SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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.
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(Exact name of registrant as specified in its charter)
Delaware 51-0228891
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Broadway, New York, NY 10018
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(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (212) 730-7770
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NOT APPLICABLE
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(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
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subject to such filing requirements for the past 90 days. Yes X No .
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Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Common Stock $0.01 par value 14,169,540 .
- - ---------------------------- ---------------------------------------
(Class) (Outstanding at September 30, 1998)
DONNKENNY, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-Q)
PART I - FINANCIAL INFORMATION Page
------
Consolidated financial statements:
Independent Accountants' Report
Balance sheets as of September 30, 1998 and December 31, 1997..........I-1
Statements of operations for the three and nine months ended
September 30, 1998 and September 30, 1997..............................II-1
Statements of cash flows for the nine months ended
September 30, 1998 and September 30, 1997..............................III-1
Notes to Consolidated Financial Statements.............................IV-1-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................V-1-4
PART II - OTHER INFORMATION
Legal Proceedings......................................................VI-1
Exhibits and Reports on Form 8-K.......................................VI-2
Signatures.............................................................VI-3
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Donnkenny, Inc.
We have reviewed the accompanying consolidated balance sheet of Donnkenny, Inc.
and subsidiaries as of September 30, 1998, the related consolidated statements
of operations for the three-month and nine-month periods ended September 30,
1998 and 1997, and the related consolidated statements of cash flows for the
nine-month periods ended September 30, 1998 and 1997. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Donnkenny, Inc. and subsidiaries as
of December 31, 1997, 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 20, 1998 (March 31, 1998 as to note 8),
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, 1997 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
New York, New York
November 16, 1998
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
September 30, December 31,
1998 1997
---------------- ---------------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 68 $ 257
Accounts receivable - net of allowances of $761 and $720 42,078 24,453
Recoverable income taxes 78 1,181
Inventories 35,074 27,248
Deferred tax assets 5,109 5,109
Prepaid expenses and other current assets 2,472 2,146
---------------- ---------------------
TOTAL CURRENT ASSETS 84,879 60,394
Property, plant and equipment, net 9,733 9,620
Other assets (Note 3) 1,667 -
Intangible assets 32,545 32,446
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TOTAL ASSETS $ 128,824 $ 102,460
================ ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease $ 1,244 $ 5,000
Accounts payable 9,121 9,320
Accrued expenses and other current liabilities 7,498 7,720
---------------- ---------------------
TOTAL CURRENT LIABILITIES 17,863 22,040
Long-term portion of capital lease 297 -
Revolving credit borrowings (Note 4) 51,208 21,540
Long-term debt, net of current portion - 508
Deferred income tax liabilites 5,286 5,286
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TOTAL LIABILITIES 74,654 49,374
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COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000
shares; issued and outstanding 14,170 and 14,075
shares in 1998 and 1997, respectively 142 141
Additional paid-in capital 47,595 47,360
Retained earnings 6,433 5,585
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TOTAL STOCKHOLDERS' EQUITY 54,170 53,086
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 128,824 $ 102,460
================ =====================
See accompanying notes to consolidated financial statements.
I - 1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended Ended September 30, Nine Months Ended Ended September 30,
-------------------------------------- -------------------------------------
1998 1997 1998 1997
--------- ---------- ----------- -----------
Net sales $ 57,649 $ 77,133 $ 152,334 $ 191,459
Cost of sales 44,308 60,763 116,959 149,713
--------- ---------- ----------- -----------
Gross profit 13,341 16,370 35,375 41,746
Selling, general and administrative expenses 10,232 12,616 30,035 36,654
Amortization of excess cost over fair value of
net assets acquired and other related acquisition
costs 337 246 984 948
--------- ----------- ----------- -----------
Operating income 2,772 3,508 4,356 4,144
Interest expense (net of interest income of $0 and $110
for the three months and nine months ended
September 30,1998) 1,192 1,642 2,725 4,242
--------- ----------- ----------- -----------
Income (loss) before income taxes 1,580 1,866 1,631 (98)
Income tax provision (benefit) 759 714 783 (39)
--------- ----------- ----------- -----------
Net income (loss) $ 821 $ 1,152 $ 848 $ (59)
========= =========== ============ ===========
Basic and diluted net income (loss) per common share $ 0.06 $ 0.08 $ 0.06 $ (0.00)
========= =========== ============ ===========
Weighted average number of common shares
outstanding 14,169,540 14,550,000 14,143,400 14,100,000
========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
II - 1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended
------------------------------------------------
September 30 September 30
1998 1997
-------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 848 $ (59)
Adjustments to reconcile net income (loss) to net cash (used in) operating
activities:
Depreciation and amortization of fixed assets 1,247 1,327
Loss on disposal of fixed assets 50 -
Amortization of intangibles and other assets 984 948
Provision for losses on accounts receivable 133 300
Changes in assets and liabilities, net of the effects of acquisitions and
disposals:
(Increase) in accounts receivable (17,758) (21,697)
Decrease in recoverable income taxes 1,103 7,104
(Increase) decrease in inventories (7,826) 4,443
(Increase) in prepaid expenses and other current assets (326) (531)
(Increase) in other assets (1,667) -
(Decrease) in accounts payable (199) (6,091)
(Decrease) increase in accrued expenses and other current liabilities 14 1,625
-------------------- ------------------------
Net cash (used in) operating activities (23,397) (12,631)
-------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,050) (291)
Proceeds from sale of fixed assets 87 232
Increase in Intangibles (1,083) (1,200)
-------------------- ------------------------
Net cash (used in) investing activities (2,046) (1,259)
-------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (3,756) (9,142)
Net borrowings under revolving credit facility 29,010 19,453
-------------------- ------------------------
Net cash provided by financing activities 25,254 10,311
-------------------- ------------------------
NET (DECREASE) IN CASH (189) (3,579)
CASH, AT BEGINNING OF PERIOD 257 3,998
-------------------- ------------------------
CASH, AT END OF PERIOD $ 68 $ 419
==================== ========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 56 $ 43
==================== ========================
Interest paid $ 2,874 $ 4,455
==================== ========================
Capital lease obligations incurred $ 483 $ -
==================== ========================
See accompanying notes to consolidated financial statements.
III - 1
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(In Thousands Except Share and Per Share Data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the Rules of the Securities and Exchange
Commission ("SEC") and , in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
financial position, results of operations and cash flows. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules. The Company believes the disclosures made
are adequate to make such financial statements not misleading. The results for
the interim periods presented are not necessarily indicative of the results to
be expected for the full year. These financial statements should be read in
conjunction with the Company's Report on Form 10-K for the year ended December
31, 1997. Balance sheet data as of December 31, 1997 have been derived from
audited financial statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
1998 1997
---- ----
Raw materials ............................ $ 3,974 $ 4,209
Work-in-process ........................... 5,256 5,584
Finished goods ............................ 25,844 17,455
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$ 35,074 $ 27,248
========= ==========
NOTE 3 - CONTINGENCIES
In connection with contingent liabilities arising from the Company's
alleged inaccuracies in the reporting of revenues and expenses for certain
reporting periods, the Company has agreed to deposit $5,000 in an escrow account
with the Company's insurance carrier over a three year period to help defray
claims, if any. At September 30, 1998, $1,667 has been deposited and has been
included in other assets.
NOTE 4 - LONG TERM DEBT
On November 13, 1998 the Company and the Company's operating subsidiaries,
DonnKenny Apparel, Inc., MegaKnits, Inc. and Beldoch Industries Corporation,
entered into an Amended and Restated Credit Facility (the "Credit Facility") to,
among other things, to provide for general working capital needs of the Company
including letters of credit. The Credit Facility was amended as follows: the
total amount available under the Revolving Credit Agreement is $75 million
subject to an asset based borrowing formula, with sublimits of $55 million for
direct borrowings, $35 million for letters of credit and certain overadvances.
The interest rate is equal to the prime rate plus 1 1/2% per annum. Outstanding
borrowings under the Revolving Credit Agreement in excess of an allowable
overadvance will bear interest at the prime rate plus 3 1/2%. The Revolving
Credit Agreement also requires the Company to pay certain letter of credit fees
and unused commitment fees. Advances and letters of credit will be limited to
(i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible
inventory, plus (iii) an allowable overadvance. Proceeds from the sales of fixed
assets and income tax refunds are to be applied to reduce the overadvance
facility. The Credit Facility will expire on March 31, 2000. Under the Credit
Facility, the Chase Manhattan Bank serves as agent, the CIT Group/ Commercial
Services Inc. ("CIT") serves as collateral agent, and each of Fleet, N.A. and
the Bank of New York are co-lenders.
NOTE 5 - SHAREHOLDERS RIGHTS PLAN
On April 2, 1998, the Company's board of directors authorized a stockholder
rights plan. Under the terms of the plan, stockholders of record at the close of
business on April 13,1998, received a dividend distribution of one preferred
stock purchase right for each outstanding share of the Company's common stock
held. The rights will become exercisable only in the event, with certain
exceptions, an acquiring party accumulates 15 percent or more of the Company's
voting stock, or if a party announces an offer to acquire 15 percent or more.
The rights will expire on April 1, 2008.
Each right will entitle stockholders to buy one one-hundredth of a share of
a new series of preferred stock at an exercise price of $14.00. In addition,
upon the occurrence of certain events, holders of the rights will be entitled to
purchase either the company's stock or shares in an "acquiring entity" at half
of market-value. Further, at any time after a person or group acquires 15
percent or more (but less than 50 percent) of the Company's outstanding voting
stock, the Board of Directors may, at its option, exchange part or all of the
rights (other than rights held by the acquiring person or group, which will
become void) for shares of the Company's common stock on a one-for-one basis.
The Company will be entitled to redeem the rights at $0.01 per right at any time
until the tenth day following the acquisition of a 15 percent position in its
voting stock.
NOTE 6 - STOCKHOLDERS EQUITY
The company issued 94,600 shares of common stock to certain key employees
during the quarter ended June 30, 1998 in payment of 1997 bonuses, which were
accrued and recorded as compensation expense of $236 in the fiscal year ended
December 31, 1997.
NOTE 7 - LEGAL PROCEEDINGS
In November 1996, ten designated class action lawsuits were commenced
against the Company and certain former officers in the United States District
Court for the Southern District of New York. The complaints in these actions
allege various violations of the federal securities laws and seek an unspecified
amount of monetary damages and other monetary relief. These actions have now
been consolidated pursuant to court order and the plaintiffs filed a
consolidated amended complaint. The Company is not presently in a position to
determine the ultimate outcome of these legal proceedings or their impact on the
financial condition of the company.
In September 1996, the Securities and Exchange Commission ("SEC") obtained
an order directing private investigation of the Company in connection with,
among other things, the alleged overstatement of revenues and expenses for
certain reporting periods.
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 on the
financial condition, results of operations, liquidity or business of the
Company.
IV - 2
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Net sales decreased by $39.2 million, or 20.4% from $191.5 million in the
first nine months of fiscal 1997 to $152.3 million in the first nine months of
fiscal 1998. The decrease in the Company's net sales was primarily due to an
$29.6 million decrease in sales of License Character products as a result of the
Company's exiting these businesses; a $14.1 million decrease in sales of the
Victoria Jones Division due to general softness in the sweater business, and
reductions in sales to three of the division's largest customers; a $2.3 million
decrease of contract work; a $0.8 million decrease in the Company's outlet
stores resulting from the planned reduction in the number of Company stores that
were operating during the period. The decreases were partially offset by a $7.6
million increase in the Casey & Max, Pierre Cardin and Donnkenny branded apparel
divisions of $2.6 million, $4.5 million, and $0.5 million ahead respectively.
Gross profit for the nine months of fiscal 1998 was $35.4 million, or 23.2%
of net sales, compared to $41.7 million, or 21.8% of net sales, during the first
nine months of fiscal 1997. The increase in Gross Profit as a percentage of net
sales was primarily attributable to the Company's reduced sales of Licensed
Character products, which were sold at lower gross margins.
Selling, general and administrative expenses decreased from $36.7 million
in the first nine months of fiscal 1997 to $30.0 million in the first nine
months of fiscal 1998. As a percentage of net sales, these expenses were 19.1%
in the first nine months of fiscal 1997 and 19.7% in the first nine months of
fiscal 1998. The decrease in selling, general and administrative expenses in
dollars (of which $4.9 million was associated with exiting the Licensed
Character businesses) was due primarily to lower sales and lower distribution
expenses as a result of the reduction in sales volume as discussed above and
synergies created in combining certain business functions; reduction in
professional fees in 1998 from the unusually high expenses that were incurred
in 1997 as a result of legal fees associated with the previously reported class
action lawsuits; legal and accounting fees associated with the restatement of
prior year quarterly and annual financial statements; and consulting services
performed in connection with the Company's amended Credit Facility, discussed
below. These reductions were partially offset by costs applicable to the
factoring agreement that became effective on April 28, 1997.
Interest expense decreased from $4.2 million during the first nine months
of fiscal 1997 to $2.7 million during the first nine months of fiscal 1998. The
decrease was primarily the result of lower net average borrowings in 1998 versus
1997 under the Company's Credit Facility.
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1998, AND SEPTEMBER 30, 1997
Net sales decreased by $19.5 million, or 25.3% from $77.1 million in the
third quarter of fiscal 1997 to $57.6 million in the third quarter of fiscal
1998. The decrease in the Company's net sales was primarily due to the $11.2
million decrease in sales of License Character products as a result of the
Company's exiting these businesses, a $8.4 million decrease in the Victoria
Jones Division due to softness in the sweater business and reductions in sales
to three of the division's largest customers; a $1.1 million decrease in
contract work; a $0.8 million reduction in Donnkenny branded apparel of which
$0.6 million was due to the loss of one customer; and a $0.2 million decrease
in the Company's outlet stores resulting from the planned reduction in the
number of Company stores that were operating during the period. The decreases
were partially offset by increases in the Pierre Cardin and Casey & Max
Divisions of $0.9 million and $1.3 million, ahead respectively.
V - 1
Gross profit for the third quarter of fiscal 1998 was $13.3 million or
23.1% of net sales compared to $16.4 million, or 21.2% of net sales during the
third quarter of fiscal 1997. The increase in Gross Profit as a percentage of
net sales is primarily attributable to the Company's reduced sales of License
Character products, which were sold at lower gross margins.
Selling, general and administrative expenses decreased from $12.6 million
in the third quarter of fiscal 1997 to $10.2 million in the third quarter of
fiscal 1998. As a percentage of net sales, these expenses were 16.4% in the
third quarter of fiscal 1997 and 17.7% in the third quarter of fiscal 1998. The
decrease in selling, general and administrative expenses was due primarily to
the Company's exiting from the Licensed Character business, which accounted for
$1.8 million of the decrease; lower sales and distribution expenses as a result
of the reduction in sales volume as discussed above and synergies created in
combining certain business functions; the reduction in professional fees in 1998
from the unusually high expenses incurred in 1997 as a result of legal fees
associated with the previously reported class action lawsuits; and legal and
accounting fees associated with the restatement of prior year quarterly and
annual financial statements. These reductions were partially offset by increased
financing costs related to the Company's factoring agreement of $0.3 million,
which were not incurred in the third quarter of fiscal 1997.
Interest expense decreased from $1.6 million during the third quarter of
fiscal 1997 to $1.2 million during the third quarter of fiscal 1998. The
decrease was primarily the result of lower average borrowings in 1998 versus
1997 under the Company's credit facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily accounts receivable, prepaid expenses, and the interest
and principal payments related to certain indebtedness. The Company's borrowing
requirements for working capital fluctuate throughout the year.
Capital expenditures were $1.1 million, primarily for upgrading computer
systems during the first nine months of fiscal 1998 compared to $0.3 million in
the first nine months of fiscal 1997. The Company may spend up to $3.5 million
annually on capital expenditures in accordance with the Revolving Credit
Agreement, as described below. The Company has committed to spend an additional
$1.9 million in 1998 (totaling $3.0 million for the fiscal year) for upgrading
computer systems to increase efficiencies as part of the Company's system
upgrade plan.
On November 13, 1998, the Company and the Company's operating subsidiaries
Donnkenny Apparel, Inc., Megaknits, Inc. and Beldoch Industries Corporation, as
borrowers, entered into an amended and Restated Credit Facility (the "Credit
Facility"). The Credit Facility consists of a Term Loan, a Revolving Credit
Agreement, and a Factoring Agreement. The purpose of the Credit Facility is to
provide for general working capital needs of the Company, including the issuance
of letters of credit. The Credit Facility will expire on March 31, 2000. Under
the Credit Facility, The Chase Manhattan Bank serves as agent, The CIT
Group/Commercial Services Inc. ("CIT") serves as collateral agent, and each of
Fleet Bank, N.A. and the Bank of New York is a co-lender.
V - 2
On November 13, 1998, the Credit Facility was amended as follows: the total
amount available under the Revolving Credit Agreement is $75 million subject to
an asset based borrowing formula, with sublimits of $55 million for direct
borrowings, $35 million for letters of credit and certain overadvances. The
interest rate is equal to the prime rate plus 1 1/2% per annum. Outstanding
borrowings under the Revolving Credit Agreement in excess of an allowable
overadvance will bear interest at the prime rate plus 3 1/2%. The Revolving
Credit Agreement also requires the Company to pay certain letter of credit fees
and unused commitment fees. Advances and letters of credit will be limited to
(i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible
inventory, plus (iii) an allowable overadvance. Proceeds from the sales of fixed
assets and income tax refunds are to be applied to reduce the overadvance
facility.
As of September 30, 1998, the balance of the Term Loan was $1.1 million
which balance is due on December 31, 1998. The Term Loan interest rate is equal
to the prime rate plus 1 1/2% per annum. As of September 30, 1998, borrowings
under the Revolving Credit Agreement amounted to $51.2 million.
In April 1997, the Company entered into a Factoring Agreement with CIT. The
Factoring Agreement provides for a factoring commission equal to 0.45% of the
gross amount of assigned sales, plus certain customary surcharges. An additional
fee of 0.20% was paid upon the conversion to a factored receivable agreement.
Collateral for the Credit Facility includes a first priority lien on all
accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock of its operating subsidiaries, Donnkenny Apparel, Inc., Beldoch Industries
Corporation, and Megaknits, Inc.
During the first nine months of fiscal 1998, the Company's operating
activities used cash principally as a result of increases in accounts
receivable, inventories and other assets. During the first nine months of
fiscal 1997, the Company's operating activities used cash principally as a
result of increases in accounts receivable and decreases in accounts payables
partially offset by a decrease in inventories. Cash used in investing
activities in the first nine months of fiscal 1998 amounted to $2.0 million,
primarily relating to the upgrades in computer systems as discussed above and a
contingent earnout payment of $1.1 million related to the acquisition of
Beldoch. In the first nine months of fiscal 1997 cash used in investing
activities amounted to $1.3 million for the purchase of fixed assets and a
contingent earnout payment of $1.2 million related to the acquisition of
Beldoch. Cash provided by financing activities in the first nine months of
fiscal 1998 amounted to $25.3 million, which represented net borrowings under
the Revolving Credit Agreement of $29.0 million and repayments on the Term Loan
of $3.8 million. Cash provided by financing activities in the first nine months
of fiscal 1997 amounted to $10.3 million, which primarily consisted of
repayments of $9.1 million on the Term Loan and net borrowings under the
Revolving Credit Agreement of $19.5 million.
The company believes that cash flows from operations and amounts available
under the Revolving Credit Agreement will be sufficient for its needs in the
foreseeable future.
V - 3
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
revelant selling season.
YEAR 2000 ISSUE
The Company recognizes the need for, and has begun implementation of, a
comprehensive program intended to upgrade the operating systems, hardware and
software, which should eliminate any issues involving Year 2000 compliance. The
Company's current software systems, without modification, will be adversely
affected by the inability of the systems to appropriately interpret date
information after 1999. As part of the process of improving the Company's
information systems to provide enhanced support to all operating areas, the
Company will upgrade to new financial and operating systems. Such upgrade will
provide for or eliminate any issues involving Year 2000 compliance because all
software to be implemented is designed to be Year 2000 compliant. The Company
anticipates that its cost for such upgrade will be approximately $1.9 million
for fiscal 1998 of which $0.6 million has been incurred to date and $1.3
million will be spent in the fourth fiscal quarter. The Company anticipates
that it will complete its systems conversion in time to accommodate Year 2000
issues. If the Company fails to complete such conversion in a timely manner,
such failure will have a material adverse effect on the business, financial
condition and results of operations of the Company. The Company does not
currently have any information concerning Year 2000 compliance status of its
suppliers and customers. In the event that the Company's significant suppliers
or customers do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be adversely affected. The Company is
currently evaluating its non-information technology systems (embedded
technology) and is also developing its contingency plans for its information
technology systems and believes that it will complete both in time to
accommodate Year 2000 issues.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income - Current accounting standards require that certain items
such as (1) foreign currency translation adjustments, (2) unrealized gains and
losses on certain investments in debt and equity securities, (3) minimum pension
liability adjustment, and (4) unearned compensation expense related to stock
issuances to employees be presented as separate components of stockholders'
equity. The adoption of SFAS No. 130 in the first quarter of 1998 had no impact
on the Company's financial statements as the Company had no comprehensive income
items.
Segment Information - In June 1997, the FASB issued SFAS No. 131, Disclosure
about Segments of an Enterprise and Related Information, which requires that
public companies report certain information about operating segments in their
annual financial statements and in condensed financial statements of interim
periods issued to shareholders. It also requires that public companies report
certain information about their products and services, the geographic areas in
which they operate, and their major customers. Management of the Company is
currently reviewing the impact of these requirements on their current level of
disclosure.
Employers' Disclosures about Pensions and other Postretirement Benefits - In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which is effective for fiscal years
beginning after December 15, 1998. SFAS No. 132 revises employers' disclosures
about pensions and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This statement standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. The Company is currently reviewing
the impact of this statement on its current level of disclosure.
V - 4
Accounting For Derivative Instruments And Hedging Activities - In June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which establishes standards for the accounting and
reporting for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has determined that this statement will not
have a significant impact on its financial statements or disclosures, as it
does not engage in derivative or hedging transactions.
V - 5
PART II. OTHER INFORMATION
Item 1 - 4. Not Applicable.
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Item 5. Other Information
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In connection with contingent liabilities arising from the
Company's alleged inaccuracies in the reporting of revenues
and expenses for certain reporting periods, the Company has
agreed to deposit $5,000 million in an escrow account with the
Company's insurance carrier over a three year period to help
defray claims, if any. At September 30, 1998, $1,667 million
has been deposited and has been included in other assets.
VI - 1
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
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The following documents are filed as part of this report:
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Certificate of Designations of Series A Junior
Preferred Stock of Donnkenny, Inc.
10.1 Rights Agreement, dated as of April 2, 1998,
between the Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent
(incorporated by reference to the Company's
Report on Form 8-K, as filed with the
Commission on April 14, 1998).
10.2 Beverly Eichel Employment Agreement
10.3 Amended and Restated Credit Facility Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The Company filed, during the fiscal quarter ended June 30,
1998, the following report on Form 8-K.
A report on Form 8-K on April 14, 1998, responding to item 5
and stating that, on April 2, 1998, the Company declared a
dividend of one Preferred Stock Purchase Right for each
outstanding share of its Common Stock, payable as of April 13,
1998, to shareholders of record on that date.
VI-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Donnkenny, Inc.
---------------------------
Registrant
Date: November 16, 1998 /s/ Harvey A. Appelle
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Harvey Appelle
Chairman of the Board,
Chief Executive Officer
Date: November 16, 1998 /s/ Beverly Eichel
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Beverly Eichel
Executive Vice President
and Chief Financial Officer,
(Principal Financial Officer)
VI - 3