-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F8GojDiEY04dvSbdWVBm/o8dcj6Tx8s5eMKw1HG/YS0AjbOKxeOPNM0AR7NndgmZ 9gZo3yLVt9380+PDefGAvQ== 0000950136-01-500352.txt : 20010514 0000950136-01-500352.hdr.sgml : 20010514 ACCESSION NUMBER: 0000950136-01-500352 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNKENNY INC CENTRAL INDEX KEY: 0000029693 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 510228891 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21940 FILM NUMBER: 1630497 BUSINESS ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2127307770 MAIL ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 10-Q 1 file001.txt QUARTERLY REPORT 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 ------- 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 -----END PRIVACY-ENHANCED MESSAGE-----