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 March 31, 2001
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
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Donnkenny, Inc.
-----------------
(Exact name of registrant as specified in its charter)
Delaware 51-0228891
--------- -----------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Broadway, New York, NY 10018
---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 790-3900
---------------
NOT APPLICABLE
---------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes [X] No [___]and (2) has
been the subject to such filing requirements for the past 90 days.
Yes [X] No [__].
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Common Stock $0.01 par value 4,367,417
- ----------------------------------- -------------
(Class) (Outstanding at May 8, 2001)
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 March 31, 2001 (unaudited) and December 31, 2000.............I-1
Statements of operations for the three months ended
March 31, 2001 and 2000 (unaudited)...............................................II-1
Statements of cash flows for the three months ended
March 31, 2001 and 2000 (unaudited)...............................................III-1
Notes to Consolidated Financial Statements (unaudited) ..........................IV-1-4
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................V-1-3
PART II - OTHER INFORMATION
Legal Proceedings and Other Information...........................................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 March 31, 2001, and the related consolidated statements
of operations and cash flows for the three-month periods ended March 31, 2001
and 2000. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Donnkenny, Inc. and subsidiaries as of December 31, 2000, 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 21,
2001 (March 28, 2001 as to note 6), we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 2000 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
May 8, 2001
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
March 31, December 31,
2001 2000
---------- ------------
(Unaudited)
CURRENT ASSETS
Cash ........................................... $ 82 $ 65
Accounts receivable - net of allowances of
$103 and $109, in 2001 and 2000 respectively . 28,913 30,968
Recoverable income taxes ....................... 143 155
Inventories .................................... 18,505 19,730
Deferred tax assets ............................ 1,482 1,482
Prepaid expenses and other current assets ...... 1,324 1,177
Assets held for sale ........................... 1,185 1,206
-------- --------
Total current assets ........................... 51,634 54,783
PROPERTY, PLANT AND EQUIPMENT, NET .................. 5,426 5,076
OTHER ASSETS ........................................ 351 430
INTANGIBLE ASSETS ................................... 30,680 31,054
-------- --------
TOTAL ............................................... $ 88,091 $ 91,343
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............ $ 1,479 $ 1,523
Accounts payable ............................. 10,949 11,751
Accrued expenses and other current liabilities 3,141 2,310
-------- --------
Total current liabilities ................. 15,569 15,584
-------- --------
LONG-TERM DEBT ...................................... 37,031 40,624
DEFERRED TAX LIABILITIES ............................ 1,482 1,482
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 2001 and 2000 .............................. 44 44
Additional paid-in capital ...................... 50,449 50,449
Deficit ......................................... (16,484) (16,840)
-------- --------
Total Stockholders' Equity ....................... 34,009 33,653
-------- --------
TOTAL ............................................... $ 88,091 $ 91,343
======== ========
See accompanying notes to consolidated financial statements.
I - 1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended
--------------------------------
March 31, 2001 March 31, 2000
-------------- ---------------
NET SALES ........................................ $ 37,308 $ 42,395
COST OF SALES .................................... 28,454 35,812
----------- -----------
Gross profit ................................. 8,854 6,583
OPERATING EXPENSES:
Selling, general and administrative expenses . 6,773 8,171
Amortization of goodwill and other related
acquisition costs ........................... 373 348
Restructuring charge .......................... 500
----------- -----------
Operating income (loss) .................. 1,708 (2,436)
INTEREST EXPENSE ................................. 1,306 1,041
----------- -----------
Income (loss) before income taxes ....... 402 (3,477)
INCOME TAXES ..................................... 45 25
----------- -----------
NET INCOME (LOSS) .......................... $ 357 $ (3,502)
=========== ===========
Basic and diluted (loss) per common share ....... $ 0.08 $ (0.98)
=========== ===========
Shares used in the calculation of basic and diluted
earnings per common share ..................... 4,367,417 3,557,400
=========== ===========
See accompanying notes to consolidated financial statements.
II - 1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands, except per share data)
(unaudited)
Three Months Ended
-----------------------------
March 31, March 31,
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $ 357 $ (3,502)
Adjustments to reconcile net cash
(used in) provided by operating activities:
Depreciation and amortization of fixed assets .. 260 201
Write down of fixed assets ..................... -- 200
Disposal of fixed assets ....................... 1 --
Amortization of intangibles and other assets ... 373 348
Provision for losses on accounts receivable ..... 5 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable . 2,049 (1,519)
Decrease in recoverable income taxes ....... 13 115
Decrease in inventories .................... 1,225 8,914
Increase in prepaid expenses and
other current assets ..................... (147) (225)
Decrease in other non-current assets ....... 79 16
Decrease in accounts payable ............... (802) (2,034)
Increase (decrease) in accrued expenses and
other current liabilities ................ 831 (401)
-------- --------
Net cash provided by operating activities 4,244 2,113
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ...... (590) (149)
-------- --------
Net cash used in investing activities .... (590) (149)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................ (402) (291)
Net borrowings under revolving credit line . 36,609 40,010
Net (repayments) under revolving credit line (39,844) (41,801)
-------- --------
Net cash used in financing activities ..... (3,637) (2,082)
-------- --------
NET INCREASE/(DECREASE) CASH ....................... 17 (118)
CASH, AT BEGINNING OF PERIOD ....................... 65 180
-------- --------
CASH, AT END OF PERIOD ............................. $ 82 $ 62
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid .................................. $ 25 $ 11
======== ========
Interest paid ...................................... $ 1,173 $ 970
======== ========
See accompanying notes to consolidated financial statements.
III - 1
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2000. Balance sheet data as of December 31, 2000 have been derived from
audited financial statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
In Thousands
------------
March 31, December 31,
2001 2000
---- ----
Raw materials ..................... $ 1,779 $ 1,719
Work-in-process ................... 596 936
Finished goods .................... 16,130 17,075
------- ---------
$18,505 $ 19,730
======= =========
NOTE 3 - DEBT
On June 29, 1999, the Company and its operating subsidiaries signed a
three-year credit agreement (the "Credit Agreement") with CIT Group/Commercial
Services. The Credit Agreement provides the Company with a $75 million facility
comprised of a $72 million revolver with sublimits up to $52 million for direct
borrowings, $35 million for letters of credit, certain overadvances and a $3
million term loan.
Borrowings under the Credit Agreement as amended (see below) bear
interest at the prime rate plus two percent (10% at March 31, 2001). The Credit
Agreement provides for advances of (i) up to 90% of eligible accounts receivable
plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the undrawn
amount of all outstanding letters of credit plus (iv) allowable overadvances.
The term loan requires quarterly payments of $0.250 million plus all accrued and
unpaid interest beginning September 30, 1999 through June 30, 2002. The Credit
Agreement as amended expires on June 30, 2004.
IV-1
Collateral for the Credit Agreement includes a first priority lien on
all accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, 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 minimum
earnings before depreciation, amortization, interest and taxes (EBITDA) and a
minimum interest coverage ratio.
During Fiscal 1999, the Company entered into the First and Second
Amendment and Waiver Agreements that waived existing defaults at September 30,
1999 and reset the amounts of overadvances for December 1999 and January 2000.
On February 29, 2000, the Company entered into a Third Amendment and Waiver
Agreement. The Third Amendment and Waiver waived any existing defaults as of
December 31, 1999 and for the End of Month Period for January 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1% above the prime rate effective
February 29, 2000 and the Overadvance Amounts for 2000 were amended and
restated. Certain covenants were also amended for the respective quarter ends in
2000. A fee of $75,000 was paid on February 29, 2000.
On April 13, 2000, the Company entered into a Fourth Amendment and
Waiver Agreement to support the Company's 2000 business plan. The Fourth
Amendment and Waiver waived any existing defaults as of the End of Month Period
for March 2000 with respect to the Company's noncompliance with covenants
related to Minimum Interest Coverage, EBITDA and Tangible Net Worth. Pursuant to
this amendment, the interest rate on borrowings was increased to 1.5% above the
prime rate effective April 13, 2000 and the Overadvance Amounts for 2000 were
amended. Certain covenants were also amended for the respective quarter ends in
2000. A fee of $75,000 was paid for the Fourth Amendment and Waiver.
On July 6, 2000, the Company entered into a Fifth Amendment to finance
the acquisition of the Ann Travis business (see note 7) by the issuance of an
additional $1.3 million term loan. The new term loan bears interest at the prime
rate plus 2.0 % and is repayable over thirty six months commencing January 1,
2001. A fee of $100,000 was paid for the Fifth Amendment.
On November 13, 2000, the Company entered into a Sixth Amendment and
Waiver Agreement to revise the loan covenants as of September 30, 2000 and for
the remainder of the year and decrease the factoring commission from 0.45% to
0.35% effective September 1, 2000 (see below). A fee of $39,990 was paid in
connection with the Sixth Amendment.
On March 28, 2001, the Company entered into a Seventh 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 Seventh Amendment and Waiver.
IV-2
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross sales, plus
certain customary charges. On November 27, 2000, the factoring agreement was
amended to lower the commission rate effective September 1, 2000 to .35% of
gross sales and to extend the agreement through December 31, 2001.
NOTE 4 - RESTRUCTURING CHARGE
The restructuring charge of $0.5 million in the first quarter of 2000
is related to the Company's closure of all of its domestic manufacturing
facilities.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
a. Commencing November 1996, nine class action complaints were
filed against the Company in the United States District Court
for the Southern District of New York. Among other things, the
complaints alleged violation of the federal securities law. By
order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and
entities who purchased publicly traded securities or sold put
options of the Company between February 14, 1995 and November
1996.
On October 7, 1999, the Company entered into a stipulation of
settlement (the "Settlement") with the class action
plaintiffs. In consideration for the discontinuance of the
lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million was the Company's share (paid
by March 31, 2000) and the balance was payable by the
Company's insurers; issue 750, 000 shares of the Company's
common stock (which were issued on December 29, 2000), and to
pursue litigation against one of the Company's insurers to
recover under its excess insurers' policies. An order
approving the settlement was signed on July 12, 2000. The cost
of the litigation is not expected to be material.
b. On April 27, 1998, an action was commenced against the Company
in the United States District Court for the Western District
of Virginia by Wanda King, a former employee of the Company.
In her complaint, the Plaintiff seeks damages in excess of
$8.0 million, claiming that she was constructively discharged
by reason of the fact that she resigned from her position
rather than follow alleged improper and illegal instructions
from her supervisors and superiors. The Company has interposed
an answer to the Complaint denying the material allegations.
Pretrial discovery is now taking place and a trial is
scheduled for July 10, 2001.
c. 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.
NOTE 6 - ANN TRAVIS ACQUISITION
On July 1, 2000 the Company acquired certain assets of Ann
Travis Inc. ("Ann Travis") for $1.5 million, including costs incurred
in the acquisition of $.3 million. Ann Travis designs, imports, and
markets women's sportswear. Assets acquired included $.5
IV-3
million of certain merchandise inventory, the Ann Travis and Decade
Designs trademarks and the license rights for sales of women's apparel
under the Delta Burke trademark. The purchase was funded by CIT under a
new $1.3 million term loan which requires payments in equal
installments over three years commencing January 1, 2001 (see note 3).
Goodwill of $1.0 million was recorded in connection with this
acquisition and will be amortized over ten years. The acquisition was
accounted for as a purchase.
IV-4
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of quarters ended March 31, 2001 and 2000
- ----------------------------------------------------
Net sales decreased by $5.1 million, or 12.0% from $42.4 million in the
first quarter of 2000 to $37.3 million in the first quarter 2001. The decline in
the Company's net sales was primarily due to decreases in the Victoria Jones
line of $4.6 million, the Pierre Cardin Knits line of $1.4 and the Casey & Max
line of $6.9 million. The decreases were partially offset by increases in the
Donnkenny Apparel line of $1.2 million, Pierre Cardin Options line of $2.3
million and the Ann Travis line of $4.3 million (acquired in July 2000).
Gross profit for the first quarter of 2001 was $8.9 million, or 23.7%
of net sales, compared to $6.6 million, or 15.5% of net sales, during the first
quarter of 2000. The increase in gross profit in dollars and as a percentage of
net sales was primarily attributable to the Company's new lines Pierre Cardin
Options and Ann Travis, decreases in the sales of non-current inventory, the
favorable impact of the plant closures in Fiscal 2000 and improved sourcing.
Selling, general and administrative expenses decreased $1.4 million
from $8.5 million in the first quarter of 2000 to $7.1 million in the first
quarter of 2001. The decrease in selling, general and administrative expenses
was primarily due to reductions in headcount.
Net interest expense increased from $1.0 million during the first
quarter of 2000 to $1.3 million during the first quarter of 2001. The increase
is attributable to higher letter of credit borrowings and lower direct
borrowings under the loan agreement and higher interest rates.
Liquidity and capital resources
- -------------------------------
The Company's liquidity requirements arise from the funding of working
capital needs, primarily accounts receivable and the interest and principal
payments related to certain indebtedness. The Company's borrowing requirements
for working capital fluctuate throughout the year.
On June 29, 1999, the Company and its operating subsidiaries signed
a three year credit agreement (the "Credit Agreement") with CIT Group/
Commercial Services to replace the existing $75 million credit facility. The
Credit Agreement provides the Company with a $75 million facility comprised of a
$72 million revolver with sublimits up to $52 million for direct borrowings, $35
million for letters of credit, certain overadvances and a $3 million term loan.
Borrowings under the Credit Agreement as amended (see below) bear
interest at the prime rate plus two percent (10% at March 31, 2001). The Credit
Agreement provides for advances of (i) up to 90% of eligible accounts receivable
plus (ii) up to 60% of eligible inventory plus (iii) up to 60% of the undrawn
amount of all outstanding letters of credit plus (iv) allowable overadvances.
The term loan requires quarterly payments of $0.250 million plus all accrued and
unpaid interest beginning September 30, 1999 through June 30, 2002. The Credit
Agreement as amended expires on June 30, 2004.
V-1
Collateral for the Credit Agreement includes a first priority lien on
all accounts receivable, machinery, equipment, trademarks, intangibles and
inventory, a first mortgage on all real property and a pledge of the Company's
stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Inc.,
and Beldoch Industries Corporation.
The Credit Agreement contains numerous financial and operational
covenants, including limitations on additional indebtedness, liens, dividends,
stock repurchases and capital expenditures. In addition, the Company is required
to maintain specified levels of tangible net worth and comply with minimum
earnings before depreciation, amoritization, interest and taxes (EBITDA) and a
minimum interest coverage ratio.
During Fiscal 1999, the Company entered into the First and Second
Amendment and Waiver Agreements that waived existing defaults at September 30,
1999 and reset the amount of Overadvances for December 1999 and January 2000. On
February 29, 2000, the Company entered into a Third Amendment and Waiver
Agreement. The Third Amendment and Waiver waived any existing defaults as of
December 31, 1999 and for the End of Month Period for January 2000 with respect
to the Company's noncompliance with covenants related to Minimum Interest
Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment, the
interest rate on borrowings was increased to 1% above the prime rate effective
February 29, 2000 and the Overadvance Amounts for 2000 were amended and
restated. Certain covenants were also amended for the respective quarter ends in
2000. A fee of $75,000 was paid on February 29, 2000.
On April 13, 2000, the Company entered into a Fourth Amendment and Waiver
Agreement to support the Company's 2000 business plan. The Fourth Amendment and
Waiver waived any existing defaults as of the End of Month Period for March 2000
with respect to the Company's noncompliance with covenants related to Minimum
Interest Coverage, EBITDA and Tangible Net Worth. Pursuant to this amendment,
the interest rate on borrowings was increased to 1.5% above the prime rate
effective April 13, 2000 and the Overadvance Amounts for 2000 were amended.
Certain covenants were also amended for the respective quarter ends in 2000. A
fee of $75,000 was paid for the Fourth Amendment and Waiver.
On July 6, 2000, the Company entered into a Fifth Amendment and Waiver
Agreement to finance the acquisition of the Ann Travis business (see note 7) by
the issuance of an additional $1.3 million term loan. The new term loan bears
interest at the prime rate plus 2.0% and is repayable over thirty six months
commencing January 1, 2001. A fee of $100,000 was paid for the Fifth Amendment.
On November 13, 2000, the Company entered into a Sixth Amendment and
Waiver Agreement to revise the loan covenants as of September 30, 2000 and for
the remainder of the year and decrease the factoring commission from 0.45% to
0.35% effective September 1, 2000 (see below). A fee of $39,990 was paid in
connection with the Sixth Amendment.
On March 28, 2001, the Company entered into a Seventh Amendment and
Waiver 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 Seventh Amendment and Waiver.
V-2
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross sales, plus
certain customary charges. On November 27, 2000, the factoring agreement was
amended to lower the commission rate effective September 1, 2000 to .35% of
gross sales and to extend the agreement through December 31, 2001.
As of March 31, 2001, borrowings under the Credit Agreement amounted to
$36.0 million compared to $38.2 million as of March 31, 2000. As of March 31,
2001, the term loan amounted to $2.4 million.
During the first quarter of 2001, the Company's operating activities
provided cash of $4.2 million principally as a result of decreases in inventory
and accounts receivable. During the first quarter of 2000, the Company's
operating activities provided cash of $2.1 million principally as a result of
decreases in inventory partially offset by increases in accounts receivable and
decreases in accounts payable. Cash used in investing activities in the first
quarter of 2001 amounted to $0.6 million primarily relating to the upgrades in
the Company's computer systems. Cash used in investing activities in the first
quarter of 2000 amounted to $0.1 million primarily relating to the upgrades in
the Company's computer systems. Cash used in financing activities in the first
quarter of 2001 amounted to $3.6 million and $2.1 million in the first quarter
of 2000 primarily relating to borrowings under the loan agreement.
The Company believes that cash flows from operations and amounts
available under the Credit Agreement will be sufficient for its needs in the
foreseeable future.
Seasonality of business and fashion risk
- ----------------------------------------
The Company's principal products are organized into seasonal lines for
resale at the retail level during the Spring, Summer, Transition, Fall and
Holiday Seasons. Typically, the Company's products are designed as much as one
year in advance and manufactured approximately one season in advance of the
related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability to successfully anticipate the needs
of retail customers and the tastes of the ultimate consumer up to a year prior
to the relevant selling season.
Restructuring charge
- --------------------
The restructuring charge of $0.5 million in the first quarter of 2000
related to the Company's closure of all of its domestic manufacturing
facilities.
Recent accounting pronouncements
- --------------------------------
In June 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivatives Instruments and Certain Hedging Activities." This statement
addresses a limited number of issues causing implementation difficulties for
entities applying SFAS No. 133. SFAS No. 133 requires that an entity recognize
all derivative instruments as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company was required to adopt
SFAS No. 133 effective January 1, 2001. Adoption of SFAS No. 133 did not have
an impact on the Company's reported results of operations, equity or
financial position, as it does not engage in derivative or hedging transactions.
V-3
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
a. Commencing November 1996, nine class action complaints were
filed against the Company in the United States District Court
for the Southern District of New York. Among other things, the
complaints alleged violation of the federal securities law. By
order dated August 11, 1998, the court certified the
litigation as class action on behalf of all persons and
entities who purchased publicly traded securities or sold put
options of the Company between February 14, 1995 and November
1996.
On October 7, 1999, the Company entered into a stipulation of
settlement (the "Settlement") with the class action
plaintiffs. In consideration for the discontinuance of the
lawsuit with prejudice, the Company agreed to pay $10.0
million, of which $5.0 million was the Company's share (paid
by March 31, 2000) and the balance was payable by the
Company's insurers; issue 750, 000 shares of the Company's
common stock (which were issued on December 29, 2000), and to
pursue litigation against one of the Company's insurers to
recover under its excess insurers' policies. An order
approving the settlement was signed on July 12, 2000. The cost
of the litigation is not expected to be material.
b. On April 27, 1998, an action was commenced against the Company
in the United States District Court for the Western District
of Virginia by Wanda King, a former employee of the Company.
In her complaint, the Plaintiff seeks damages in excess of
$8.0 million, claiming that she was constructively discharged
by reason of the fact that she resigned from her position
rather than follow alleged improper and illegal instructions
from her supervisors and superiors. The Company has interposed
an answer to the Complaint denying the material allegations.
Pretrial discovery is now taking place and a trial is
scheduled for July 10, 2001.
c. 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
--------------
VI-1
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on May 10,
2001. The first item of business before the Meeting was to elect the
Board of Directors to serve until the next Annual Meeting. The vote for
the election of Directors was as follows:
Name of Nominee Votes For Votes Withheld
--------------- --------- --------------
Daniel H. Levy 4,151,385 43,229
Lynn Siemers-Cross 4,151,385 43,229
Sheridan C. Biggs 4,151,385 43,229
Harvey Horowitz 4,151,385 43,229
Harry A. Katz 4,151,385 43,229
Richard C. Rusthoven 4,151,385 43,229
ITEM 5. Not Applicable
--------------
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None
--------
(b) Reports on Form 8-K
-------------------
The Company filed no reports on Form 8-K during the first
quarter ended March 31, 2001.
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: May ___, 2001 _____________________
Daniel H. Levy
Chairman of the Board,
Chief Executive Officer
Date: May ___, 2001 _______________________
Beverly Eichel
Executive Vice President
and Chief Financial Officer,
(Principal Financial Officer)
VI-3