-----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, DCs5O48mMWKf9rqYZcdWg6Dlv3iLrqYAshBonuIbtWqNFLseh+pGcRNdXpbs4ido dWn5nhVjE+LtenmcP4B4rg== 0001157523-03-004223.txt : 20030813 0001157523-03-004223.hdr.sgml : 20030813 20030813161620 ACCESSION NUMBER: 0001157523-03-004223 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03841490 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 a4453638.txt DONNKENNY 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, 2003 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes ___ No X . ------- 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 11, 2003)
DONNKENNY, INC AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (FORM 10-Q) PART I - FINANCIAL INFORMATION Page ---- Item 1. Consolidated financial statements: Independent Accountants' Report............................................................1 Balance sheets as of June 30, 2003 (unaudited) and December 31, 2002.......................2 Statements of operations for the three and six months ended June 30, 2003 and 2002 (unaudited).........................................................3 Statements of cash flows for the six months ended June 30, 2003 and 2002 (unaudited).........................................................4 Notes to Consolidated Financial Statements (unaudited)..................................5-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................................11-16 Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................17 Item 4. Controls and Procedures......................................................................17 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................................................18 Item 6 Exhibits and Reports on Form 8-K..........................................................18-19 Signatures................................................................................20 Certifications.........................................................................21-24
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, 2003, the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2003 and 2002 and cash flows for the six-month periods ended June 30, 2003 and 2002. These interim financial statements are the responsibility of the Company's management. We conducted our reviews 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 reviews, we are not aware of any material modifications that should be made to such consolidated interim 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, 2002, 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 17, 2003 (March 27, 2003 as to Note 6) we expressed an unqualified opinion on those consolidated financial statements which included an explanatory paragraph concerning the change in the Company's method of accounting for goodwill and other intangible assets, to conform to Statement of Financial Accounting Standards No. 142. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ DELOITTE & TOUCHE LLP New York, New York August 11, 2003 1
DONNKENNY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except per share data) June 30, December 31, 2003 2002 ----------------- ------------ (Unaudited) CURRENT ASSETS Cash.................................................. $ 48 $ 66 Accounts receivable - net of allowances for bad debts of $119 and $116, in 2003 and 2002 respectively...... 11,860 20,634 Recoverable income taxes.............................. 62 203 Inventories, net...................................... 16,655 15,949 Prepaid expenses and other current assets............. 951 615 Assets held for sale.................................. 358 402 ----------- ------------ Total current assets.................................. 29,934 37,869 PROPERTY, PLANT AND EQUIPMENT, NET......................... 3,892 4,515 OTHER ASSETS............................................... 189 234 INTANGIBLE ASSETS.......................................... 1,325 821 ----------- ------------ TOTAL...................................................... $ 35,340 $ 43,439 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt................... $ - $ 253 Accounts payable.................................... 6,481 10,101 Accrued expenses and other current liabilities...... 1,904 2,209 ----------- ------------ Total current liabilities........................ 8,385 12,563 ----------- ------------ LONG-TERM DEBT............................................. 21,310 23,730 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 2003 and 2002...................................... 44 44 Additional paid-in capital............................. 50,449 50,449 Deficit................................................ (44,848) (43,347) ----------- ------------ Total Stockholders' Equity.............................. 5,645 7,146 ----------- ------------ TOTAL...................................................... $ 35,340 $ 43,439 =========== ============ 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, 2003 June 30, 2002 June 30, 2003 June 30, 2002 ------------- ------------- -------------- ------------- NET SALES.................................................. $ 17,846 $ 22,358 $ 36,799 $ 46,796 COST OF SALES.............................................. 13,948 17,170 27,196 35,191 ---------- ----------- ----------- ---------- Gross profit.......................................... 3,898 5,188 9,603 11,605 OPERATING EXPENSES: Selling, general and administrative expenses........... 5,115 5,067 10,461 10,412 ---------- ----------- ----------- ---------- Operating income (loss)............................ (1,217) 121 (858) 1,193 INTEREST EXPENSE........................................... 294 423 612 1,091 ---------- ----------- ----------- ---------- (Loss) income before income taxes and cumulative effect of change in accounting principle................. (1,511) (302) (1,470) 102 INCOME TAXES............................................... 45 45 31 90 --------- ----------- ----------- ---------- (Loss) income before cumulative effect of change in accounting princple.......................... (1,556) (347) (1,501) 12 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (no tax benefit recognized)..................... - - - 28,744 -------- ----------- ----------- ---------- NET LOSS............................................. $ (1,556) $ (347) $ (1,501) $ (28,732) ========= =========== =========== ========== Basic loss per common share: (Loss) before accounting change............................ $ (0.36) $ (0.08) $ (0.34) $ - Cumulative effect of accounting change..................... - - - (6.58) -------- ----------- ----------- --------- Net loss................................................... $ (0.36) $ (0.08) $ (0.34) $ (6.58) ========= =========== =========== ========= Diluted loss per common share: (Loss) accounting change................................... $ (0.36) $ (0.08) $ (0.34) $ - Cumulative effect of accounting change..................... - - - (6.58) -------- ----------- ----------- --------- Net loss................................................... $ (0.36) $ (0.08) $ (0.34) $ (6.58) ========= =========== =========== ========= Shares used in the calculation of loss 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, 2003 2002 ------------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................... $ (1,501) $ (28,732) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of fixed assets.............. 764 750 Disposal of fixed assets................................... - 2 Amortization of finite-lived intangibles................... 8 - Cumulative effect of change in accounting principle ....... - 28,744 Provision for losses on accounts receivable................ 3 10 Changes in assets and liabilities: Decrease in accounts receivable............................ 8,771 9,241 Decrease in recoverable income taxes....................... 141 2 Increase in inventories.................................... (706) (745) (Increase) decrease in prepaid expenses and other current assets....................................... (336) 785 Decrease in other non-current assets....................... 45 35 (Decrease) increase in accounts payable.................... (3,620) 2,848 Decrease in accrued expenses and other current liabilities.................................. (305) (1,722) ------------------- ------------------ Net cash provided by operating activities.................. 3,264 11,218 ------------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment.................. (97) (339) Proceeds from sale of property, plant and equipment........ - 143 License acquisition cost................................... (512) - ------------------- ------------------ Net cash used in investing activities...................... (609) (196) ------------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt................................ (253) (717) Borrowings under revolving credit line..................... 43,512 46,638 Repayments under revolving credit line..................... (45,932) (56,950) ------------------- ------------------ Net cash used in financing activities...................... (2,673) (11,029) ------------------- ------------------ NET DECREASE IN CASH....................................... (18) (7) CASH, AT BEGINNING OF PERIOD............................... 66 39 ------------------- ------------------ CASH, AT END OF PERIOD..................................... $ 48 $ 32 =================== ================== SUPPLEMENTAL DISCLOSURES Income taxes paid.......................................... $ 15 $ 36 =================== ================== Interest paid.............................................. $ 614 $ 1,096 =================== ================== 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, 2002. Balance sheet data as of December 31, 2002 have been derived from audited financial statements of the Company. NOTE 2 - STOCK BASED COMPENSATION The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the Common Stock on the date of grant. The following table details the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Statement ("SFAS") No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, to stock-based employee compensation.
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2003 2002 2003 2002 ------- -------- -------- -------- (in thousands, except per share data) Net loss, as reported $(1,556) $(347) $(1,501) $(28,732) Deduct: Total stock-based employee Compensation expense determined under fair value based method 13 49 44 98 -- -- -- -- Pro-forma net loss $(1,569) $ (396) $(1,545) $(28,830) ======== ====== ======== ========= Loss per share: Basic- as reported $ (0.36) $(0.08) $ (0.34) $ (6.58) ======= ======= ======== ======= Basic - pro-forma $ (0.36) $(0.09) $ (0.35) $ (6.60) ======= ======= ======= ======= Diluted - as reported $ (0.36) $(0.08) $ (0.34) $ (6.58) ======= ======= ======= ======= Diluted - pro-forma $ (0.36) $(0.09) $ (0.35) $ (6.60) ======= ======= ======= =======
5 The effect of outstanding stock option awards is antidilutive and, accordingly, 22,942 and 39,274 stock options have been excluded from the calculation of diluted loss per share for the three and six months periods ended June 30, 2003, respectively. The weighted-average Black-Scholes value of the options granted during second quarter 2002 which was used to calculate the pro-forma compensation expense was $0.90. The following weighted-average assumptions were used in the Black-Scholes option-pricing model for grants in 2002: dividend yield of 0%, volatility of 253%; risk-free interest rate of 2.40%; and an expected life of 5 years. Information regarding the Company's stock option plan is summarized below:
June 30, 2003 June 30, 2002 -------------------- ----------------------- Weighted- Weighted- Average Average Exercise Exercise Options Price Options Price Outstanding at beginning of the period... 345,552 $5.95 403,853 $ 6.59 Granted.................................. - - 5,000 0.90 Exercised................................ - - - - Cancelled................................ (111,000) $3.83 (8,925) $ 9.60 --------- ------- ------- ------ Outstanding at end of period.. 234,552 $6.95 399,928 $ 6.45 ======= ===== ======= ====== Exercisable at end of period .. 205,552 $7.82 226,303 $10.54 ======= ===== ======= ====== Available for grant at period end........ 240,623 75,247
The options outstanding at June 30, 2003 range in exercise price as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------------------------------------------------- Outstanding Weighted-Average Range of Exercise as of Remaining Contractual Weighted-Average Exercisable as Weighted-Average Prices 06/30/2003 Life Exercise Price of 06/30/2003 Exercise Price ------ ---------- ---- -------------- ---------- -------------- $0.00 - $ 7.23 163,750 5.7 $ 1.77 134,750 $ 1.97 $ 7.24 -$14.45 42,776 0.7 $ 11.74 42,776 $ 11.74 $14.46 -$28.90 18,125 2.9 $ 16.37 18,125 $ 16.37 $28.91 -$43.35 1,750 1.8 $ 33.25 1,750 $ 33.25 $43.36 -$65.03 3,751 0.8 $ 44.25 3,751 $ 44.25 $65.04 -$72.25 4,400 1.4 $ 72.25 4,400 $ 72.25
NOTE 3 - INVENTORIES Inventories consist of the following:
June 30, December 31, 2003 2002 ---- ---- (In thousands) Raw materials . . . . . . . . . . . . . . . . . $ 2,491 $ 701 Work-in-process . . . . . . . . . . . . . . . . . 961 143 Finished goods . . . . . . . . . . . . . . . . 13,464 16,411 Reserves................................... (261) (1,306) ----------- ------- $ 16,655 $ 15,949 =========== ====== Inventories at June 30, 2002 were $18.5 million consisting primarily of finished goods.
6 NOTE 4 - 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 provided the Company with a $75 million facility comprised of a $72 million revolver with sub-limits up to $52 million for direct borrowings, $35 million for letters of credit, certain overadvances and a $3 million term loan which was paid in full as of June 30, 2002. 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. Collateral for the Credit Agreement includes a first priority lien on all assets of the Company including, accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corporation. The Credit Agreement contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with a requirement for minimum earnings before depreciation, amortization, interest and taxes (EBITDA) and a minimum interest coverage ratio, all based upon the Company's annual business plan approved by the lender. 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. A fee of $100,000 was paid for the Amendment. The new term loan bore interest at the prime rate plus 2.0% and was repayable over thirty-six months commencing January 1, 2001. On March 31, 2003, the Company paid the loan in full. On March 28, 2001, the Company entered into an Amendment and Waiver Agreement to extend the Final Maturity Date of the original agreement to June 30, 2004, to waive existing events of default under the Credit Agreement as of December 31, 2000 with respect to the Company's non-compliance with covenants related to minimum interest coverage, EBITDA and Tangible Net Worth, and to amend certain other provisions of the Credit Agreement including covenants and the level of allowable overadvances to support the Company's 2001 business plan. Pursuant to this amendment, the interest rate on borrowings was increased to 2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid in connection with the Amendment and Waiver. 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 and provided for an additional interest rate reduction effective July 1, 2002 if certain objectives were achieved. No fee was paid in connection with the Amendment and Waiver. The Company has achieved the objectives and received an additional rate reduction effective July 1, 2002. The interest rate on the revolving credit borrowings was prime plus one and one-half percent. Effective January 1, 2003, the Company established covenants and the level of allowable overadvances with the lender, through an Amendment to the Credit Agreement dated March 27, 2003, to support its 2003 business plan. The Amendment also amended the interest rate on the revolving credit borrowings to the prime rate plus one and one-quarter percent (5.25% at June 30, 2003). No fee was paid in connection with this Amendment. As of June 30, 2003, the Company was not in compliance with the Tangible Net Worth Covenant due to the intangible assets acquired in connection with the Bill Blass licenses which were not contemplated in the 2003 business plan (See Note 5). The Lender has waived this covenant. No fee was paid in connection with this Waiver. 7 The Company also has a factoring agreement with CIT Group/Commercial Services. The factoring agreement provides for a factoring commission equal to ..35% of gross sales, plus certain customary charges. Effective June 30, 2003, the Company through an Amendment and Waiver Agreement dated August 11, 2003 extended the Final Maturity Date of the Credit Agreement to June 30, 2007. This Amendment provides the Company with a $65 million facility, and amends the anniversary date of the factoring agreement to June 30, 2004 with annual renewals thereafter. Fees payable in connection with this Amendment are $243,750. All other terms and conditions of the Revolving Credit Agreement remain unchanged. At June 30, 2003 and 2002, the Company was contingently liable for outstanding letters of credit issued amounting to $9.6 million and $17.4 million, respectively. NOTE 5 - GOODWILL AND INTANGIBLE ASSETS Intangible assets consisted of licenses of $0.8 million with indefinite lives and $0.5 million with definite lives at June 30, 2003. At December 31, 2002 intangible assets consisted of $0.8 million of licenses with indefinite lives. 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 the Company in 1989 following a change in control, the sportswear division of Oak Hill Sportswear Corporation ("Oak Hill"), Beldoch Industries Corporation ("Beldoch") in 1995, and 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 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, "Goodwill and Other Intangible Assets," on January 1, 2002, the Company ceased the amortization of goodwill and other intangible assets with indefinite lives and determined that the value of its intangible assets had been impaired. The impairment charge of $28.7 million, recorded as a change in accounting principle, 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 consisted of $25.4 million related to goodwill and $3.3 million related to the license. The Company did not record an income tax benefit related to this charge. The $0.8 million of intangibles 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 in the Company's June 30, 2003 and December 31, 2002 Consolidated Balance Sheets. On May 1, 2003, the Company entered into a licensing arrangement to manufacture and sell coats under the Bill Blass(R), Bill Blass Signature(R) and Blassport(R) labels. The Company recorded an intangible asset of approximately $0.5 million for the costs incurred in connection with the acquisition of the licenses. The intangible asset will be amortized over the expected life of the license until December 31, 2009. 8 The minimum licensing commitments under the Company's licensing arrangements are disclosed in Note 7. NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS 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 require 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 was encouraged. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on the Company's Consolidated Financial Statements. 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 adopted SFAS No. 146 on January 1, 2003. This Statement did not have an impact on the Company's Consolidated Financial Statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure amendments to Statement 123 contained in SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company does not expect adoption of SFAS No. 149 to have an impact on the consolidated financial statements as the Company does not engage in derivative or hedging activity. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of SFAS 150 will not have an impact on the Company's reported consolidated financial position, results of operations or cash flows. 9 NOTE 7 - 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 appealed this dismissal to the United States Court of Appeals for the Fourth Circuit. On appeal, the United States Court of Appeals for the Fourth Circuit reversed the United States District Court's decision and remanded the case back to the District Court for further consideration. 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 the financial condition, results of operations, liquidity or business of the Company. c. The Company has guaranteed minimum royalties which represent those minimum amounts due in connection with the Licenses the Company has to manufacture under the various labels. The minimum guarantees are contractual. The Company has estimated minimum guaranteed royalties for these Licenses to be approximately $0.9 million. There are no maximum guarantees. d. On June 16, 2003, the Company entered into a licensing arrangement to manufacture knits, sweaters, and woven tops under the Z. Cavaricci label. The Company intends to begin shipments with the Spring 2004 season. The guaranteed minimum royalties for this license are reflected in the amount disclosed in Note 7c. e. The Company has agreed to purchase $2.7 million of raw materials in connection with the manufacturing of coats under the Bill Blass licenses. It is estimated that 60% of this amount will be purchased in 2003 and the balance in 2004. 10 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, 2003 and 2002 - ----------------------------------------------------- Net sales decreased by $10.0 million, or 21.4% from $46.8 million in the first half of 2002 to $36.8 million in the first half of 2003. The decline was primarily due to the continuing slow retail environment, uncertainty about the war with Iraq and low consumer confidence, which caused a drop in the Company's core businesses. Gross profit for the first half of 2003 was $9.6 million, or 26.1% of net sales, compared to $11.6 million, or 24.8% of net sales, during the first half of 2002. The decrease in gross profit in dollars was due to the drop in sales. The increase in the gross margin 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 for the first half of 2003 was $10.5 million compared to $10.4 million in the first half of 2002. Selling, general and administrative expenses remained consistent despite certain increases in operating expenses offset by reductions in headcount and reductions in distribution, sales and product-related expenses. Net interest expense decreased from $1.1 million during the first half of 2002 to $0.6 million during the first half of 2003. The decrease was attributable to lower revolving credit borrowings under the credit agreement, a lower interest rate and interest received from an income tax refund. The Company recorded a provision for state and local income taxes of $0.09 million in the first half of 2002 compared to $0.03 million in 2003. In the first half of 2003, an audit of prior years State income tax returns was completed. As a result, the Company received additional refunds of $0.06 million. In the first half of 2002, the Company recorded an impairment charge related to goodwill and intangible assets of $28.7 million as a change in accounting principle upon the adoption of SFAS No. 142. Comparison of Quarters Ended June 30, 2003 and 2002 - --------------------------------------------------- Net sales decreased by $4.5 million, or 20.2% from $22.4 million in the second quarter of 2002 to $17.8 million in the second quarter 2003. The decline was primarily due to the slow retail environment, competitive price reductions, and low consumer confidence which caused a drop in the Company's core businesses. Gross profit for the second quarter of 2003 was $3.9 million, or 21.8% of net sales, compared to $5.2 million, or 23.2% of net sales, during the second quarter of 2002. The decrease in gross profit in dollars was due to the drop in sales as a result of the slow retail environment. The decrease in the gross margin as a percent of sales was primarily due to sales of non-current inventory, and competitive price reductions. Selling, general and administrative expenses for the second quarter 2003 was $5.1 million compared to $5.1 million in the second quarter of 2002. Selling, general and administrative expenses remained consistent despite certain increases in operating expenses, notably, expenses incurred in 2003 for the coat division, offset by reductions in headcount and reductions in distribution, sales and product-related expenses. 11 Net interest expense decreased from $0.4 million during the second quarter of 2002 to $0.3 million during the second quarter of 2003. The decrease was attributable to lower revolving credit borrowings under the credit agreement and a lower interest rate. The Company recorded a provision for state and local income taxes of $0.05 million in second quarter 2002 and 2003. New Licensing Agreement - ----------------------- On May 1, 2003, the Company entered into a licensing arrangement to manufacture and sell coats under the Bill Blass (R), Bill Blass Signature (R) and Blassport (R) labels. The Company intends to begin shipments with the Fall 2003 season. On June 16, 2003, the Company entered into a licensing arrangement to manufacture knits, sweaters, and woven tops under the Z. Cavaricci label. The Company intends to begin shipments with the Spring 2004 season. 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. 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 provided the Company with a $75 million facility comprised of a $72 million revolver with sub limits up to $52 million for direct borrowings, $35 million for letters of credit, certain overadvances and a $3 million term loan which was paid in full as of June 30, 2002. 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. Collateral for the Credit Agreement includes a first priority lien on all assets of the Company including, accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc. and Beldoch Industries Corporation. The Credit Agreement contains numerous financial and operational covenants, including limitations on additional indebtedness, liens, dividends, stock repurchases and capital expenditures. In addition, the Company is required to maintain specified levels of tangible net worth and comply with a requirement for minimum earnings before depreciation, amortization, interest and taxes (EBITDA) and a minimum interest coverage ratio, all based upon the Company's annual business plan approved by the lender. 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. A fee of $100,000 was paid for the Amendment. The new term loan bore interest at the prime rate plus 2.0% and was repayable over thirty-six months commencing January 1, 2001. On March 31, 2003, the Company paid the loan in full. 12 On March 28, 2001, the Company entered into an Amendment and Waiver Agreement to extend the Final Maturity Date of the original agreement to June 30, 2004, to waive existing events of default under the Credit Agreement as of December 31, 2000 with respect to the Company's non-compliance with covenants related to minimum interest coverage, EBITDA and Tangible Net Worth, and to amend certain other provisions of the Credit Agreement including covenants and the level of allowable overadvances to support the Company's 2001 business plan. Pursuant to this amendment, the interest rate on borrowings was increased to 2.0% above the prime rate effective January 1, 2001. A fee of $200,000 was paid in connection with the Amendment and Waiver. 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 and provide for an additional interest rate reduction effective July 1, 2002 if certain objectives were achieved. No fee was paid in connection with the Amendment and Waiver. The Company has achieved the objectives and received an additional rate reduction effective July 1, 2002. The interest rate on the revolving credit borrowings was prime plus one and one-half percent. Effective January 1, 2003, the Company established covenants and the level of allowable overadvances with the lender, through an Amendment to the Credit Agreement dated March 27, 2003, to support its 2003 business plan. The Amendment also amended the interest rate on the revolving credit borrowings to the prime rate plus one and one-quarter percent (5.25% at June 30, 2003). No fee was paid in connection with this Amendment. As of June 30, 2003, the Company was not in compliance with the Tangible Net Worth Covenant due to the intangible assets acquired in connection with the Bill Blass licenses which were not contemplated in the 2003 business plan (See Note 5). The Lender has waived this covenant. No fee was paid in connection with this Waiver. The Company also has a factoring agreement with CIT Group/Commercial Services. The factoring agreement provides for a factoring commission equal to ..35% of gross sales, plus certain customary charges. Effective June 30, 2003, the Company through an Amendment and Waiver Agreement dated August 11, 2003 extended the Final Maturity Date of the Credit Agreement to June 30, 2007. This Amendment provides the Company with a $65 million facility, and amends the anniversary date of the factoring agreement to June 30, 2004 with annual renewals thereafter. Fees payable in connection with this Amendment are $243,750. All other terms and conditions of the Revolving credit Agreement remain unchanged. During the first half of 2003, cash provided by operating activities was $3.3 million, principally as the result of decreases in accounts receivable partially offset by increases in inventory and prepaid expenses and other current assets and by decreases in accounts payable and accrued expenses and other current liabilities. On a comparable basis, net inventories at June 30, 2003 were $1.9 million less than June 30, 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. Cash used in investing activities during the first half of 2003 was $0.6 million, mainly for the purchase of fixed assets, principally computer equipment and related software and costs associated with the acquisition of a license. 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 financing activities during the first half of 2003 was $2.7 million, which represents net repayments under the revolver of $2.4 million and repayments of $0.3 million on the term loan. 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 on the term loan. 13 The Company believes that cash flows from operations and amounts available under the Credit Agreement, as amended, 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. Recent Accounting Pronouncements - --------------------------------- 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 require 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 was encouraged. Adoption of SFAS No. 145 on January 1, 2003 did not have an impact, on the Company's Consolidated Financial Statements. 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 adopted SFAS No. 146 on January 1, 2003. This Statement did not have an impact on the Company's Consolidated Financial Statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure amendments to Statement 123 contained in SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provision of SFAS No. 148. 14 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company does not expect adoption of SFAS No. 149 to have an impact on the consolidated financial statements as the Company does not engage in derivate or hedging activity. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a freestanding financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of SFAS 150 will not have an impact on the Company's reported consolidated financial position, results of operations or cash flows. Critical Accounting Policies and Estimates - ------------------------------------------ The Company's significant accounting policies are more fully described in Note 1 to the Annual Consolidated Financial Statements filed on Form 10-K (not presented herein). 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. Critical accounting policies include: Revenue Recognition - The Company recognizes sales upon shipment of products to customers as title and risk of loss pass upon shipment. 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. Accounts Receivable - Accounts Receivable as shown on the Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on historic trends and an evaluation of the impact of economic conditions. This amount is not significant since the Company has a factoring agreement. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational charge backs, net of expected recoveries, are included as a reduction to net sales and are part of the provision for allowances included in Accounts Receivable. These provisions result from seasonal negotiations as well as historic deduction trends, net expected recoveries and the evaluation of current market conditions. The Company's historical estimates of these costs have not differed materially from actual results. 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. Inventory reserves for slow moving and aged merchandise were $0.3 million and $1.3 million at June 30, 2003 and December 31, 2002, respectively. Inventory reserves decreased due to the levels and composition of inventory on hand at June 30, 2003. Additionally, during the first half of 2003, the Company directly wrote down the value of certain merchandise, which reduced the cost of finished goods and reduced corresponding inventory reserves. 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. 15 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. Income Taxes - The Company provides for income taxes only to the extent that it expects to pay taxes (primarily state franchise and local taxes). As of December 31, 2002, the Company's cumulative net operating loss (NOL) carryforward of $18.3 million for federal income taxes and $29.4 million for state income taxes, resulted in estimated tax benefits of $7.6 million. However, the Company has recorded a valuation allowance against these deferred tax assets due to the size of the NOL carryforward and the Company's history of unprofitable operations. However, should the Company conclude that future profitability is reasonably assured, the value of the deferred tax asset would be increased by eliminating some or all of the valuation allowance. Subsequent revisions to the estimated value of the deferred tax asset could cause the Company's provision for income taxes to vary from period to period; payments would remain unaffected until the benefit of the NOL is utilized. Forward Looking Statements - This Form 10-Q (including but not limited to the sections hereof entitled "Business" and "Management's Discussion and Analysis") contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, there can be no assurance that the statement of the expectation or belief will result, or be achieved or accomplished. The words "believe", "expect", "estimate", "project", "seek", "anticipate" and similar expressions may identify forward-looking statements. 16 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 4 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, 2003 and 2002, the carrying amounts of the Company's revolving credit borrowings and term loans approximated fair value. Effective January 1, 2003, the Company's revolving credit borrowings under its Credit Agreement bear interest at the prime rate plus one and one-quarter percent (5.25% at June 30, 2003). As of June 30, 2003, a hypothetical immediate 10% adverse change in prime interest rates (from 4.25% to 4.68%) relating to the Company's revolving credit borrowings would have a $0.1 million unfavorable impact on the Company's earnings and cash flows over a one-year period. Item 4. Controls and Procedures - ------------------------------- The Company's management with the participation of Daniel H. Levy, the Chief Executive Officer and Maureen d Schimmenti, the Chief Financial Officer of the Company has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation the Company's Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be included in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended. Such evaluation did not identify any change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 17 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 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 appealed this dismissal to the United States Court of Appeals for the Fourth Circuit. On appeal, the Fourth Circuit reversed the District Court's decision and remanded the case back to the District Court for further consideration. 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 ----------- ---------------------- 10.71 The Tenth Amendment among the Company Lenders named therein and the CIT Group/Commercial Services Inc. dated August 11, 2003. 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
18 (b) Reports on Form 8-K On April 17, 2003, the Company filed a Current Report on Form 8-K reporting a press release announcing the resignation of Lynn Siemers, the Company's President and Chief Operating Officer. The press release was filed as an exhibit. On April 28, 2003, the Company filed a Current Report on Form 8-K reporting a press release announcing the promotions of Sharon Wax and Glenn Lembersky. The press release was filed as an exhibit. On May 9th, 2003, the Company filed a Current Report on Form 8-K reporting a press release announcing its entry into the Ladies Coat Business. The press release was filed as an exhibit. 19 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, 2003 /s/ Daniel H. Levy --------------------------- Daniel H. Levy Chairman of the Board, Chief Executive Officer Date: August 13, 2003 /s/ Maureen d. Schimmenti --------------------------- Maureen d. Schimmenti Vice President and Chief Financial Officer, (Principal Financial Officer) 20 Exhibit 31.1 Certification pursuant to Section 302 of the Sarbannes-Oxley Act of 2002 I, Daniel H. Levy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Donnkenny, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers/employees and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officers/employees and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: August 13, 2003 /s/ Daniel H. Levy ---------------------------- Daniel H. Levy Chairman of the Board, Chief Executive Officer 21 Exhibit 31.2 Certification pursuant to Section 302 of the Sarbannes-Oxley Act of 2002 I, Maureen d. Schimmenti, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Donnkenny, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers/employees and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officers/employees and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: August 13, 2003 /s/ Maureen d. Schimmenti --------------------------- Maureen d. Schimmenti Vice President and Chief Financial Officer, (Principal Financial Officer) 22 Exhibit 32.1 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, 2003 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, 2003 23 Exhibit 32.2 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, 2003 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, 2003 24 EX-99 3 a4453638_ex.txt DONNKENNY EXHIBIT Exhibit [EXECUTION FINAL] TENTH AMENDMENT TO CREDIT AGREEMENT TENTH AMENDMENT TO CREDIT AGREEMENT, dated as of August 11, 2003 (this "Amendment"), to the Credit Agreement dated as of June 29, 1999 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among DONNKENNY APPAREL, INC. a Delaware corporation (DKA), BELDOCH INDUSTRIES CORPORATION, a Delaware corporation ("BIC"; together with DKA, and severally, the "Borrowers"), the Guarantors party thereto, the Lenders party thereto and THE CIT GROUP/COMMERCIAL SERVICES, INC. as agent for the Lenders (in such capacity, the "Agent"). The Borrowers, the Guarantors, the Lenders and the Agent are parties to the Credit Agreement. The Borrowers have requested that the Lenders (a) decrease the Total Revolving Credit Commitment, (b) agree to extend the Final Maturity Date and (c) amend the negative covenants relating to redemption of Parent's common stock and capital expenditures. The Lenders are willing to (a) decrease the Total Revolving Credit Commitment, (b) extend the Final Maturity Date and (c) amend the negative covenants relating to redemption of Parent's common stock and capital expenditures, all upon the terms and subject to the conditions set forth in this Amendment. Accordingly, in consideration of the mutual agreements set forth herein, and for good and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Initially capitalized terms used and not otherwise defined herein shall have their respective meanings as defined in the Credit Agreement. 2. Reduction of Revolving Credit Commitments. The Total Revolving Credit Commitments are hereby reduced from $75,000,000 to $65,000,000 and, in order to evidence such reduction, Schedule 2.01 (b) to the Credit Agreement is hereby deleted in its entirety and replaced by Schedule 2.01 (b) attached to this Amendment. 3. Extension of Final Maturity Date. The definition of Final Maturity Date set forth in the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Final Maturity Date" shall mean June 30, 2007." 4. Amendment of Negative Covenants. (a) Prohibition, with respect to Redemption of Parent's Capital Stock. Borrowers, Parent, Agent and Lenders agree that Parent shall not be permitted to redeem, purchase or otherwise acquire for value any shares of its capital stock without the express prior written consent thereto of Agent, on behalf of Required Lenders. In order to reflect such agreement, Section 7.04 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "SECTION 7.04 Dividends. Distributions and Payments. Declare or pay, directly and indirectly, any cash dividends or make any other distribution, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value (or permit any Subsidiary to purchase or acquire) any shares of any class of its capital stock or set aside any amount for any such purchase." (b) Increase in Permitted Capital Expenditures. Section 7.07 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "SECTION 7.07 Capital Expenditures. Permit the aggregate amount of payments made for capital expenditures, including Capitalized Lease Obligations and Indebtedness secured by Liens permitted under Section 7.01(e) hereof, for the Parent and its Subsidiaries on a consolidated basis, to exceed in any Fiscal Year $2,500 000 less the aggregate amount of cash payments or other consideration paid in such Fiscal Year by Parent (or any of its Subsidiaries) to redeem, purchase, retire or otherwise acquire any shares of any class of Parent's capital stock (provided, however, that all such payments are expressly subject to Agent's prior written consent thereto, on behalf of Required Lenders, pursuant to Section 7.04)." 5. Representations and Warranties. Borrowers hereby represent and warrant to Lenders that the representations and warranties set forth in Article IV of the Credit Agreement are true on and. as of the date hereof, as if made on and as of the date hereof, after giving effect to this Amendment, except to the extent that any such representation or warranty expressly relates to a prior date, and breach of any of the representations and warranties made in this paragraph 4 shall constitute an Event of Default under Article VIII(a) of the Credit Agreement. Borrowers further represent and warrant that, after giving effect to this Amendment, no Event of Default or event which, with the lapse of time or the giving of notice or both, would become an Event of Default has occurred and is continuing, except that, Borrowers hereby advise Agent and Lenders that Borrowers' financial statements for Borrowers' Fiscal Quarter ended June 30, 2 2003 may reflect that Borrowers have failed to comply with the Tangible Net Worth covenant set forth in Section 7.12A of the Credit Agreement for such Fiscal Quarter ended June 30, 2003. 6. Amendment Fee. In consideration of the agreement of Agent and Lenders to amend the Credit Agreement on the terms and conditions set forth herein, Borrowers agree to pay to Agent, for the ratable benefit of Lenders, an amendment fee in the amount of $243,750, which fee is earned and payable in full as of the date hereof and may, at Agent's option, be charged to any account of Borrowers maintained by Agent. 7. Effectiveness. This Amendment shall become effective on the date each of the following conditions precedent shall have been satisfied in full, as determined by Agent: (a) Agent shall have received counterparts of this Amendment duly executed and delivered by each of the parties hereto; (b) CIT shall have received an amendment to the Factoring Agreements, duly authorized, executed and delivered by each Borrower in favor of CIT, in form and substance satisfactory to CIT, pursuant to which the termination date set forth in the Factoring Agreements shall be extended to June 30, 2004. 8. Continuing Effect of Credit Agreement, This Amendment shall not constitute a waiver or amendment of any provision of the Credit Agreement not expressly referred to herein and shall not be construed as a consent to any further or future action on the part of either of the Borrowers that would require consent of Lenders. Except as expressly amended by this Amendment, the provisions of the Credit Agreement are and shall remain in full force and effect. 9. Applicable Law. This Amendment shall be construed in accordance with and governed by the laws of the State of New York (other than the conflicts of law principles thereof). 10. Counterparts: Facsimile Signature. This Amendment may be executed in counterparts, each of which shall constitute an original and all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of the signature page of this Amendment by facsimile shall be effective as delivery of a manually executed signature page hereto. [SIGNATURE PAGE FOLLOWS] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective authorized officers as of the day and year first above written,
DONNKENNY APPAREL, INC., as a Borrower and a Guarantor BELDOCH INDUSTRIES CORPORATION, as a Borrower and a Guarantor By: /s/ Maureen d Schimmenti By: /s/ Maureen d Schimmenti -------------------------------------------- --------------------------------------------------- Name: Maureen d Schimmenti Name: Maureen d Schimmenti -------------------------------------------- --------------------------------------------------- Title: VP/CFO Title: VP/CFO -------------------------------------------- --------------------------------------------------- CHRISTIANBURG GARMENT COMPANY, INCORPORATED, as a H SQUARED DISPOSITIONS, INC., as a Guarantor Guarantor By: /s/ Maureen d Schimmenti By: /s/ Maureen d Schimmenti --------------------------------------------- ------------------------------------------------- Name: Maureen d Schimmenti Name: Maureen d Schimmenti --------------------------------------------- ------------------------------------------------- Title: VP/CFO Title: VP/CFO --------------------------------------------- ------------------------------------------------- THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent DONNKENNY, INC. as a Guarantor By: /s/ John M. Szwalek By: /s/ Maureen d Schimmenti --------------------------------------------- ------------------------------------------------- Name: John M. Szwalek Name: Maureen d Schimmenti --------------------------------------------- ------------------------------------------------- Title: Vice President Title: VP/CFO --------------------------------------------- ------------------------------------------------- CENTURY BUSINESS CREDIT CORPORATION, as a Lender THE CIT GROUP/COMMERCIAL SERVICES, INC., as a Lender By: /s/ Steven Stone By: /s/ John M. Szwalek --------------------------------------------- ------------------------------------------------- Name: Steven Stone Name: John M. Szwalek --------------------------------------------- ------------------------------------------------- Title: Executive Vice President Title: Vice President --------------------------------------------- -------------------------------------------------
SCHEDULE 2.01(b) Revolving Credit Commitments Percentage of Total Lender Revolving Credit Revolving Loan Commitment Commitment ---------------- ------------------- The CIT Group/Commercial Services, Inc. $47,671,000 73 .34% 1211 Avenue of the Americas New York, NY 10036 Attn: John Szwalek Century Business Credit Corporation $17,329,000 26.66% 119 West 10th Street 10th Floor New York, NY 10018 Attn: Steven Stone
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