The new loan bears interest at the prime rate plus one
and one-half percent (11% at June 30, 2000). The acquisition will
be accounted for as a purchase.
IV-4
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net sales decreased by $15.7 million, or 18.3% from $85.8 million in
the first half of 1999 to $70.1 million in the first half of 2000. The decline
in the Company's net sales was essentially due to decreases in the Donnkenny
Label of $7.6 million (primarily due to the planned exit of the coordinate
business), the Victoria Jones label of $8.1 million, and the Casey & Max label
of $0.8 million. The decreases were partially offset by increases in the Pierre
Cardin label of $0.8 million.
Gross profit for the first half of 2000 was $12.1 million, or 17.2% of
net sales, compared to $18.9 million, or 22.0% of net sales, during the first
half of 1999. The decrease in gross profit in dollars and as a percentage of net
sales was essentially attributable to the Company's idle domestic plant
capacity, which has now been shut down. Additionally, the decrease in gross
profit came from reduced sales levels and sell off of non-current inventory.
Selling, general and administrative expenses decreased from $16.9
million in the first half of 1999 to $14.4 million in the first half 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 $0.9 million for a new label.
In the second quarter of 1999, the Company recorded a 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 6 to the financial statements for further description). 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 will be closing 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 as of June 2000.
Net interest expense was $2.1 million during the first half of 1999 and
2000.
V-1
<PAGE>
COMPARISON OF QUARTERS ENDED JUNE 30, 2000 AND 1999
Net sales decreased by $7.0 million, or 20.2% from $34.7 million in
the second quarter of 1999 to $27.7 million in the second quarter of 2000. The
decline in the Company's net sales was primarily due to decreases in the
Donnkenny Label of $3.9 million (primarily due to the planned exit of the
coordinate business), the Victoria Jones label of $3.1 million, and the Pierre
Cardin label of $0.9 million. The decreases were partially offset by increases
in the Casey & Max label of $0.9 million.
Gross profit for the second quarter of 2000 was $5.5 million, or
19.7% of net sales, compared to $6.8 million, or 19.6% of net sales, during
the second quarter of 1999. The decrease in gross profit dollars was primarily
attributable to the Company's idle domestic plant capacity, which has now been
shut down. Additionally, the decrease in gross profit came from reduced sales
levels, and sell off of non-current inventory.
Selling, general and administrative expenses decreased from $7.7
million in the second quarter of 1999 to $6.2 million in the second 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 $0.4 million for a new label.
In the second quarter of 1999, the Company recorded a 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 6 to the financial statements for further description). The terms of
settlement involves a cash payment and the issuance of shares of the Company's
common stock.
Operating loss was $1.1 million for the second quarter of 2000 as
compared to $7.6 million (inclusive of the $6.4 million reserve for the
settlement of the consolidated Class Action) for the second quarter of 1999.
Net interest expense decreased from $1.3 million during the second
quarter of 1999 to $1.1 million during the second quarter of 2000. The
decrease is primarily the result of $0.2 million of financing charges
amortized in the second quarter of 1999 compared to $0.1 million in the second
quarter of 2000.
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.
V-2
<PAGE>
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.
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. 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.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to 0.45 of gross amount of
sales, plus certain customary charges.
As of June 30, 2000 and 1999, borrowings under the Credit Agreement
amounted to $31.5 million compared to $23.8 million with an interest rate of
11.0% and 8.25%, respectively. As of June 30, 2000, the term loan amounted to
$2.0 million.
V-3
<PAGE>
During the first half of 2000, the Company's operating activities
provided cash principally as a result of decreases in inventory and accounts
receivable offset by decreases in accounts payable and accrued expenses.
During the first half of 1999, the Company's operating activities provided
cash principally as a result of decreases in accounts receivable and increases
in accounts payable partially offset by increases in inventory and decreases
in accrued expenses. Cash used in investing activities in the first half of
2000 amounted to $0.04 million primarily as the result of capital purchases
relating to the upgrades of the company's computer systems ($0.22 million)
partially offset by the sale of machinery from the closed Virginia
manufacturing facilities ($0.18 million). Cash provided by investing
activities in the first half of 1999 amounted to $1.1 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 $0.2
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 had 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.
V-4
<PAGE>
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 has been given 90
days (until October 16, 2000) to regain compliance. If the Company cannot
demonstrate compliance for a minimum of 10 consecutive days on or before the
October 16th deadline, the Company's common stock will be delisted on October
18, 2000.
ANN TRAVIS ACQUISITION
On July 1, 2000 the Company acquired certain assets of Ann Travis
Inc. ("Ann Travis") for $1.15 million. Assets acquired included certain
merchandise inventory, the ANN TRAVIS and DECADE DESIGNS trademarks and the
license rights for sales of womens' apparel under the DELTA BURKE trademark.
Ann Travis designed, imported, and marketed women's sportswear. The purchase
was funded by CIT under a new $1.3 million term loan which requires principal
payment in equal installments over three years commencing January 1, 2001. The
new term loan bears interest at the prime rate plus one and one-half percent
(11% at June 30, 2000). The acquisition will be accounted for as a purchase.
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 SPAS No. 133. SPAS 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. If certain conditions are
met, a derivative may be specially designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company has determined that this
statement will not have a significant impact on its financial statements or
disclosures, as it does not engage in derivative or hedging transactions.
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. lOlA and No. lO1B, 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.
V-5
<PAGE>
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. 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.
VI-1
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Item 4 below
ITEM 3. NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of the Company was held on April
18, 2000. The first item of business before the Meeting was a
proposal to reverse split the outstanding shares of the Company's
Common Stock on a one-for-four basis so that the 14,229,540 shares of
the Company's Common Stock outstanding prior to the reverse split
would become approximately 3,557,385 shares of the Company's Common
Stock following the reverse split; all fractional shares being
rounded up to the next nearest whole share.
The vote on this proposal was as follows:
FOR AGAINST ABSTAIN
--- ------- ------
10,930,944 549,542 20,040
The second item of business was to amend the Company's Certificate of
Incorporation to: (i) reduce the number of authorized shares of the
Company's Common Stock from 20,000,000 to 10,000,000 shares; and (ii)
affect the reverse split of the outstanding shares of the Company's
Common Stock outstanding prior to the reverse split to become
approximately 3,557,385 shares of the Company's Common Stock
following the reverse split; all fractional shares being rounded up
to the nearest whole share.
The vote on this proposal was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
10,956,864 515,147 28,515
ITEM 5. OTHER INFORMATION
On March 28, 2000, Harry A. Katz was elected to the Board of
Directors of the Company to fill a vacancy on the Board.
VI-2
<PAGE>
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
10.55 Asset Purchase Agreement - Ann Travis Inc.
10.56 5th Amendment to Credit Agreement
10.57 1st Amendment to Daniel H. Levy Employment Agreement
10.58 Beverly Eichel Employment Agreement
27 Financial Data Schedule
(B) REPORTS ON FORM B-K
The Company filed no reports on Form B-K during the quarter ended
June 30, 2000.
VI-3
<PAGE>
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
/s/ Daniel H. Levy
Date: August 14, 2000 ------------------------------
Daniel H. Levy
Chairman of the Board,
Chief Executive Officer
Date: August 14, 2000
/s/ Beverly Eichel
------------------------------
Beverly Eichel
Executive Vice President
and Chief Financial Officer,
(Principal Financial Officer)
VI-4