-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fe8tZzZGxwjDliCroWk0S9uhyax/Ri/9iN2tHsO0jdbhXv/A4YPS0zUgWrAIBVNB /dvccHa4NAlrlApgfAevFw== 0000950136-01-501834.txt : 20020410 0000950136-01-501834.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950136-01-501834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNKENNY INC CENTRAL INDEX KEY: 0000029693 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 510228891 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21940 FILM NUMBER: 1788026 BUSINESS ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2127307770 MAIL ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 10-Q 1 file001.txt QUARTERLY REPORT 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, 2001 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 4,367,417 . ---------------------------- -------------------------------- (Class) (Outstanding at November 9, 2001) 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 September 30, 2001 (unaudited) and December 31, 2000.................I-1 Statements of operations for the three and nine months ended September 30, 2001 and 2000 (unaudited)..................................................II-1 Statements of cash flows for the nine months ended September 30, 2001 and 2000 (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 Exhibits and Reports on Form 8-K.........................................................VI-1 Signatures...............................................................................VI-2
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, 2001, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2001 and 2000 and cash flows for the nine-month periods ended September 30, 2001 and 2000. 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, 2000, 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 21, 2001 (March 28, 2001 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, 2000 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 9, 2001 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data)
September 30, December 31, 2001 2000 -------------------- ---------------- (Unaudited) CURRENT ASSETS Cash ........................................... $ 44 $ 65 Accounts receivable - net of allowances of $153 and $109, respectively ................... 32,525 30,968 Recoverable income taxes ....................... 143 155 Inventories .................................... 28,027 19,730 Deferred tax assets ............................ 1,482 1,482 Prepaid expenses and other current assets ...... 1,910 1,177 Assets held for sale ........................... 1,142 1,206 ---------- ---------- Total current assets ........................... 65,273 54,783 PROPERTY, PLANT AND EQUIPMENT, NET .................. 5,469 5,076 OTHER ASSETS ........................................ 408 430 INTANGIBLE ASSETS ................................... 29,937 31,054 ---------- ---------- TOTAL ............................................... $ 101,087 $ 91,343 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ............ $ 1,183 $ 1,523 Accounts payable ............................. 13,270 11,751 Accrued expenses and other current liabilities 2,868 2,310 ---------- ---------- Total current liabilities ................. 17,321 15,584 ---------- ---------- LONG-TERM DEBT ...................................... 48,603 40,624 DEFERRED TAX LIABILITIES ............................ 1,482 1,482 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 4,367 shares in 2001 and 2000 ........................ 44 44 Additional paid-in capital ...................... 50,449 50,449 Deficit ......................................... (16,812) (16,840) ---------- ---------- Total Stockholders' Equity ....................... 33,681 33,653 ---------- ---------- TOTAL ............................................... $ 101,087 $ 91,343 ========== ==========
See accompanying notes to consolidated financial statements. I-1 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share and per share data) (Unaudited)
Three Months Ended Nine Months Ended ---------------------------- ------------------------------ September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------- ------------- ------------ -------------- NET SALES ............................................. $ 44,242 $ 39,710 $ 112,089 $ 109,837 COST OF SALES ......................................... 33,947 31,777 86,369 89,850 ---------------- ------------- ------------ -------------- Gross profit ..................................... 10,295 7,933 25,720 19,987 OPERATING EXPENSES: Selling, general and administrative expenses ...... 7,542 6,795 20,781 20,841 Provision for settlement of litigation ............ -- -- -- 349 Amortization of goodwill and acquisition costs .... 372 361 1,117 1,056 Restructuring charge .............................. -- -- -- 500 ------------- ------------- ------------ -------------- Operating profit (loss) ....................... 2,381 777 3,822 (2,759) INTEREST EXPENSE ...................................... 1,233 1,262 3,659 3,384 ------------- ------------- ------------ -------------- Income (Loss) before income taxes ............. 1,148 (485) 163 (6,143) INCOME TAXES .......................................... 45 5 135 88 ------------- ------------- ------------ -------------- NET INCOME (LOSS) ............................... $ 1,103 $ (490) $ 28 $ (6,231) ============= ============= ============ ============== Basic income (loss) per common share ................. $ 0.25 $ (0.11) $ 0.01 $ (1.63) ============= ============= ============ ============== Shares used in the calculation of basic income (loss) per common share .................................. 4,367,417 4,277,743 4,367,417 3,818,767 ================ ============= ============ ============== Diluted income (loss) per common share ................ $ 0.25 $ (0.11) $ 0.01 $ (1.63) ================ ============= ============ ============== Shares used in the calculation of diluted income (loss) per common share ................................... 4,394,606 4,277,743 4,384,067 3,818,767 ================ ============= ============ ==============
See accompanying notes to consolidated financial statements. II-1 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended ----------------------------------- September 30, September 30, 2001 2000 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ..................................... $ 28 $ (6,231) Adjustments to reconcile net cash provided by (used in) operating activities: Depreciation and amortization of fixed assets ......... 807 587 Write down of fixed assets ............................ -- 200 Net loss on disposal of fixed assets .................. 2 -- Amortization of intangibles and other assets .......... 1,117 1,056 Provision for losses on accounts receivable ........... 44 (11) Changes in assets and liabilities: Increase in accounts receivable ....................... (1,601) (4,058) Decrease in recoverable income taxes .................. 12 156 (Increase) decrease in inventories .................... (8,297) 4,802 Increase in prepaid expenses and other current assets .................................. (733) (990) Decrease in other non-current assets .................. 21 24 Increase in accounts payable .......................... 1,519 1,042 Increase (decrease) in accrued expenses and other current liabilities .......................... 558 (1,209) --------------- --------------- Net cash provided by (used in) operating activities ... (6,523) (4,632) --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets .............................. (1,137) (391) Proceeds from sale of fixed assets .................... -- 189 Acquisition of business ............................... -- (1,485) --------------- --------------- Net cash used in investing activities ................. (1,137) (1,687) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ................... (1,164) (874) Net borrowings for acquisition ................ -- 1,300 Borrowings under revolving credit line ........ 120,052 5,790 Repayments under revolving credit line ........ (111,249) -- --------------- --------------- Net cash provided by (used in) financing activities ... 7,639 6,216 --------------- --------------- NET (DECREASE) IN CASH ................................ (21) (103) CASH, AT BEGINNING OF PERIOD .......................... 65 180 --------------- --------------- CASH, AT END OF PERIOD ................................ $ 44 $ 77 ================= =============== SUPPLEMENTAL DISCLOSURES Income taxes paid ..................................... $ 77 $ 31 ================= =============== Interest paid ......................................... $ 3,674 $ 3,104 ================= =============== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES Issuance of common stock .............................. $ -- $ 705 ================= ===============
See accompanying notes to consolidated financial statements. III-1 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, 2000. Balance sheet data as of December 31, 2000 have been derived from audited financial statements of the Company. NOTE 2 - INVENTORIES Inventories consist of the following: September 30, December 31, 2001 2000 ---- ---- (In thousands) Raw materials ............................... $ 1,404 $ 1,719 Work-in-process ............................. 727 936 Finished goods .............................. 25,896 17,075 ------- ------ $ 28,027 $ 19,730 ======= ====== 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 as amended (see below) bear interest at the prime rate plus two percent (8.50% at September 30, 2001). 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 $0.250 million plus all accrued and unpaid interest beginning September 30, 1999 through June 30, 2002. The Credit Agreement as amended expires on June 30, 2004. 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. IV-1 The Credit Agreement contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with a minimum earnings before depreciation, amortization, interest and taxes (EBITDA) and a minimum interest coverage ratio. During Fiscal 1999 and Fiscal 2000, the Company entered into various amendments and agreements to waive the Company's noncompliance with financial covenants on certain dates and to reset overadvanced amounts and covenants. These amendments and agreements also increased the interest rate on borrowings. On July 6, 2000, the Company entered into an Amendment to finance the acquisition of the Ann Travis business (see note 6) by the issuance of an additional $1.3 million term loan. The new term loan bears interest at the prime rate plus 2.0 % and is repayable over thirty six months commencing January 1, 2001. A fee of $100,000 was paid for the Amendment. On March 28, 2001, the Company entered into an Amendment and Waiver Agreement to extend the Final Maturity Date of the original agreement to June 30, 2004, to waive existing events of default under the Credit Agreement as of December 31, 2000 with respect to the Company's non-compliance with covenants related to minimum interest coverage, EBITDA and Tangible Net Worth, and to amend certain other provisions of the Credit Agreement including covenants and the level of allowable overadvances to support the Company's 2001 business plan. Pursuant to this amendment, the interest rate on borrowings was increased to 2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid in connection with the Amendment and Waiver. The Company also has a factoring agreement with CIT. The factoring agreement provides for a factoring commission equal to .35% of gross sales, plus certain customary charges. The agreement is in effect through December 31, 2001. NOTE 4 - RESTRUCTURING CHARGE The restructuring charge of $0.5 million in the nine months ended September 30, 2000 is related to the Company's closure of all of its domestic manufacturing facilities. NOTE 5 - COMMITMENTS AND CONTINGENCIES a. On April 27, 1998, Wanda King, a former employee of the Company, commenced an action against the Company in the United States District Court for the Western District of Virginia. In her complaint, the Plaintiff seeks damages in excess of $8.0 million, claiming 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 former employees of the Company. On October 3, 2001, a hearing was held on the Company's Motion for Summary Judgment before a United States Magistrate Judge. On October 22, 2001, the Magistrate Judge, after considering the Motion for Summary Judgment, recommended to the United States District Court that the case against the Company be dismissed in its entirety. The Plaintiff has objected to the recommendation of the Magistrate Judge. The recommendation to dismiss and the Plaintiff's objection will be reviewed by the Federal District Judge who will either dismiss the case or, if the Judge finds some of the issues should be decided by a jury, will schedule a trial date. IV-2 b. The Company is also a party to legal proceedings arising in the ordinary course of its business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse effect on financial condition, results of operations, liquidity or business of the Company. NOTE 6 - 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 women's apparel under the Delta Burke trademark. The purchase was funded by CIT under a new $1.3 million term loan which requires payments in monthly installments over three years commencing January 1, 2001 (see note 3). Goodwill of $1.0 million was recorded in connection with this acquisition and is being amortized over ten years. The acquisition was accounted for as a purchase. NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB No. 16 "Business Combinations" and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. SFAS 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). The Company has determined that the adoption of this statement will not have an impact on the consolidated financial statements. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets". It changes the accounting for goodwill from an amortization method to an impairment only approach. SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company will cease the amortization of goodwill, which was recorded in past business combinations on December 31, 2001 as required by SFAS No. 142. Amortization expense was $1.4 million during fiscal 2000. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is IV-3 currently evaluating the impact of adopting this pronouncement on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Dispose Of" and provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements. IV-4 DONNKENNY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Net sales increased by $2.3 million, or 2.1% from $109.8 million in the first nine-months of 2000 to $112.1 million in the first nine-months 2001. The increase in the Company's net sales was primarily due to increases in Donnkenny Apparel of $5.2 million, Pierre Cardin Options line of $5.5 million, Ann Travis of $6.6 million (acquired in July 2000), and the Pierre Cardin Knits line of $10.8 million. The increases were partially offset by decreases in the Victoria Jones line of $9.0 million, and the Casey & Max line of $16.8 million. Gross profit for the first nine-months of 2001 was $25.7 million, or 22.9% of net sales, compared to $20.0 million, or 18.2% of net sales, during the first nine-months of 2000. The increase in gross profit in dollars and as a percentage of net sales was primarily attributable to the Company's Pierre Cardin Knits and Donnkenny Apparel lines, decreases in sales of non-current inventory due to lower non-current inventory levels on hand, the favorable impact of the plant closures in Fiscal 2000 and improved sourcing. Selling, general and administrative expenses remained consistent at 20.8 million. Net interest expense increased from $3.4 million during the first nine-months of 2000 to $3.7 million during the first nine-months of 2001. The increase is attributable to an increase in direct borrowings under the loan agreement to finance inventory purchases, partially offset by a decrease in the Company's interest rate. COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000 Net sales increased by $4.5 million, or 11.3% from $39.7 million in the third quarter of 2000 to $44.2 million in the third quarter 2001. The increase in the Company's net sales was primarily due to increases in the Donnkenny Apparel line of $3.1 million, the Pierre Cardin Knits line of $7.6 million, and the Pierre Cardin Options line of $1.2 million. The increases were partially offset by decreases in the Victoria Jones line of $2.2 million, the Casey & Max line of $4.6 million, and the Ann Travis line of $0.6 million (acquired in July 2000). Gross profit for the third quarter of 2001 was $10.3 million, or 23.3% of net sales, compared to $7.9 million, or 20.0% of net sales, during the third quarter of 2000. The increase in gross profit in dollars and as a percentage of net sales was primarily attributable to the Company's Pierre Cardin Knits and Donnkenny Apparel lines, decreases in the sales of non-current inventory due to lower non-current inventory levels on hand, the favorable impact of the plant closures in Fiscal 2000 and improved sourcing. Selling, general and administrative expenses increased $0.7 million from $6.8 million in the third quarter of 2000 to $7.5 million in the third quarter of 2001. The increase in selling, general and administrative expenses was primarily due to increased design costs, depreciation expense, distribution costs associated with units shipped and costs associated with the implementation of a new inventory tracking and distribution system. V-1 Net interest expense was relatively consistent at $1.3 million and $1.2 million during the third quarters of 2000 and 2001 respectively. Based on management's evaluation of the performance of the Pierre Cardin Options and Decade Designs lines, the Company has decided to merge the Pierre Cardin Options line under the Pierre Cardin brand, and to exit the women's dress business as of October 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise from the funding of working capital needs, primarily accounts receivable, inventory 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 to replace the existing $75 million credit facility. The Credit Agreement provides the Company with a $75 million facility comprised of a $72 million revolver with sublimits up to $52 million for direct borrowings, $35 million for letters of credit, certain overadvances and a $3 million term loan. Borrowings under the Credit Agreement as amended (see below) bear interest at the prime rate plus two percent (8.50% at September 30, 2001). 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 $0.250 million plus all accrued and unpaid interest beginning September 30, 1999 through June 30, 2002. The Credit Agreement as amended expires on June 30, 2004. 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. In addition, the Company is required to maintain specified levels of tangible net worth and comply with minimum earnings before depreciation, amortization, interest and taxes (EBITDA) and a minimum interest coverage ratio. During Fiscal 1999 and Fiscal 2000, the Company entered into various amendments and agreements to waive the Company's noncompliance with financial covenants on certain dates and to reset overadvanced amounts and covenants. These amendments and agreements also increased the interest rate on borrowings. On July 6, 2000, the Company entered into an Amendment and Waiver Agreement to finance the acquisition of the Ann Travis business (see note 6) by the issuance of an additional $1.3 million term loan. The new term loan bears interest at the prime rate plus 2.0% and is repayable over thirty six months commencing January 1, 2001. A fee of $100,000 was paid for the Amendment. V-2 On March 28, 2001, the Company entered into an Amendment and Waiver to extend the Final Maturity Date of the original agreement to June 30, 2004; to waive existing events of default under the Credit Agreement as of December 31, 2000 with respect to the Company's non-compliance with covenants related to minimum interest coverage, EBITDA and Tangible Net Worth; and to amend certain other provisions of the Credit Agreement including covenants and the level of allowable overadvances to support the Company's 2001 business plan. Pursuant to this amendment, the interest rate on borrowings was increased to 2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid in connection with the Amendment and Waiver. The Company also has a factoring agreement with CIT. The factoring agreement provides for a factoring commission equal to .35% of gross sales, plus certain customary charges. The agreement is in effect through December 31, 2001. As of September 30, 2001, borrowings under the Credit Agreement amounted to $48.1 million compared to $45.8 million as of September 30, 2000. As of September 30, 2001, the term loans amounted to $1.7 million. During the first nine-months of 2001, the Company's operating activities used cash of $6.5 million principally as a result of increases in inventory levels related to anticipated fourth quarter sales, increase in accounts receivable, offset by an increase in accounts payable. Cash used in investing activities in the first nine-months of 2001 amounted to $1.1 million primarily relating to the upgrades in the Company's computer systems. Cash used in investing activities in the first nine-months of 2000 amounted to $1.7 million primarily relating to the acquisition of the Ann Travis business and upgrades in the Company's computer systems. Cash provided by financing activities in the first nine-months of 2001 amounted to $7.6 million, primarily relating to borrowings under the loan agreement. Cash provided by financing activities amounted to $6.2 million in the first nine-months of 2000 primarily relating to borrowings under the loan agreement. 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 sale 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. RESTRUCTURING CHARGE The restructuring charge of $0.5 million in the nine months ended September 30, 2000 related to the Company's closure of all of its domestic manufacturing facilities. V-3 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB No. 16 "Business Combinations" and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. SFAS 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). The Company has determined that the adoption of this statement will not have an impact on the consolidated financial statements. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets". It changes the accounting for goodwill from an amortization method to an impairment only approach. SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company will cease the amortization of goodwill, which was recorded in past business combinations on December 31, 2001 as required by SFAS No. 142. Amortization expense was $1.4 million during fiscal 2000. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Dispose Of" and provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements. V-4 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings a. On April 27, 1998, Wanda King, a former employee of the Company, commenced an action against the Company in the United States District Court for the Western District of Virginia. In her complaint, the Plaintiff seeks damages in excess of $8.0 million, claiming 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 former employees of the Company. On October 3, 2001, a hearing was held on the Company's Motion for Summary Judgment before a United States Magistrate Judge. On October 22, 2001, the Magistrate Judge, after considering the Motion for Summary Judgment, recommended to the United States District Court that the case against the Company be dismissed in its entirety. The Plaintiff has objected to the recommendation of the Magistrate Judge. The recommendation to dismiss and the Plaintiff's objection will be reviewed by the Federal District Judge who will either dismiss the case or, if the Judge finds some of the issues should be decided by a jury, will schedule a trial date. b. The Company is also a party to legal proceedings arising in the ordinary course of its business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse effect on financial condition, results of operations, liquidity or business of the Company. ITEM 2. Not Applicable ITEM 3. Not Applicable ITEM 4. Not Applicable ITEM 5. Not Applicable ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- None a. Reports on Form 8-K The Company filed no reports on Form 8-K during the third quarter ended September 30, 2001. VI-1 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: _____________, 2001 /s/ Daniel H. Levy -------------------- Daniel H. Levy Chairman of the Board, Chief Executive Officer Date: _____________, 2001 /s/ Maureen d. Schimmenti ------------------------- Maureen d. Schimmenti Vice President and Chief Financial Officer, (Principal Financial Officer) VI-2 -----END PRIVACY-ENHANCED MESSAGE-----