10-Q 1 0001.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 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) 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 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 DONNKENNY, INC AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data)
June 30, December 31, 2000 1999 ----------------- ----------------- (Unaudited) 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 =========== ==========
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 Six Months Ended --------------------------------- -------------------------------- June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 --------------- --------------- --------------- --------------- 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 ========== ========== =========== ==========
See accompanying notes to consolidated financial statements II-1 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited)
------------------------------- June 30, June 30, 2000 1999 ------------------------------- 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 ======== ========
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, 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:
June 30, December 31, 2000 1999 ---- ---- (In thousands) Raw materials ............................................ $ 1,477 $ 1,548 Work-in-process ......................................... 1,547 2,742 Finished goods ........................................... 18,840 25,033 -------- -------- $ 21,864 $ 29,323
NOTE 3 - DEBT On June 29, 1999, the Company and its operating subsidiaries signed a three year credit agreement (the "Credit Agreement") with CIT Group/Commercial Services. The Credit Agreement provides the Company with a $75 million facility comprised of a $72 million revolver with sublimits up to $52 million for direct borrowings, $35 million for letters of credit, certain overadvances and a $3 million term loan. Borrowings under the Credit Agreement originally bore interest at the prime rate plus one half percent. The Credit Agreement provides for advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the undrawn amount of all outstanding letters of credit plus (iv) allowable overadvances. The term loan requires quarterly payments of $0.25 million plus all accrued and unpaid interest beginning September 30, 1999 through June 30, 2002. The Credit Agreement expires on June 30, 2002. IV-1 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 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 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 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 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 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 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 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 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 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 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 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