DONNKENNY LAUNCHES PROBE OF ACCOUNTING; STOCK TUMBLES

NEW YORK — Donnkenny Inc. stock plunged 3 5/8 to 8 7/8 Thursday as investors dumped shares in the wake of a possible accounting scandal.
Nearly nine million shares traded over the counter compared with an average daily volume of about 290,000 shares. The stock traded as low as 5 3/4 during the session. Prior to Thursday, the company’s 52-week low had been 10 1/8, with a high of 21 3/8.
The company announced that its auditing committee along with independent counsel is investigating Donnkenny’s financial statements. After reviewing preliminary results of the investigation, the company reassigned its controller and assistant controller to nonfinancial positions. The company also brought in a new chief financial officer, Stuart S. Levy, a former chief financial officer of Polo Ralph Lauren.
Donnkenny’s auditor, KPMG Peat Marwick, has resigned and been replaced by Deloitte & Touche.
Donnkenny officials could not be reached for comment. However, after the market closed, an analyst with Stifel Nicolaus told Dow Jones that he had spoken to Harvey Horowitz, a member of Donnkenny’s audit committee, and had been assured that restatements of Donnkenny figures would still fall within analysts’ estimates of $1.30 to $1.40 a share for 1996. Third-quarter earnings are scheduled to be released next week.
In a filing with the Securities and Exchange Commission last month, the company said that previously issued financial statements “should no longer be relied upon,” adding that it plans to file amended reports.
For the six months ended June 3, Donnkenny’s most recent figures, the company reported earnings up 27.9 percent to $5.5 million, or 39 cents a share. Sales were reported to be up 35.2 percent to $107.2 million.
While the scale of the problem at Donnkenny could not be learned at press time, misstated financial statements are not unfamiliar ground for publicly owned firms. The apparel industry’s most notorious case in recent years was the accounting scandal at The Leslie Fay Cos., which made headlines in 1993 when it announced financial irregularities.
This resulted in Leslie Fay filing Chapter 11, putting itself up for sale to no avail and delisting its stock after it plunged and become virtually valueless. Last week, Paul Polishan, Leslie Fay’s former chief financial officer, was indicted on charges he directed the financial fraud filing statements that misstated earnings over a three-year period.
Donnkenny manufactures mass and moderate women’s and men’s sportswear as well as children’s wear, with various cartoon characters under licenses. The company has rapidly built a business based on diversification — its distribution channels go from mass merchants to department stores to specialty chains.
Donnkenny Classics, which markets primarily stretch gabardine pull-on pants to department and specialty stores, represents about 40 percent of the overall business. The company’s sales hit $210.3 million in 1995, a 32.4 percent increase over 1994.
The firm’s licensed carton apparel division, which accounts for the remaining 60 percent, has been Donnkenny’s strongest growth vehicle. That stable includes Mickey & Co., whose licensed sportswear line is sold in department and specialty stores, and Lewis Frimel/Flirts, which markets women’s and girls sleepwear and underwear featuring such licensed cartoon characters as Bugs Bunny, the Peanuts Group and Warner Bros. characters. The Lewis Frimel/Flirts line is sold to mass chains like Wal-Mart, Kmart and Target.
Capitalizing on the overall popularity of cartoon characters, Donnkenny has been rapidly adding lines to complement the category. Two years ago, Donnkenny signed a license to market women’s, men’s and children’s apparel under the Felix the Cat label. In addition, Donnkenny launched maternity and large-size lines under its Mickey & Co. label two years ago.

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