-----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, GkTJ1kh2d68vYt6QtZpMxv8XhMY/qXShG+Y2A0WeMTBI0ju2pCUTCao29WI4q51C wxqk/56JWaMJpgVORMUWkA== 0001157523-02-000780.txt : 20020813 0001157523-02-000780.hdr.sgml : 20020813 20020813120539 ACCESSION NUMBER: 0001157523-02-000780 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNKENNY INC CENTRAL INDEX KEY: 0000029693 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 510228891 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21940 FILM NUMBER: 02728572 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 a4229378.txt DONNKENNY, INC. 10-Q 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, 2002 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number 0-21940 ------- Donnkenny, Inc. -------------- (Exact name of registrant as specified in its charter) Delaware 51-0228891 -------- ---------- (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1411 Broadway, New York, NY 10018 --------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 790-3900 -------------- NOT APPLICABLE -------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), Yes X No ___ and (2) has been the subject to such filing requirements for the past 90 days. Yes X No ___. Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock $0.01 par value 4,367,417 - ---------------------------- ------------------------------------- (Class) (Outstanding at August 7, 2002)
DONNKENNY, INC AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (FORM 10-Q) PART I - FINANCIAL INFORMATION Page ---- Consolidated financial statements: Independent Accountants' Report.............................................1 Balance sheets as of June 30, 2002 (unaudited) and December 31, 2001........2 Statements of operations for the three and six months ended June 30, 2002 and 2001 (unaudited)..........................................3 Statements of cash flows for the six months ended June 30, 2002 and 2001 (unaudited)..........................................4 Notes to Consolidated Financial Statements (unaudited)..................5 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................10 - 15 Quantitative and Qualitative Disclosures about Market Risk...................15 PART II - OTHER INFORMATION Legal Proceedings and Other Information....................................16 Exhibits and Reports on Form 8-K...........................................16 Signatures.................................................................17
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, 2002, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2002 and 2001 and cash flows for the six-month periods ended June 30, 2002 and 2001. 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, 2001, 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 25, 2002, 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, 2001 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 7, 2002 1
DONNKENNY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except per share data) June 30, December 31, 2002 2001 --------------- -------------- (Unaudited) CURRENT ASSETS Cash......................................................... $ 32 $ 39 Accounts receivable - net of allowances of $114 and $116, in 2002 and 2001, respectively......... 15,974 25,225 Recoverable income taxes..................................... 379 381 Inventories.................................................. 18,518 17,773 Deferred tax assets.......................................... 1,662 1,662 Prepaid expenses and other current assets.................... 435 1,220 Assets held for sale......................................... 601 788 ---------- ---------- Total current assets......................................... 37,601 47,088 PROPERTY, PLANT AND EQUIPMENT, NET................................ 5,010 5,379 OTHER ASSETS...................................................... 333 368 INTANGIBLE ASSETS................................................. 821 4,198 GOODWILL.......................................................... - 25,367 ---------- ---------- TOTAL............................................................. $ 43,765 $ 82,400 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt.......................... $ 433 $ 933 Accounts payable........................................... 10,608 7,760 Accrued expenses and other current liabilities............. 1,782 3,504 ---------- ---------- Total current liabilities............................... 12,823 12,197 ---------- ---------- LONG-TERM DEBT.................................................... 24,315 34,844 DEFERRED TAX LIABILITIES.......................................... 1,662 1,662 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock $.01 par value; authorized 500 shares, issued none......................................... Common stock, $.01 par value. Authorized 10,000 shares, issued and outstanding 4,367 shares in 2002 and 2001............................................. 44 44 Additional paid-in capital.................................... 50,449 50,449 Deficit....................................................... (45,528) (16,796) ---------- ---------- Total Stockholders' Equity..................................... 4,965 33,697 ---------- ---------- TOTAL............................................................. $ 43,765 $ 82,400 ========== ========== See accompanying notes to consolidated financial statements.
2
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, 2002 June 30, 2001 June 30, 2002 June 30, 2001 -------------- ------------- ------------- ------------- NET SALES..................................................$ 22,358 $ 30,539 $ 46,796 $ 67,847 COST OF SALES.............................................. 17,170 23,968 35,191 52,422 ------ ------ ------ ------ Gross profit........................................... 5,188 6,571 11,605 15,425 OPERATING EXPENSES: Selling, general and administrative expenses........... 5,067 6,466 10,412 13,239 Amortization of goodwill and other related acquisition costs..................................... - 372 - 745 ----- ----- ----- ----- Operating income (loss)............................ 121 (267) 1,193 1,441 INTEREST EXPENSE........................................... 423 1,120 1,091 2,426 ----- ----- ----- ----- Income (loss) before income taxes and cumulative effect of change in accounting princple....... (302) (1,387) 102 (985) INCOME TAXES............................................... 45 45 90 90 ----- ----- ----- ----- Income (loss) before cumulative effect of change in accounting principle........................ (347) (1,432) 12 (1,075) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NO TAX BENEFIT REC-GNIZED)..................... - - 28,744 - ------- ------- ------ ----- NET LOSS.............................................$ (347) $ (1,432) $ (28,732) $ (1,075) =========== =========== =========== =========== Basic earnings per common share: Income (loss) before accounting change..................$ (0.08) $ (0.33) $ - $ (0.25) Cumulative effect of accounting change.................. - - (6.58) - ----------- ----------- ----------- ----------- Net loss...............................................$ (0.08) $ (0.33) $ (6.58) $ (0.25) =========== =========== =========== =========== Diluted earnings per common share: Income (loss) before accounting change..................$ (0.08) $ (0.33) $ - $ (0.25) Cumulative effect of accounting change.................. - - (6.58) - ----------- ----------- ----------- ----------- Net loss...............................................$ (0.08) $ (0.33) $ (6.58) $ (0.25) =========== =========== =========== =========== Shares used in the calculation of earnings per share: Basic................................................... 4,367,417 4,367,417 4,367,417 4,367,417 =========== =========== =========== =========== Diluted................................................. 4,367,417 4,367,417 4,367,417 4,367,417 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 3
DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (unaudited) Six Months Ended ---------------------------- June 30 June 30 2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)................................................. $ (28,732) $ (1,075) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of fixed assets.............. 750 509 Disposal of fixed assets................................... 2 2 Amortization of intangibles and other assets............... - 745 Cumulative effect of change in accounting principle ....... 28,744 - Provision for losses on accounts receivable................ 10 10 Changes in assets and liabilities: Decrease in accounts receivable............................ 9,241 5,885 Decrease in recoverable income taxes....................... 2 12 Increase in inventories.................................... (745) (10,748) Decrease (increase) in prepaid expenses and other current assets....................................... 785 (99) Decrease in other non-current assets....................... 35 10 Increase in accounts payable............................... 2,848 4,344 Decrease in accrued expenses and other current liabilities................................. (1,722) (648) ----------- ----------- Net cash provided by (used in) operating activities........ 11,218 (1,053) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment.................. (339) (1,079) Proceeds from sale of property, plant and equipment........ 143 - ----------- ----------- Net cash used in investing activities...................... (196) (1,079) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt................................ (717) (806) Borrowings under revolving credit line..................... 46,638 77,298 Repayments under revolving credit line..................... (56,950) (74,301) ----------- ----------- Net cash (used in) provided by financing activities........ (11,029) 2,191 ----------- ----------- NET (DECREASE) INCREASE IN CASH............................ (7) 59 CASH, AT BEGINNING OF PERIOD............................... 39 65 ----------- ----------- CASH, AT END OF PERIOD..................................... $ 32 $ 124 =========== =========== SUPPLEMENTAL DISCLOSURES Income taxes paid.......................................... $ 36 $ 77 =========== =========== Interest paid.............................................. $ 1,096 $ 2,437 =========== ===========
See accompanying notes to consolidated financial statements. 4 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 accounting principles generally accepted in the United States of America 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, 2001. Balance sheet data as of December 31, 2001 have been derived from audited financial statements of the Company.
NOTE 2 - INVENTORIES Inventories consist of the following: June 30, December 31, 2002 2001 ---- ---- (In thousands) Raw materials . . . . . . . . . . . . . . $ 1,184 $ 840 Work-in-process . . . . . . . . . . . . . . 786 331 Finished goods . . . . . . . . . . . . . . 16,548 16,602 -------- -------- $ 18,518 $ 17,773 ======== ========
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. 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 as amended expires on June 30, 2004. 5 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 its operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corporation. The Credit Agreement contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with minimum earnings before depreciation, amortization, interest and taxes (EBITDA) and a minimum interest coverage ratio, based upon the annual business plan approved by the lender. During Fiscal 1999 and Fiscal 2000, the Company entered into various amendments and agreements to waive the Company's noncompliance with financial covenants on certain dates and to reset overadvanced amounts and covenants. These amendments and agreements also increased the interest rate on borrowings. On July 6, 2000, the Company entered into an Amendment to finance the acquisition of the Ann Travis business by the issuance of an additional $1.3 million term loan. The new term loan bears interest at the prime rate plus 2.0% (6.75% at June 30, 2002) and is repayable over thirty-six months commencing January 1, 2001. A fee of $100,000 was paid for the Amendment. On March 28, 2001, the Company entered into an Amendment and Waiver Agreement to extend the Final Maturity Date of the original agreement to June 30, 2004, to waive existing events of default under the Credit Agreement as of December 31, 2000 with respect to the Company's non-compliance with covenants related to minimum interest coverage, EBITDA and Tangible Net Worth, and to amend certain other provisions of the Credit Agreement including covenants and the level of allowable overadvances to support the Company's 2001 business plan. Pursuant to this amendment, the interest rate on borrowings was increased to 2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid in connection with this Amendment and Waiver. Effective January 1, 2002, the Company established covenants and the level of allowable overadvances with the lender to support its 2002 business plan. This Amendment and Waiver Agreement also amended the interest rate on the revolving credit borrowings to the prime rate plus one and three quarters percent (6.50% at June 30, 2002) and provided for an additional interest rate reduction effective July 1, 2002 if certain objectives were achieved. No fee was paid in connection with this Amendment and Waiver. The Company has achieved the objectives and will receive an additional rate reduction effective July 1, 2002. The interest rate on the revolving credit borrowings will now be prime plus one and one half percent. On June 30, 2002, the Company made the final payment on the $3 million term loan in accordance with the terms of the Credit Agreement. Direct borrowings under the revolving credit facility were $24.1 million and the remaining acquisition term loan amounted to $0.6 million as of June 30, 2002. Additionally, the Company had letters of credit outstanding of $17.4 million, with an unused facility of $33.5 million. As of June 30, 2001, direct borrowings, term loans and letters of credit outstanding under the credit facility were $42.3 million, $2.0 million and $17.5 million, respectively. The Company also has a factoring agreement with CIT. The factoring agreement provides for a factoring commission equal to .35% of gross sales, plus certain customary charges. The agreement is in effect through December 31, 2002. 6 NOTE 4 - GOODWILL AND INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets". It changes the accounting for goodwill from an amortization method to an impairment only approach. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. Prior to January 1, 2002, the Company had net intangible assets of $29.6 million on its Consolidated Balance Sheet. The intangible assets included goodwill of $25.4 million, which represented the excess purchase price over fair value of net assets acquired. The assets acquired related to the acquisitions of (1) the Company in 1989 following a change in control, (2) the sportswear division of Oak Hill Sportswear Corporation ("Oak Hill"), (3) Beldoch Industries Corporation ("Beldoch") in 1995, and (4) Ann Travis in 2000. Goodwill was amortized on a straight-line basis over expected periods to be benefited, ranging from 10 to 40 years. Also included in the net intangible assets were $4.2 million of costs related to the Pierre Cardin license acquired by the Company in connection with the Beldoch acquisition, which were amortized on a straight-line basis over 20 years. As a result of adopting SFAS No. 142 on January 1, 2002, the Company ceased the amortization of goodwill and determined that the value of its intangible assets had been impaired. The impairment charge of $28.7 million was calculated based upon a valuation of the Company's market capitalization on January 1, 2002, adjusted for an estimated premium that a willing buyer would assign to the market capitalization in the event of a sale of the Company. The premium was based on an average of such premiums paid in similar transactions in the industry. The impairment charge consists of $25.4 million related to goodwill and $3.3 million related to intangible assets. The impairment charge is reflected in the Company's Consolidated Statement of Operations as a line item disclosing the cumulative effect of a change in accounting principle before the net income for the period. The Company did not record an income tax benefit related to this charge. The remaining value of intangible assets of $0.8 million is attributable to those intangible assets acquired related to the Pierre Cardin license from the Beldoch acquisition, and is classified as an intangible asset with an indefinite life on the Company's June 30, 2002 Consolidated Balance Sheet. Actual results of operations for the six-month period ended June 30, 2002 and pro forma results of operations for the six-month period ended June 30, 2001 had the Company applied the non-amortization provisions of SFAS No. 142 in that period follows (in thousands, except per share amounts): 7
Six Month Periods Ended June 30, -------- 2002 2001 ---- ---- Income before cumulative effect of change in accounting principle.................. $ 12 $ (1,075) Cumulative effect of change in accounting principle (no tax benefit recognized)..................... 28,744 - --------- --------- Reported net income (loss)................................. (28,732) (1,075) Add: Amortization of goodwill and intangibles.............. - 745 --------- --------- - Adjusted net income (loss)................................. $ (28,732) $ (330) ========= ========= Basic and diluted net income (loss) per share: Reported net income (loss).............................. $ - $ (0.25) Amortization of goodwill and intangibles................ (6.58) .17 --------- --------- Adjusted net income (loss) per share.................... $ (6.58) $ (0.08) ========= =========
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Early adoption is encouraged. Adoption of SFAS No. 143 on January 1, 2002 did not have an impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Adoption of SFAS No. 144 on January 1, 2002 did not have an impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment is effective for fiscal years beginning after May 15, 2002. Earlier application is encouraged. The adoption of SFAS No. 145 is not expected to have a material impact in the financial position or results of operation of the Company. 8 In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the impact, if any, of SFAS No. 146 on its consolidated financial statements. NOTE 6 - COMMITMENTS AND CONTINGENCIES a. On April 27, 1998, Wanda King, a former employee of the Company, commenced an action against the Company in the United States District Court for the Western District of Virginia. In her complaint, the Plaintiff sought damages in excess of $8.0 million claiming that she was constructively discharged by the Company. The Company interposed an Answer to the amended Complaint denying the material allegations asserted in the Complaint and brought a motion for summary judgment to dismiss the case. On October 22, 2001, the Magistrate Judge, after considering the Motion for Summary Judgment, recommended to the United States District Court that the case against the Company be dismissed in its entirety. The Plaintiff objected to the recommendation of the Magistrate Judge. By Order dated February 25, 2002, the United States District Judge granted the Company's motion for summary judgment and the case was dismissed. The Plaintiff has appealed this dismissal to the United States Court of Appeals for the Fourth Circuit. 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. 9 DONNKENNY, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Six Months Ended June 30, 2002 and 2001 - ----------------------------------------------------- Net sales decreased by $21.0 million, or 31.0% from $67.8 million in the first half of 2001 to $46.8 million in the first half 2002. The decline was primarily due to the Company's discontinuation of the Decade dress business, the de-emphasis and consolidation of Pierre Cardin Options into Pierre Cardin Knits, the Company's decision to exit the career private label business and the continuing slow retail environment, which caused a drop in the Company's core businesses. Gross profit for the first half of 2002 was $11.6 million, or 24.8% of net sales, compared to $15.4 million, or 22.7% of net sales, during the first half of 2001. The increase in gross profit as a percentage of net sales was primarily attributable to decreases in the levels and sales of non-current inventory and the continued effort to improve sourcing. Selling, general and administrative expenses decreased $2.8 million from $13.2 million in the first half of 2001 to $10.4 million in the first half of 2002. The decrease in selling, general and administrative expenses was primarily due to reductions in headcount and reductions in distribution, sales, design and product related expenses. Net interest expense decreased from $2.4 million during the first half of 2001 to $1.1 million during the first half of 2002. The decrease was attributable to lower revolving credit borrowings under the loan agreement in addition to lower interest rates. Comparison of Quarters Ended June 30, 2002 and 2001 - --------------------------------------------------- Net sales decreased by $8.1 million, or 26.6% from $30.5 million in the second quarter of 2001 to $22.4 million in the second quarter 2002. The decline was primarily due to the Company's discontinuation of the Decade dress business, the de-emphasis and consolidation of Pierre Cardin Options into Pierre Cardin Knits, the Company's decision to exit the career private label business, competitive price reductions and the continuing slow retail environment, which caused a drop in the Company's core businesses. Gross profit for the second quarter of 2002 was $5.2 million, or 23.2% of net sales, compared to $6.6 million, or 21.6% of net sales, during the second quarter of 2001. The increase in gross profit in dollars and as a percent of sales was primarily due to decreases in the levels and sales of non-current inventory and the continued effort to improve sourcing. Selling, general and administrative expenses decreased $1.4 million from $6.5 million in the second quarter of 2001 to $5.1 million in the second quarter of 2002. The decrease in selling, general and administrative expenses was primarily due to reductions in headcount and reductions in distribution, sales and product related expenses. Net interest expense decreased from $1.1 million during the second quarter of 2001 to $0.4 million during the second quarter of 2002. The decrease was attributable to lower revolving credit borrowings under the loan agreement in addition to lower interest rates. Liquidity and Capital Resources - ------------------------------- The Company's liquidity requirements arise from the funding of working capital needs, primarily inventory and accounts receivable, and interest and principal payments related to certain indebtedness and capital expenditures. The Company's borrowing requirements for working capital fluctuate throughout the year. 10 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. 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 as amended expires on June 30, 2004. Collateral for the Credit Agreement includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in its operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corporation. The Credit Agreement contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with minimum earnings before depreciation, amortization, interest and taxes (EBITDA) and a minimum interest coverage ratio, based upon the annual business plan approved by the lender. During Fiscal 1999 and Fiscal 2000, the Company entered into various amendments and agreements to waive the Company's noncompliance with financial covenants on certain dates and to reset overadvanced amounts and covenants. These amendments and agreements also increased the interest rate on borrowings. On July 6, 2000, the Company entered into an Amendment to finance the acquisition of the Ann Travis business by the issuance of an additional $1.3 million term loan. The new term loan bears interest at the prime rate plus 2.0% (6.75% at June 30, 2002) and is repayable over thirty-six months commencing January 1, 2001. A fee of $100,000 was paid for the Amendment. On March 28, 2001, the Company entered into an Amendment and Waiver Agreement to extend the Final Maturity Date of the original agreement to June 30, 2004, to waive existing events of default under the Credit Agreement as of December 31, 2000 with respect to the Company's non-compliance with covenants related to minimum interest coverage, EBITDA and Tangible Net Worth, and to amend certain other provisions of the Credit Agreement including covenants and the level of allowable overadvances to support the Company's 2001 business plan. Pursuant to this amendment, the interest rate on borrowings was increased to 2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid in connection with this Amendment and Waiver. Effective January 1, 2002, the Company established covenants and the level of allowable overadvances with the lender to support its 2002 business plan. This Amendment and Waiver Agreement also amended the interest rate on the revolving credit borrowings to the prime rate plus one and three quarters percent (6.50% at June 30, 2002) and provided for an additional interest rate reduction effective July 1, 2002 if certain objectives were achieved. No fee was paid in connection with this Amendment and Waiver. The Company has achieved the objectives and will receive an additional rate reduction effective July 1, 2002. The interest rate on the revolving credit borrowings will now be prime plus one and one half percent. 11 On June 30, 2002, the Company made the final payment on the $3 million term loan in accordance with the terms of the Credit Agreement. Direct borrowings under the revolving credit facility were $24.1 million and the remaining acquisition term loan amounted to $0.6 million as of June 30, 2002. Additionally, the Company had letters of credit outstanding of $17.4 million, with an unused facility of $33.5 million. As of June 30, 2001, direct borrowings, term loans and letters of credit outstanding under the credit facility were $42.3 million, $2.0 million and $17.5 million, respectively. The Company also has a factoring agreement with CIT. The factoring agreement provides for a factoring commission equal to .35% of gross sales, plus certain customary charges. The agreement is in effect through December 31, 2002. During the first half of 2002, cash provided by operating activities was $11.2 million, principally as the result of decreases in accounts receivable and prepaid expenses and increases in accounts payable partially offset by increases in inventories and decreases in accrued expenses. During the first half of 2001, the Company's operating activities used cash of $1.1 million principally as a result of increases in inventory partially offset by decreases in accounts receivable and increases in accounts payable. Cash used in investing activities during the first half of 2002 included $0.3 million for the purchase of fixed assets, principally computer equipment and related software, partially offset by $0.1 million from the sale of fixed assets. Cash used in investing activities during the first half of 2001 included $1.1 million primarily relating to the upgrades in the Company's computer system. Cash used in financing activities during the first half of 2002 was $11.0 million, which represents net repayments under the revolver of $10.3 million and repayments of $0.7 million of the term loan. Cash provided by financing activities during the first half of 2001 was $2.2 million which represents net borrowings under the revolver of $3.0 million and repayments of $0.8 million of the term loan and a secured term loan. The Company believes that cash flows from operations and amounts available under the revolving credit agreement will be sufficient for its needs for 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. 12 Recent Accounting Pronouncements - -------------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets". It changes the accounting for goodwill from an amortization method to an impairment only approach. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company ceased the amortization of goodwill, which was recorded in past business combinations on December 31, 2001 as required by SFAS No. 142 and recorded an impairment charge of $28.7 million related to goodwill and intangible assets as a change in accounting principle upon the adoption of this statement (See Note 4 to the consolidated financial statements). In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Early adoption is encouraged. Adoption of SFAS No. 143 on January 1, 2002 did not have an impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Adoption of SFAS No. 144 on January 1, 2002 did not have an impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment is effective for fiscal years beginning after May 15, 2002. Earlier application is encouraged. The adoption of SFAS No. 145 is not expected to have a material impact in the financial position or results of operation of the Company. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the impact, if any, of SFAS No. 146 on its consolidated financial statements. 13 Critical Accounting Policies and Estimates - ------------------------------------------ The Company's significant accounting policies are more fully described in Note 1 to the annual consolidated financial statements. Certain of the Company's accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. Significant accounting policies include: Revenue Recognition - The Company recognizes sales upon shipment of ------------------- products and transfer of title to customers. Provisions for estimated uncollectible accounts, discounts and returns and allowances are provided when sales are recorded based upon historical experience and current trends. While such amounts have been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same rates as in the past. Inventories - Inventory is stated at the lower of cost or market, cost ----------- being determined on the first-in, first-out method. Reserves for slow moving and aged merchandise are provided based on historical experience and current product demand. The Company evaluates the adequacy of the reserves quarterly. While markdowns have been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same level of markdowns as in the past. Valuation of Long-Lived Assets - The Company periodically reviews the ------------------------------ carrying value of its long-lived assets for continued appropriateness. This review is based upon projections of anticipated future undiscounted cash flows. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect evaluations. 14 Income Taxes - The Company has cumulative net operating loss (NOL) ------------ carry-forwards of $19.7 million for federal income taxes and $30.8 million for state income taxes, which have generated estimated tax benefits of $8.1 million as of December 31, 2001. In accordance with generally accepted accounting principles, the Company has not recognized in income any of this tax benefit due to the size of the NOL carry-forward and the Company's history of unprofitable operations. However, should the Company conclude that future profitability is assured; the estimated net realizable value of the deferred tax asset would be partially or fully credited to net income. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the Company's provision for income taxes to vary from period to period. The provision for income taxes primarily consists of state and local income taxes. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------ Interest Rate Risk - The Company is subject to market risk from ------------------ exposure to changes in interest rates based primarily on its financing activities. The market risk inherent in the financial instruments represents the potential loss in earnings or cash flows arising from adverse changes in interest rates. These debt obligations with interest rates tied to the prime rate are described in "Liquidity and Capital Resources", as well as Note 3 of the Notes to the Consolidated Financial Statements. The Company manages these exposures through regular operating and financing activities. The Company has not entered into any derivative financial instruments for hedging or other purposes. The following quantitative disclosures are based on the prevailing prime rate. These quantitative disclosures do not represent the maximum possible loss or any expected loss that may occur, since actual results may differ from these estimates. At June 30, 2002 and 2001, the carrying amounts of the Company's revolving credit borrowings and term loans approximated fair value. Effective July 1, 2002, the Company's revolving credit borrowings under its Credit Agreement bear interest at the prime rate plus one and one half percent (6.25% at July 1, 2002). The Company's acquisition term loan bears interest at the prime rate plus two percent (6.75% at June 30, 2002). As of June 30, 2002, a hypothetical immediate 10% adverse change in prime interest rates (from 4.75% to 5.23%) relating to our revolving credit borrowings and term loan would have a $0.1 million unfavorable impact on our earnings and cash flows over a one-year period. 15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- a. On April 27, 1998, Wanda King, a former employee of the Company, commenced an action against the Company in the United States District Court for the Western District of Virginia. In her complaint, the Plaintiff sought damages in excess of $8.0 million claiming that she was constructively discharged by the Company. The Company interposed an Answer to the amended Complaint denying the material allegations asserted in the Complaint and brought a motion for summary judgment to dismiss the case. On October 22, 2001, the Magistrate Judge, after considering the Motion for Summary Judgment, recommended to the United States District Court that the case against the Company be dismissed in its entirety. The Plaintiff objected to the recommendation of the Magistrate Judge. By Order dated February 25, 2002, the United States District Judge granted the Company's motion for summary judgment and the case was dismissed. The Plaintiff has appealed this dismissal to the United States Court of Appeals for the Fourth Circuit. b. The Company is also a party to legal proceedings arising in the ordinary course of its business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse effect on financial condition, results of operations, liquidity or business of the Company. ITEM 2. Not Applicable -------------- ITEM 3. Not Applicable -------------- ITEM 4. Not Applicable -------------- ITEM 5. Not Applicable -------------- ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits --------- Exhibit No. Description of Exhibit ----------- ---------------------- 10.68 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 10.69 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K ------------------- None 16 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: August 13, 2002 /s/ Daniel H. Levy ----------------------------- Daniel H. Levy Chairman of the Board, Chief Executive Officer Date: August 13, 2002 /s/ Maureen d. Schimmenti ---------------------------- Maureen d. Schimmenti Vice President and Chief Financial Officer, (Principal Financial Officer) 17 EX-10 3 a4229378_1069.txt EXHIBIT 10.69 Exhibit 10.68 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Donnkenny Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel H. Levy, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report Fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Daniel H. Levy Daniel H. Levy Chief Executive Officer August 13, 2002 1 Exhibit 10.69 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Donnkenny Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Maureen d. Schimmenti, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report Fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Maureen d. Schimmenti Maureen d. Schimmenti Chief Financial Officer August 13, 2002 2 -----END PRIVACY-ENHANCED MESSAGE-----