<PAGE>
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, 2000
--------------
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 3,557,385
---------------------------- ---------------------------------
(Class) (Outstanding at May 10, 2000)
<PAGE>
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, 2000 (unaudited) and December 31, 1999..I-1
Statements of operations for the three months ended
March 31, 2000 and 1999 (unaudited)....................................II-1
Statements of cash flows for the three months ended
March 31, 2000 and 1999 (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-1-4
PART II - OTHER INFORMATION
Legal Proceedings and Other Information................................VI-1
Exhibits and Reports on Form 8-K.......................................VI-3
Signatures.............................................................VI-4
<PAGE>
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, 2000, and the related consolidated statements
of operations and cash flows for the three-month periods ended March 31, 2000
and 1999. 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, 1999, 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 22,
2000 (March 31, 2000 as to note 13 and April 13, 2000 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, 1999 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 10, 2000
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash ............................................ $ 62 $ 180
Accounts receivable - net of allowances of
$406 and $382, respectively .................... 31,541 30,022
Recoverable income taxes ........................ 189 304
Inventories ..................................... 20,410 29,323
Deferred tax assets ............................. 2,178 2,865
Prepaid expenses and other current assets ....... 860 636
Assets held for sale ............................ 456 456
--------- ---------
Total current assets ............................ 55,696 63,786
PROPERTY, PLANT AND EQUIPMENT, NET ................... 5,729 5,981
OTHER ASSETS ......................................... 531 546
INTANGIBLE ASSETS .................................... 31,176 31,524
--------- ---------
TOTAL ................................................ $ 93,132 $ 101,837
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............. $ 1,171 $ 1,168
Accounts payable .............................. 8,318 10,351
Accrued expenses and other current liabilities 3,565 3,965
--------- ---------
Total current liabilities .................. 13,054 15,484
--------- ---------
LONG-TERM DEBT ....................................... 39,521 41,607
DEFERRED TAX LIABILITIES ............................. 2,178 2,865
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 3,557 shares ... 36 36
in 2000 and 1999, respectively
Additional paid-in capital ....................... 47,877 47,877
Issuable shares for litigation settlement ........ 1,875 1,875
Deficit .......................................... (11,409) (7,907)
--------- ---------
Total Stockholders' Equity ........................ 38,379 41,881
--------- ---------
TOTAL ................................................ $ 93,132 $ 101,837
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
NET SALES ......................................... $ 42,395 $ 51,051
COST OF SALES ..................................... 35,812 39,002
----------- -----------
Gross profit ................................. 6,583 12,049
OPERATING EXPENSES:
Selling, general and administrative expenses .. 8,171 9,010
Amortization of goodwill and other related
acquisition costs ............................ 348 348
Restructuring charge .......................... 500 --
----------- -----------
Operating income (loss) ................... (2,436) 2,691
NTEREST EXPENSE ................................... 1,041 1,064
----------- -----------
Income (loss) before income taxes ........ (3,477) 1,627
INCOME TAXES ...................................... 25 100
----------- -----------
NET INCOME (LOSS) ........................... $ (3,502) $ 1,527
=========== ===========
Basic earnings (loss) per common share ........... $ (0.98) $ 0.43
=========== ===========
Shares used in the calculation of basic earnings
per common share .............................. 3,557,400 3,542,500
=========== ===========
Diluted earnings (loss) per common share .......... $ (0.98) $ 0.42
=========== ===========
Shares used in the calculation of diluted earnings
per common share ............................... 3,557,400 3,642,500
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
II-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (3,502) $ 1,527
Adjustments to reconcile net cash
(used in) provided by operating activities:
Depreciation and amortization of fixed assets .................... 201 205
Write down of fixed assets ....................................... 200 --
Amortization of intangibles and other assets ..................... 348 348
Provision for losses on accounts receivable ...................... -- 18
Changes in assets and liabilities:
Increase in accounts receivable .............................. (1,519) (12,164)
Decrease in recoverable income taxes ......................... 115 302
Decrease in inventories ...................................... 8,914 987
(Increase) decrease in prepaid expenses and
other current assets ....................................... (225) 43
Decrease (increase) in other non-current assets .............. 16 (366)
(Decrease) increase in accounts payable ...................... (2,034) 1,014
Decrease in accrued expenses and
other current liabilities .................................. (401) (212)
-------- --------
Net cash provided by (used in) operating activities ........ 2,113 (8,298)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ......................................... (149) (74)
Proceeds from sale of fixed assets ............................... -- 1,311
-------- --------
Net cash (used in) provided by investing activities ........ (149) 1,237
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt .................................. (291) (38)
Net borrowings (repayments) under revolving credit line (1,791) 6,882
-------- --------
Net cash (used in) provided by financing activities ......... (2,082) 6,844
-------- --------
NET DECREASE CASH .................................................... (118) (217)
CASH, AT BEGINNING OF PERIOD ......................................... 180 503
-------- --------
CASH, AT END OF PERIOD ............................................... $ 62 $ 286
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid .................................................... $ 11 $ 14
======== ========
Interest paid ........................................................ $ 970 $ 861
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
III-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(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 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, 1999. Balance sheet data as of December 31, 1999 have been derived from
audited financial statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2000 1999
--------- ------------
Raw materials .................... $ 1,342 $ 1,548
Work-in-process .................. 1,667 2,742
Finished goods ................... 17,401 25,033
------- -------
$20,410 $29,323
======= =======
NOTE 3 - DEBT
On June 29, 1999, the Company and its operating subsidiaries signed a new
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 bear interest at the prime rate plus
one half percent (9.75% at March 31, 2000). 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 $250 plus all accrued and unpaid interest beginning
September 30, 1999 through June 30, 2002. The Credit Agreement expires on June
30, 2002.
IV-1
<PAGE>
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.
The Credit Agreement contains several financial and operational covenants,
including limitations on additional indebtedness, liens, dividends, stock and
capital expenditures.
Subsequent to June 1999, the Company amended the Credit Agreement. 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.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross amount of
sales, plus certain customary charges.
As of March 31, 2000 and 1999, the borrowings under the Credit Agreement
amounted to $38.2 million and $38.5 million with an interest rate of 9.75% and
10.25%, respectively. As of March 31, 2000, the term loan amounted to $2.3
million.
Other debt consists of a secured term loan that was entered into on June
30, 1998 in the amount of $483. As of March 31, 2000 the principal balance of
this loan amounted to $216. The interest rate is fixed at 8.75% and the loan
requires monthly principal and interest payments of $15 through June 2001.
Software, machinery and equipment secure this obligation.
NOTE 4 - REVERSE STOCK SPLIT
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to the Company's shareholders a one for four reverse stock split as
part of an effort to maintain continued listing of the Company's common stock on
the NASDAQ National Market.
The reverse stock split recommendation was approved by the Company's
shareholders at a special meeting held on April 18, 2000. The reverse split
became effective on April 20, 2000. As a result of the split, each four shares
of common stock applicable to shareholders on the effective date of the split
were converted into one share of stock. One of the requirements for continued
listing on the NASDAQ National Market is the maintenance of a bid price for the
Company's shares of $1.00 or higher. During the last quarter of 1999, and during
fiscal 2000, the Company's bid price had fallen below $1.00.
IV-2
<PAGE>
Prior to the split, the Company had 14,229,540 shares outstanding. As a
result of the split, the Company has approximately 3,557,385 shares outstanding.
Earnings (loss) per share and share amounts have been restated to reflect the
reverse split for all periods presented.
By letter dated May 8, 2000, NASDAQ notified the Company that although the
Company had achieved compliance with the listing requirement of a closing bid
price of at least $1.00, the Company's market capitalization had fallen below
$5,000,000 which was an additional requirement for listing on the NASDAQ
National Market. Accordingly, while the Company maintained its listing with
NASDAQ, the Company's securities were transferred from the NASDAQ National
Market to the NASDAQ Smallcap Market effective with the open of business on May
11, 2000.
NOTE 5 - RESTRUCTURING CHARGE
On March 15, 2000 the Company announced that it will be closing all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. During the quarter ended March 31, 2000, the Company
recorded a restructuring charge of $0.5 million which included the following: i)
$0.3 million related to the cost of providing severance payments to
approximately 200 employees terminated as a result of the facility closures. As
of March 31, 2000, the $0.3 million was included in accrued expenses; ii) $0.2
million to write down property, plant and equipment. The plant closings are
planned to be completed by the end of May 2000.
NOTE 6 - 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 is the
Company's share and the balance is payable by the Company's insurers;
issue 3 million shares of the Company's common stock (which when issued
will be 750,000 shares as a result of the reverse split), and to pursue
litigation against two of the Company's insurers to recover under its
excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all
appeals and reviews. A settlement hearing on the proposed settlement
was held on March 31, 2000 and the court orally approved the
settlement. A written order is expected to be signed in due course. In
1999, the Company recorded a charge of $5.9 million, which represented
the cost of the Settlement. The Company had funded its required cash
contribution to the settlement as of March 31, 2000; except for the
cost of the litigation with two of the Company's insurers, which are
not expected to be material.
IV-3
<PAGE>
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 claimed 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 denied the allegations contained in the complaint. On
July 26, 1999, the District Court dismissed the complaint on the
grounds that it failed to plead a legally recognizable case against the
Company. On August 30, 1999 the Plaintiff filed an amended complaint
alleging additional actions on the part of the Company and former
employees and seeking damages against the Company in excess of $8.0
million. On February 1, 2000, the District Court ruled that the
allegations in the amended Complaint, if true, state claims against the
Company. The Company has interposed an answer to the Complaint denying
the material allegations.
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.
IV-4
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 31, 2000 AND 1999
- ----------------------------------------------------
Net sales decreased by $8.7 million, or 16.9% from $51.1 million in the
first quarter of 1999 to $42.4 million in the first quarter 2000. The decline in
the Company's net sales was primarily due to decreases in the Donnkenny Label of
$3.7 million (primarily due to the planned exit of the coordinate business), the
Victoria Jones label of $5.0 million (of which $2.0 million is due to the
discontinuation of a one time program from 1999 with one major customer), and
the Casey & Max label of $1.7 million. The decreases were partially offset by
increases in the Pierre Cardin label of $1.7 million.
Gross profit for the first quarter of 2000 was $6.6 million, or 15.5% of
net sales, compared to $12.0 million, or 23.6% of net sales, during the first
quarter of 1999. The decrease in gross profit in dollars and as a percentage of
net sales was primarily attributable to the Company's reduced sales levels, idle
domestic plant capacity costs, sell off of non-current inventory and higher
transportation costs from imports.
Selling, general and administrative expenses decreased from $9.0 million in
the first quarter of 1999 to $8.2 million in the first quarter of 2000. The
decrease in selling, general and administrative expenses was primarily due to
reductions in headcount. These reductions were partially offset by start up
costs of approximately $0.5 million for a new label.
During the quarter ended March 31, 2000, the Company recorded a
restructuring charge of $0.5 million which included the following: i) $0.3
million related to the cost of providing severance payments to approximately 200
employees terminated as a result of the facility closures. As of March 31, 2000,
the $0.3 million was included in accrued expenses; ii) $0.2 million to write
down property, plant and equipment. The plant closings are planned to be
completed by the end of May 2000.
Net interest expense decreased from $1.1 million during the first quarter
of 1999 to $1.0 million during the first quarter of 2000. The decrease is
primarily the result of $0.3 million of financing charges amortized in the first
quarter of 1999 compared to $0.1 million in the first quarter of 2000.
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 new
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.
V-1
<PAGE>
Borrowings under the Credit Agreement bear interest at the prime rate plus
one half percent (9.75% at March 31, 2000). 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 $250 plus all accrued and unpaid interest beginning
September 30, 1999 through June 30, 2002. The Credit Agreement expires on June
30, 2002.
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.
Subsequent to June 1999, the Company amended the Credit Agreement. 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.
The Company also has a factoring agreement with CIT. The factoring
agreement provides for a factoring commission equal to .45% of gross amount of
sales, plus certain customary charges.
As of March 31, 2000, borrowings under the Credit Agreement amounted to
$38.2 million compared to $38.5 million as of March 31, 1999. As of March 31,
2000, the term loan amounted to $2.3 million.
During the first quarter of 2000, the Company's operating activities
provided cash principally as a result of decreases in inventory offset by
increases in accounts receivable and decreases in accounts payable. During the
first quarter of 1999, the Company's operating activities used cash principally
as a result of increases in accounts receivable partially offset by decreases in
inventory and increases in accounts payable. 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 provided by investing
activities in the first quarter of 1999 amounted to $1.2 million, primarily as
the result of the sale of a closed Virginia manufacturing facility ($1.1
million) and a manufacturing unit in New York ($0.2 million) partially offset by
$0.1 million relating to the upgrades in the Company's computer systems.
V-2
<PAGE>
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
On March 15, 2000 the Company announced that it will be closing all of its
domestic manufacturing plants. These facilities are located in Floyd and
Independence, Virginia. The Company has provided a restructuring charge of
approximately $0.5 million for employee severance payments and, the write down
of property, plant and equipment. The plant closings are planned to be completed
by the end of May 2000.
REVERSE STOCK SPLIT
On February 15, 2000, the Company's Board of Directors adopted a resolution
to recommend to the Company's shareholders a one for four reverse stock split as
part of an effort to maintain continued listing of the Company's common stock on
the NASDAQ National Market. One of the requirements for continued listing on the
NASDAQ National Market is the maintenance of a bid price for the Company's
shares of $1.00 or higher. During the last quarter of 1999, and during fiscal
2000, the Company's bid price had fallen below $1.00.
The reverse stock split recommendation was approved by the Company's
shareholders at a special shareholders meeting held on April 18, 2000. The
reverse split became effective on April 20, 2000. As a result of the reverse
split, each four shares of common stock on April 20, 2000 was converted into one
share of common stock.
By letter dated May 8, 2000, NASDAQ notified the Company that although the
Company had achieved compliance with the listing requirement of a closing bid
price of at least $1.00, the Company's market capitalization had fallen below
$5,000,000 which was an additional requirement for listing on the National
Market. Accordingly, while the Company maintained its listing with NASDAQ, the
Company's securities were transferred from the NASDAQ National Market to the
NASDAQ Smallcap Market effective with the open of business on May 11, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
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. In June 1999, the FASB issued SFAS No. 137 which deferred the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
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-3
<PAGE>
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 is the
Company's share and the balance is payable by the Company's insurers;
issue 3 million shares of the Company's common stock (which when issued
will be 750,000 shares as a result of the reverse split), and to pursue
litigation against two of the Company's insurers to recover under its
excess insurers' policies. The Settlement is subject to class
notification, the entry of a final judgement, and exhaustion of all
appeals and reviews. A settlement hearing on the proposed settlement
was held on March 31, 2000 and the court orally approved the
settlement. A written order is expected to be signed in due course. In
1999, the Company recorded a charge of $5.9 million, which represented
the cost of the Settlement. The Company had funded its required cash
contribution to the settlement as of March 31, 2000; except for the
cost of the litigation with two of the Company's insurers, which are
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 claimed 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 denied the allegations contained in the complaint. On
July 26, 1999, the District Court dismissed the complaint on the
grounds that it failed to plead a legally recognizable case against the
Company. On August 30, 1999, the Plaintiff filed an amended Complaint
alleging additional actions on the part of the Company and former
employees and seeking damages against the Company in excess of $8.0
million. On February 1, 2000, the District Court ruled that the
allegations in the amended Complaint, if true, state claims against the
Company. The Company has interposed an answer to the Complaint denying
the material allegations.
VI-1
<PAGE>
ITEM 2. Changes in Securities and use of proceeds
See Item 4 below
ITEM 3. Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders of the Company was held on April 18,
2000. The first item of business before the Meeting was a proposal to
reverse split the outstanding shares of the Company's Common Stock on a
one-for-four basis so that the 14,229,540 shares of the Company's
Common Stock outstanding prior to the reverse split would become
approximately 3,557,385 shares of the Company's Common Stock following
the reverse split; all fractional shares being rounded up to the next
nearest whole share.
The vote on this proposal was as follows:
For Against Abstain
--- ------- -------
10,930,944 549,542 20,040
The second item of business was to amend the Company's Certificate of
Incorporation to: (i) reduce the number of authorized shares of the
Company's Common Stock from 20,000,000 to 10,000,000 shares; and (ii)
affect the reverse split of the outstanding shares of the Company's
Common Stock outstanding prior to the reverse split to become
approximately 3,557,385 shares of the Company's Common Stock following
the reverse split; all fractional shares being rounded up to the
nearest whole share.
The vote on this proposal was as follows:
For Against Abstain
--- ------- -------
10,956,864 515,147 28,515
ITEM 5. Other Information
On March 28, 2000, Harry A. Katz was elected to the Board of Directors
of the Company to fill a vacancy on the Board.
VI-2
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following documents are filed as part of this report:
Exhibit No. Description of Exhibit
----------- ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the first quarter ended
March 31, 2000.
VI-3
<PAGE>
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 12, 2000 /s/ Daniel H. Levy
-----------------------------
Daniel H. Levy
Chairman of the Board,
Chief Executive Officer
Date: May 12, 2000 /s/ Beverly Eichel
-----------------------------
Beverly Eichel
Executive Vice President
and Chief Financial Officer,
(Principal Financial Officer)
VI-4
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 62,182
<SECURITIES> 0
<RECEIVABLES> 37,236,361
<ALLOWANCES> 5,695,418
<INVENTORY> 20,409,546
<CURRENT-ASSETS> 55,696,007
<PP&E> 11,993,047
<DEPRECIATION> 6,264,081
<TOTAL-ASSETS> 93,131,886
<CURRENT-LIABILITIES> 13,053,766
<BONDS> 0
0
0
<COMMON> 35,574
<OTHER-SE> 38,343,113
<TOTAL-LIABILITY-AND-EQUITY> 93,131,886
<SALES> 42,394,650
<TOTAL-REVENUES> 42,394,650
<CGS> 35,811,984
<TOTAL-COSTS> 35,811,984
<OTHER-EXPENSES> 9,019,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,040,685
<INCOME-PRETAX> (3,477,053)
<INCOME-TAX> 25,000
<INCOME-CONTINUING> (3,502,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,502,053)
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
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