-----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, FYY3g5hnx0Z2NRYZWUmVwyK9y+5RGdmXFX9pzRZcMAmNnl3MjkYBn7AYosbSz9ZA xjWicT+Ms7+l1uNGi3JqUA== 0000950136-99-001475.txt : 19991117 0000950136-99-001475.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950136-99-001475 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 000-21940 FILM NUMBER: 99755536 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 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, 1999 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number 0-21940 -------- Donnkenny, Inc. --------------- (Exact name of registrant as specified in its charter) Delaware 51-0228891 -------- ---------- (State or 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) 730-7770 -------------- 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 14,229,540 - ------------------------------------ ------------------------------------ (Class) (Outstanding at September 30, 1999) 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, 1999 (unaudited) and December 31, 1998....................................................I-1 Statements of operations for the three and nine months ended September 30, 1999 and September 30, 1998 (unaudited)..................II-1 Statements of cash flows for the nine months ended September 30, 1999 and September 30, 1998 (unaudited)................................III-1 Notes to Consolidated Financial Statements............................IV-1-3 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................V-1-5 PART II - OTHER INFORMATION Legal Proceedings.......................................................VI-1 Exhibits and Reports on Form 8-K........................................VI-2 Signatures..............................................................VI-3 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, 1999, the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 1999 and September 30, 1998 and the consolidated statements of cash flows for the nine-month periods ended September 30, 1999 and September 30, 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Donnkenny, Inc. and subsidiaries as of December 31, 1998, 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 19, 1999 (March 29, 1999 as to note 15), 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, 1998 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 15, 1999 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data)
September 30 December 31, 1999 1998 --------- --------- (Unaudited) CURRENT ASSETS Cash ......................................................... $ 92 $ 503 Accounts receivable - net of allowances of $600 and $620, respectively ................................. 33,890 29,363 Recoverable income taxes ..................................... 317 655 Inventories .................................................. 28,010 21,972 Deferred tax assets .......................................... 4,101 3,080 Prepaid expenses and other current assets .................... 738 1,265 Assets held for sale ......................................... 479 1,799 --------- --------- Total current assets ..................................... 67,627 58,637 PROPERTY, PLANT AND EQUIPMENT, NET ................................ 6,174 6,337 OTHER ASSETS ...................................................... 510 2,327 INTANGIBLE ASSETS ................................................. 31,871 32,914 --------- --------- TOTAL ............................................................. $ 106,182 $ 100,215 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt........................... $ 1,164 $ 154 Accounts payable ............................................ 9,976 8,391 Accrued expenses and other current liabilities............... 5,345 7,431 --------- --------- Total current liabilities ................................ 16,485 15,976 --------- --------- LONG-TERM DEBT .................................................... 40,941 31,901 DEFERRED TAX LIABILITIES .......................................... 4,101 3,080 COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Preferred stock $.01 par value; authorized 500 shares , issued none ........................................ -- -- Common stock, $.01 par value. authorized 20,000 shares, issued and outstanding 14,230 and 14,170 shares, respectively ........................................ 142 142 Additional paid-in capital .................................... 47,770 47,595 Shares issuable on settlement of litigation ................... 1,875 Retained (deficit) earnings ................................... (5,132) 1,521 --------- --------- Total Stockholders' Equity ............................... 44,655 49,258 --------- --------- TOTAL ............................................................. $ 106,182 $ 100,215 ========= =========
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 ------------ ------------ ------------ -------------- 1999 1998 1999 1998 NET SALES ...................................................... $ 44,965 $ 57,649 130,724 $ 152,334 COST OF SALES .................................................. 35,758 44,308 102,658 116,959 ----------- ----------- ---------- ----------- Gross profit .............................................. 9,207 13,341 28,066 35,375 OPERATING EXPENSES: Selling, general and administrative expenses ............... 7,784 9,991 24,724 29,420 Provision for / reversal of settlement of litigation........ (519) 5,875 Amortization of goodwill and other related acquisition costs ......................................... 348 337 1,043 984 ----------- ----------- ---------- ----------- Operating income (loss) ................................ 1,594 3,013 (3,576) 4,971 INTEREST EXPENSE (net of interest income of $110 in 1998) ...... 812 1,433 2,910 3,340 ----------- ----------- ---------- ----------- Income (loss) before income taxes ...................... 782 1,580 (6,486) 1,631 INCOME TAX PROVISION .......................................... 150 759 167 783 ----------- ----------- ---------- ----------- NET INCOME (LOSS) ....................................... $ 632 $ 821 (6,653) $ 848 =========== =========== ========== =========== Basic earnings (loss) per common share ......................... $ 0.04 $ 0.06 (0.47) $ 0.06 =========== =========== ========== =========== Shares used in the calculation of basic earnings per common share ............................................. 14,229,540 14,169,540 14,200,500 14,143,400 =========== =========== ========== =========== Diluted earnings (loss) per common share ....................... $ 0.04 $ 0.06 (0.47) $ 0.06 =========== =========== ========== =========== Shares used in the calculation of diluted earnings per common share ............................................. 14,499,750 14,474,540 14,200,500 14,444,300 =========== =========== ========== ===========
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 1999 1998 ---------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income .................................................... (6,653) $ 848 Adjustments to reconcile net cash provided by (used in) operating activities: Provision for shares issuable on settlement of litigation.... 1,875 Depreciation and amortization of fixed assets .................... 599 1,247 Net loss on disposal of fixed assets ............................. 5 50 Amortization of intangibles and other assets ..................... 1,043 984 Provision for losses on accounts receivable ...................... 17 133 Changes in assets and liabilities: (Increase) in accounts receivable ............................ (4,544) (17,758) Decrease in recoverable income taxes ......................... 338 1,103 Increase in inventories ...................................... (6,038) (7,826) Decrease (increase) in prepaid expenses and other current assets ....................................... 527 (326) Decrease (increase) in other non-current assets .............. 1,817 (1,667) (Decrease) increase in accounts payable ...................... 1,585 (199) (Decrease) increase in accrued expenses and other current liabilities .................................. (1,911) 14 -------- -------- Net cash (used in) operating activities .................... (11,340) (23,397) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ......................................... (441) (1,050) Proceeds from sale of fixed assets ............................... 1,320 87 Increase in intangibles .......................................... -- (1,083) -------- -------- Net cash provided by (used in) investing activities .................. 879 (2,046) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayment) of long-term debt ................. 2,636 (3,756) Net borrowings under revolver ................................ 7,414 29,010 -------- -------- Net cash provided by financing activities ................... 10,050 25,254 -------- -------- NET (DECREASE) CASH .................................................. (411) (189) CASH, AT BEGINNING OF PERIOD ......................................... 503 257 -------- -------- CASH, AT END OF PERIOD ............................................... $ 92 $ 68 ======== ======== SUPPLEMENTAL DISCLOSURES Income taxes paid .................................................... $ 208 $ 56 ======== ======== Interest paid ........................................................ $ 2,401 $ 2,874 ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES Issuance of common stock ............................................. $ 176 $ 946 ======== ========
See accompanying notes to consolidated financial statements. III - 1 DONNKENNY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (In thousands, except share and per share data) (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, 1998. Balance sheet data as of December 31, 1998 have been derived from audited financial statements of the Company. Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in 1999. NOTE 2 - INVENTORIES Inventories consist of the following: September 30, December 31, 1999 1998 ---- ---- Raw materials ............................. $ 2,335 $ 2,155 Work-in-process ........................... 4,301 4,235 Finished goods ............................ 21,374 15,582 ======= ======= $28,010 $21,972 ======= ======= NOTE 3 - DEBT On June 29, 1999, the Company and its operating subsidiaries signed a new three year credit agreement with CIT Group/Commercial Services to replace the existing $75 million Amended Credit Facility. The new 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 new credit agreement bear interest at the prime rate plus one half percent (8.75% at September 30, 1999). The new credit agreement provides for advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the undrawn amount of all outstanding letters of credit plus (iv) allowable overadvances. The term loan requires quarterly payments of $250 plus all accrued and unpaid interest beginning September 30, 1999 through June 30, 2002. IV-1 Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corporation. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of net worth and comply with a maximum cumulative net loss test and a minimum interest coverage ratio. At September 30, 1999, the Company was not in compliance with certain covenant requirements contained in the credit agreement. On November 12, 1999, the Company and its Lenders signed a Waiver and First Amendment to Credit Agreement ("Amendment"). The Amendment waived the covenant requirements for September 30, 1999 and contained several changes to the covenants for the quarterly period ending December 31, 1999. No additional fees were required and no changes were made to the interest rates with respect to the credit facility borrowings. As of September 30, 1999 and September 30, 1998, the borrowings under the revolver amounted to $39.1 million and $51.2 million, respectively. As of September 30, 1999, the term loan amounted to $2.8 million and availability under the revolver was $4.2 million. Other debt consists of a secured term loan that was entered into on June 30, 1998 in the amount of $483. As of September 30, 1999 the principal balance of this loan amounted to $297. The interest rate is fixed at 8.75% and the loan requires monthly principal and interest payments of $15 through June 2001. Software, machinery and equipment secure this obligation. NOTE 4 - 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 ("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, issue 3 million shares of the Company's common stock, and to pursue litigation against two of the Company's insurers to recover under its excess insurers' policies. The Settlement is subject to the court entering a preliminary approval order, class notification, the entry of a final judgement, and exhaustion of all appeals and reviews. In the second quarter ended June 30, 1999, the Company recorded a charge of $6.4 million, which represented their estimated cost of the Settlement. 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 Company has funded its cash contribution to the settlement except for a) the sum of $1.7 million, which the Company will pay through March 31, 2000; and b) the cost of the litigations with two of the Company's insurers which are not expected to be material. 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. IV-3 DONNKENNY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 - ------------------------------------------------------------------------- Net sales decreased by $21.6 million, or 14.2% from $152.3 million in the first nine months of fiscal 1998 to $130.7 million in the first nine months of fiscal 1999. The decrease in the Company's net sales was primarily due to decreases in the Donnkenny, Victoria Jones and Pierre Cardin labels of $17.5 million and a $4.9 million decrease in sales of License Character, CMT products and the outlet division as a result of the Company's exiting these businesses. These decreases were partially offset by the Casey & Max label, which had an increase of $0.8 million. Gross profit for the nine months of fiscal 1999 was $28.1 million, or 21.5% of net sales, compared to $35.4 million, or 23.2% of net sales, during the first nine months of fiscal 1998. The decrease in gross profit in dollars and as a percentage of net sales was primarily attributable to the effect of the Company's reduced sales and lower margins from the Donnkenny, Victoria Jones and Casey & Max labels. The lower margins are primarily the result of increased freight costs with respect to the Victoria Jones and Casey & Max labels, and higher domestic manufacturing variances due to decreased manufacturing volume in the Donnkenny label. Selling, general and administrative expenses decreased from $29.4 million in the first nine months of fiscal 1998 to $24.7 million in the first nine months of fiscal 1999. As a percentage of net sales, these expenses decreased from 19.3% in the first nine months of fiscal 1998 to 18.9% in the first nine months of fiscal 1999. The decrease in selling, general and administrative expenses was due primarily to lower selling expenses and synergies created in combining certain business functions, which allowed for reductions in headcount. These reductions were partially offset by higher distribution costs as a result of increased costs associated with the Company's customer's requirements for "floor ready" merchandise. In the second quarter of fiscal 1999, the Company had 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 a further description). The actual cost of the Settlement is $5.9 million, therefore $0.5 million of the charge has been reversed. The terms of settlement involves a cash payment and the issuance of shares of the Company's common stock. Operating loss amounted to $3.6 million inclusive of the $5.9 million provision for the settlement of the Consolidated Class Action for the first nine months of fiscal 1999 as compared to operating income of $5.0 million for the first nine months of fiscal 1998. Net interest expense decreased from $3.3 million during the first nine months of fiscal 1998 to $2.9 million during the first nine months of fiscal 1999. The decrease was primarily due to the reduction in the average loan balances with respect to the senior term and revolver borrowings and a reduction in the interest rates as a result of the credit agreement, which was signed on June 29, 1999. V-1 The income tax expense decreased from $0.8 million in the first nine months of fiscal 1998 to $0.2 million in the first nine months of fiscal 1999. In 1998, the expense reflects an estimated effective income tax rate of 48%. In 1999, the expense relates to federal income tax payments for amended returns and current year estimated state and local taxes. COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1999, AND SEPTEMBER 30, 1998 - ----------------------------------------------------------------------- Net sales decreased by $12.6 million, or 21.9% from $57.6 million in the third quarter of fiscal 1998 to $45.0 million in the third quarter of fiscal 1999. Of the $12.6 million decrease, the Company was unable to ship $4.4 million primarily due to the inability to receive finished goods at the South Carolina distribution facility during the last full week of the third quarter because of Hurricane Floyd. In addition, a decrease of $2.7 million in the Donnkenny label was due to reductions in sales of one of the label's largest customers from the softness in traditional sportswear; a $3.4 million decrease in the Pierre Cardin label, due to a reduction in sales to two of the label's largest customers which shifted into the fourth quarter; a $0.9 million decrease in contract work, outlet divisions and License Character products as a result of the Company's exiting these businesses; and a decrease in the Casey & Max label of $1.2 million. Gross profit for the third quarter of fiscal 1999 was $9.2 million, or 20.4% of net sales, compared to $13.3 million, or 23.1% of net sales, during the third quarter of fiscal 1998. The decrease in gross profit in dollars and as a percentage of net sales was primarily due to the lower sales dollars combined with a change in sales mix that included lower margin sales to several customers. All the labels experienced a reduction in margins primarily due to higher transportation costs. Selling, general and administrative expenses decreased from $10.0 million in the third quarter of fiscal 1998 to $7.8 million in the third quarter of fiscal 1999. As a percentage of net sales, these expenses are 17.3% in the third quarter of fiscal 1998 and fiscal 1999. The decrease in selling, general and administrative expenses was due primarily to lower sales and administrative expenses as a result of the reduction in sales volume as discussed above and synergies created in combining certain business functions, which resulted in a reduction of headcount. Operating profit was $1.6 million, inclusive of the reversal of $0.5 million for the Settlement, for the third quarter of fiscal 1999 as compared to $3.0 million for the third quarter of fiscal 1998. Net interest expense decreased from $1.4 million during third quarter of fiscal 1998 to $0.8 million during the third quarter of fiscal 1999. The decrease was primarily due to the reduction in the average loan balance with respect to the revolver borrowings, a reduction in the interest rates as a result of the credit agreement, which was signed on June 29, 1999 and a $0.2 million reduction of financing charges. V-2 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 its indebtedness. The Company's borrowing requirements for working capital fluctuate throughout the year. Capital expenditures were $0.4 million, primarily for upgrading computer systems during the first nine months of fiscal 1999 compared to $1.1 million in the first nine months of fiscal 1998. The Company has committed to spend an additional $0.1 million in fiscal 1999 for upgrading computer systems to increase efficiencies as part of the Company's system upgrade plan. On June 29, 1999, the Company and its operating subsidiaries signed a new three year credit agreement with CIT Group/Commercial Services to replace the existing $75 million Amended Credit Facility. The new 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 new credit agreement will bear interest at the prime rate plus one half percent (8.25% at June 30, 1999). The new credit agreement provides for advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the undrawn amount of all outstanding letters of credit plus (iv) allowable overadvances. The term loan requires quarterly payments of $250 plus all accrued and unpaid interest beginning September 30, 1999 through June 30, 2002. Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corp. The Credit Facility contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of net worth and comply with a maximum cumulative net loss test and a minimum interest coverage ratio. At September 30, 1999, the Company was not in compliance with certain covenant requirements contained in the credit agreement. On November 12, 1999, the Company and its Lenders signed a Waiver and First Amendment to Credit Agreement ("Amendment"). The Amendment waived the covenant requirements for September 30, 1999 and contained several changes to the covenants for the quarterly period ending December 31, 1999. No additional fees were required and no changes were made to the interest rates with respect to the credit facility borrowings. As of September 30, 1999, borrowings under the revolver amounted to $39.1 million compared to $51.2 million as of September 30, 1998. As of September 30, 1999, the term loan amounted to $2.8 million and availability under the revolver was $4.2 million. V-3 During the first nine months of fiscal 1999, the Company's operating activities used cash principally as a result of increases in accounts receivable, increases in inventory, and decreases in accrued expenses partially offset by increases in accounts payable. During the first nine months of fiscal 1998, the Company's operating activities used cash principally as a result of increases in accounts receivable and inventories and other assets. Cash provided by investing activities in the first nine months of fiscal 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. In the first nine months of fiscal 1998 cash used in investing activities amounted to $2.0 million, primarily relating to the upgrades in computer systems and a contingent earnout payment of $1.1 million related to the acquisition of Beldoch. Cash provided by financing activities in the first nine months of fiscal 1999 amounted to $10.1 million, which principally represented net borrowings under the revolver of $7.4 million and new term loan borrowing of $3.0 million less payments of $0.3 million and payments of the secured term loan of $0.1 million. Cash provided by financing activities in the first nine months of fiscal 1998 amounted to $25.3 million, which represented net borrowings under the revolver of $29.0 million and repayments on the term loan of $3.8 million. The company believes that cash flows from operations and amounts available under the new 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. YEAR 2000 ISSUE The Company has implemented a comprehensive program intended to upgrade the operating systems, including hardware and software, which should eliminate any issues involving Year 2000 compliance. Only one of the Company's current software systems, the payroll system, without modification, would be adversely affected by the inability of the systems to appropriately interpret date information after 1999. The Company has contracted to outsource its payroll processing to a third party service provider that is year 2000 compliant so that this system will not be an issue. As part of the process of improving the Company's information systems to provide enhanced support to all operating areas, the Company has successfully upgraded to new financial and operating systems for all other areas of the business. Such upgrades will provide for or eliminate any issues involving Year 2000 compliance because all software that has been implemented is designed and has been tested to be Year 2000 compliant. The Company estimates that its total cost for such system upgrades will be approximately $0.5 million for Fiscal 1999, of which $0.4 million has been incurred as of September 30, 1999. The Company initiated communications with its significant customers, suppliers and contractors to determine their plans to remedy any Year 2000 issues that arise in their businesses. As a result of these communications, the Company received letters from all significant customers, suppliers and contractors indicating their Year 2000 readiness. The customers, suppliers and contractors that have not responded to these inquiries are not considered to be critical or material to the Company's operations. The Company is in the process of following up with these companies to obtain their Year 2000 readiness status and expects to complete this process prior to December 31, 1999. For those customers that use Electronic Data Interchange (EDI), the Company has tested that its systems and its customers' systems are compatible and year 2000 compliant. The Company has evaluated its non-information technology systems (embedded technology) issues and has determined and tested that they are year 2000 compliant. Based upon its assessment and remediation efforts to date, the Company is not aware of any material issues that would prevent it or its significant third party vendors, suppliers and customers from completing efforts necessary to achieve Year 2000 compliance on a timely basis. Accordingly, the Company has not developed a formal contingency plan for dealing with the most reasonably likely worst case scenario at this time. However, if issues do arise, either with customers or vendors or in some area of the Company's business that was not identified, the Company plans to prepare manual workarounds to process transactions. V-4 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes standards for the accounting and reporting for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133 to 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. V-5 PART II. OTHER INFORMATION Item 1. Legal Proceedings Commencing November 1996, nine class action complaints were filed against the Company in the United States District Court for the Southern District of New York. Among other things, the complaints alleged violation of the federal securities 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 ("Settlement") with the class action plaintiffs. In consideration for the discontinuance of the lawsuit with prejudice, the Company agreed to pay $10 million of which $5.0 million is the Company's share, issue 3 million shares of the Company's common stock, and to pursue litigation against two of the Company's insurers to recover under its excess insurers' policies. The Settlement is subject to the court entering a preliminary approval order, class notification, the entry of a final judgement, and exhaustion of all appeals and reviews. The Company recognized all costs and expenses related to the settlement prior to and in its quarter ended June 30, 1999. In the second quarter ended June 30, 1999, the Company recorded a charge of $6.4 million, which represented their estimated cost of the Settlement. 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 Company has funded its cash contribution to the settlement except for a) the sum of $1.7 million, which the Company will pay through March 31, 2000; and b) the cost of the litigations with two of the Company's insurers which are not expected to be material. VI-1 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 ----------- ---------------------- 27 Financial Data Schedule 28 First Amendment to the New Credit Agreement with CIT (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the first nine months ended September 30, 1999. VI-2 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: November 15, 1999 --------------------------------- Harvey Appelle Chairman of the Board, Chief Executive Officer Date: November 15, 1999 --------------------------------- Beverly Eichel Executive Vice President and Chief Financial Officer, (Principal Financial Officer) VI-3 EX-28 2 WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT [EXECUTION COPY] WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of November 12, 1999 (this "Waiver and Amendment"), to the Credit Agreement dated as of June 29, 1999 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among DONNKENNY APPAREL, INC. a Delaware corporation ("DKA"), BELDOCH INDUSTRIES CORPORATION, a Delaware corporation ("BIC"; together with DKA, and severally, the "Borrowers"), the Guarantors party thereto, the lenders party thereto (collectively, the "Lenders") and THE CIT GROUP/COMMERCIAL SERVICES, INC. as agent for the Lenders (in such capacity, the "Agent"). The Borrowers, the Guarantors, the Lenders and the Agent are parties to the Credit Agreement. The Borrowers have requested that the Lenders (a) waive certain existing Events of Default under the Credit Agreement and (b) amend the Credit Agreement to amend certain financial covenants set forth therein. The Lenders are willing to waive such existing Events of Default and to make such amendments to the Credit Agreement upon the terms and subject to the conditions set forth in this Waiver and Amendment. Accordingly, in consideration of the mutual agreements set forth herein, and for good and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Initially capitalized terms used and not otherwise defined herein shall have their respective meanings as defined in the Credit Agreement. 2. Waiver of Events of Default. Borrowers have defaulted under Sections 7.10 (Minimum Interest Coverage Ratio) and 7.11 (EBITDA) of the Credit Agreement (collectively, the "Subject Covenants") as a result of their breach of such financial covenants for the quarterly period ending September 30, 1999. As a result of the foregoing, Events of Default (collectively, the "Covenant Defaults") have occurred under Article VIII(d) of the Credit Agreement. In response to the Borrowers' request on or about the date hereof for a waiver of the Covenant Defaults, Lenders hereby waive the Covenant Defaults, provided, however, that nothing contained in this Waiver and Amendment shall be construed to limit, impair or otherwise affect any rights of Lenders in respect of any future noncompliance with the Subject Covenants or with any other covenant, term or provision of the Credit Agreement or of any of the other Loan Documents. 3. Amendment of Section 1.01. Section 1.01 of the Credit Agreement is amended by adding thereto the following defined term: "Tangible Net Worth" shall mean, as of any date, stockholders' equity less the aggregate book value of intangible assets, all as determined on a Consolidated basis for the Parent and its Subsidiaries in accordance with GAAP." 4. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is amended in its entirety to read as follows: "Section 7.10 Minimum Interest Coverage Ratio. Permit the Interest Coverage Ratio of the Parent and its Subsidiaries on a Consolidated basis for each four consecutive fiscal quarter period ending on the last day of each of the fiscal quarters set forth below to be less than the ratio set forth below opposite such fiscal quarter: Quarterly Period Ending Minimum Interest Coverage Ratio ----------------------- ------------------------------- September 30, 1999 .50 to 1.00 December 31, 1999 1.30 to 1.00" 5. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is amended in its entirety to read as follows: "Section 7.11 EBITDA. Permit EBITDA of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis for each four consecutive fiscal quarter period ending on the last day of each of the fiscal quarters set forth below to be less than the amount set forth below opposite each such fiscal quarter; Quarterly Period Ending EBITDA ----------------------- ------ September 30, 1999 $2,450,000 December 31, 1999 $4,800,000" 6. Amendment of Section 7.12. Section 7.12 of the Credit Agreement is amended in its entirety to read as follows: "Section 7.12 Net Worth. Permit the Net Worth of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis as of the end of the fiscal quarter ending September 30, 1999 to be less than $15,500,000." 7. Addition of Section 7.12A. The Credit Agreement is hereby amended by adding the following Section 7.12A thereto immediately following Section 7:12: 2 "Section 7.12A Tangible Net Worth. Permit the Tangible Net Worth of the Parent and its Subsidiaries (in each case computed and calculated in accordance with GAAP) on a Consolidated basis as of the end of the fiscal quarter ending December 31, 1999 to be less than $11,500,000." 8. Representations and Warranties. Borrowers hereby represent and warrant to Lenders that the representations and warranties set forth in Article IV of the Credit Agreement are true on and as of the date hereof, as if made on and as of the date hereof, after giving effect to this Waiver and Amendment, except to the extent that any such representation or warranty expressly relates to a prior date, and breach of any of the representations and warranties made in this paragraph 8 shall constitute and Event of Default under Article VIII(a) of the Credit Agreement. Borrowers further represent and warrant that, after giving effect to this Waiver and Amendment, no Event of Default or event which, with the lapse of time or the giving of notice or both, would become an Event of Default has occurred and is continuing. 9. Effectiveness. This Waiver and Amendment shall become effective on the date Agent shall have received counterparts of this Waiver and Amendment duly executed and delivered by each of the parties hereto. 10. Continuing Effect of Credit Agreement. This Waiver and Amendment shall not constitute a waiver or amendment of any provision of the Credit Agreement not expressly referred to herein and shall not be construed as a consent to any further or future action on the part of either of the Borrowers that would require consent of Lenders. Except as expressly amended by this Waiver and Amendment, the provisions of the Credit Agreement are and shall remain in full force and effect. 11. Applicable Law. This Amendment shall be construed in accordance with and governed by the laws of the State of New York (other than the conflicts of law principles thereof). 12. Counterparts; Facsimile Signature. This Waiver and Amendment may be executed in counterparts, each of which shall constitute and original and all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of the signature page of this Waiver and Amendment by facsimile shall be effective as delivery of a manually executed signature page hereto. 3 IN WITNESS WHEREOF, the parties hereto have caused this Waiver and Amendment to be duly executed and delivered by their respective authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC., as a Borrower and a Guarantor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- BELDOCH INDUSTRIES CORPORATION, as a Borrower and a Guarantor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- CHRISTIANSBURG GARMENT COMPANY, INCORPORATED as a Guarantor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- H SQUARED DISPOSITIONS, INC., as a Guarantor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 4 THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- THE CIT GROUP/COMMERCIAL SERVICES, INC., as a Lender By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 SEP-30-1999 92,103 0 39,319,544 5,429,415 28,009,674 67,627,276 12,662,113 6,488,010 106,182,502 16,484,773 0 0 0 142,409 44,513,404 106,182,502 130,723,888 130,723,888 102,657,721 102,657,721 31,624,324 17,428 2,909,994 (6,485,579) 168,347 (6,653,926) 0 0 0 (6,653,926) (0.47) (0.47)
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