-----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, E2RRL2S1F8g5NJR40B6LsbacasIkRBQYYZ0KNYuqzn7HQkuPLTdHPRzad0vfYf31 IRrZg295TigNufqWgcgjsA== 0000950136-99-000710.txt : 19990518 0000950136-99-000710.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950136-99-000710 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626304 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 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, 1999 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) 730-7770 -------------- 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 14,169,540 ---------------------------- ------------------------------- (Class) (Outstanding at March 31, 1999) 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, 1999 and December 31, 1998........I-1 Statements of operations for the three months ended March 31, 1999 and March 31, 1998 ...............................II-1 Statements of cash flows for the three months ended March 31, 1999 and March 31, 1998................................III-1 Notes to Consolidated Financial Statements.......................IV-1-3 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................V-1-4 PART II - OTHER INFORMATION Legal Proceedings................................................VI-1 Exhibits and Reports on Form 8-K.................................VI-2 Signatures.......................................................VI-3 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of Donnkenny, Inc. We have reviewed the accompanying consolidated balance sheet of Donnkenny, Inc. and subsidiaries as of March 31, 1999, the related consolidated statements of operations and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Donnkenny, Inc. and subsidiaries as of December 31, 1998, 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 19,1999 (March 29, 1999 as to note 15), 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, 1998 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 14, 1999 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data)
March 31, December 31, 1999 1998 -------- -------- (Unaudited) CURRENT ASSETS Cash ........................................... $ 286 $ 503 Accounts receivable - net of allowances of $673 and $620, respectively .................. 41,509 29,363 Recoverable income taxes ....................... 353 655 Inventories .................................... 20,985 21,972 Deferred tax assets ............................ 1,655 3,080 Prepaid expenses and other current assets ...... 1,222 1,265 Assets held for sale ........................... 490 1,799 -------- -------- Total current assets ........................... 66,500 58,637 PROPERTY, PLANT AND EQUIPMENT, NET .................. 6,204 6,337 OTHER ASSETS ........................................ 2,693 2,327 INTANGIBLE ASSETS ................................... 32,566 32,914 -------- -------- TOTAL ............................................... $107,963 $100,215 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ............ $ 38,683 $ 154 Accounts payable ............................. 9,405 8,391 Accrued expenses and other current liabilities ................................ 7,218 7,431 -------- -------- Total current liabilities ................. 55,306 15,976 -------- -------- LONG-TERM DEBT ...................................... 216 31,901 DEFERRED TAX LIABILITIES ............................ 1,655 3,080 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock $.01 par value; authorized 500 shares , issued none .......................... -- -- Common stock, $.01 par value. Authorized 20,000 shares, issued and outstanding 14,170 shares . 142 142 Additional paid-in capital ...................... 47,595 47,595 Retained earnings ............................... 3,049 1,521 -------- -------- Total Stockholders' Equity ................. 50,786 49,258 -------- -------- TOTAL ............................................... $107,963 $100,215 ======== ========
See accompanying notes to consolidated financial statements. I-1 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share and per share data) (Unaudited)
Three Months Ended ------------------------------- March 31,1999 March 31, 1998 ------------- -------------- NET SALES ........................................ $ 51,051 $ 52,527 COST OF SALES .................................... 39,002 39,576 ----------- ----------- Gross profit ................................ 12,049 12,951 OPERATING EXPENSES: Selling, general and administrative expenses . 9,273 9,982 Amortization of goodwill and other related acquisition costs ........................... 348 321 ----------- ----------- Operating income ......................... 2,428 2,648 INTEREST EXPENSE (Net of interest income of $110 in 1998) .. 800 686 ----------- ----------- Income before income taxes ............... 1,628 1,962 INCOME TAXES ..................................... 100 942 ----------- ----------- NET INCOME ................................. $ 1,528 $ 1,020 =========== =========== Basic earnings per common share .................. $ 0.11 $ 0.07 =========== =========== Shares used in the calculation of basic earnings per common share ............................. 14,170,000 14,075,000 =========== =========== Diluted earnings per common share ................ $ 0.10 $ 0.07 =========== =========== Shares used in the calculation of diluted earnings per common share .............................. 14,570,000 14,173,000 =========== ===========
See accompanying notes to consolidated financial statements. II-1 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended ------------------------ March 31, March 31, 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................. $ 1,528 $ 1,020 Adjustments to reconcile net cash (used in) provided by operating activities: Depreciation and amortization of fixed assets ........... 205 395 Amortization of intangibles and other assets ............ 348 321 Provision for losses on accounts receivable ............. 18 96 Changes in assets and liabilities: Increase in accounts receivable ..................... (12,164) (10,844) Decrease in recoverable income taxes ................ 302 -- Decrease in inventories ............................. 987 3,252 Decrease (increase) in prepaid expenses and other current assets .............................. 43 (494) Increase in other non-current assets ................ (366) (833) Increase in accounts payable ........................ 1,014 239 Decrease in accrued expenses and other current liabilities ......................... (213) (268) -------- -------- Net cash used in operating activities ............. (8,298) (7,116) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ................................ (74) (750) Proceeds from sale of fixed assets ...................... 1,311 6 -------- -------- Net cash provided by (used in) investing activities 1,237 (744) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ......................... (38) (1,450) Net borrowings under revolving credit line .......... 6,882 9,571 -------- -------- Net cash provided by financing activities .......... 6,844 8,121 -------- -------- NET (DECREASE)/INCREASE CASH ................................ (217) 261 CASH, AT BEGINNING OF PERIOD ................................ 503 257 -------- -------- CASH, AT END OF PERIOD ...................................... $ 286 $ 518 ======== ======== SUPPLEMENTAL DISCLOSURES Income taxes paid ........................................... $ 14 $ 13 ======== ======== Interest paid ............................................... $ 861 $ 809 ======== ========
See accompanying notes to consolidated financial statements. III-1 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, 1998. Balance sheet data as of December 31, 1998 have been derived from audited financial statements of the Company. NOTE 2 - INVENTORIES Inventories consist of the following: March 31, December 31, 1999 1998 ---- ---- Raw materials .................................... $ 2,421 $ 2,155 Work-in-process .................................. 2,885 4,235 Finished goods ................................... 15,679 15,582 ======= ======= $20,985 $21,972 ======= ======= NOTE 3 - DEBT In November 1998, the Company and its operating subsidiaries, Donnkenny Apparel, MegaKnits, and Beldoch, entered into an Amended and Restated Credit Facility (the "Amended Credit Facility") to, among other things, provide for general working capital needs of the Company including letters of credit and to extend the Amended Credit Facility to March 31, 2000. The Amended Credit Facility was amended as follows: the total amount available under the Revolving Credit Agreement is $75 million subject to an asset based borrowing formula, with sublimits of $55 million for direct borrowings, $35 million for letters of credit and certain overadvances. Outstanding borrowings under the Revolving Credit agreement in excess of an allowable overadvance will bear interest at the prime rate plus 3 1/2 %. The Revolving Credit Agreement also requires the Company to pay certain letters of credit fees and unused commitment fees. Advances and letters of credit will be limited to (i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance. Proceeds from the sale of fixed assets and income tax refunds are to be applied to reduce the overadvance facility. IV-1 Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Beldoch, and Megaknits. The Credit Facility 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 maximum cumulative net loss test. As of March 31, 1999 and March 31, 1998, the borrowings under the Revolving Credit Agreement amounted to $38.5 million and $31.1 million with an interest rate of 10.25% and 10.0%, respectively. In March 1999, the Company entered into a Second Waiver and Amendment Agreement to the Amended Credit Facility effective as of February 28, 1999 to support the Company's 1999 business plan. Pursuant to this amendment, the interest rate on borrowings (10.25% at March 31, 1999) was increased to 2 1/2% above the prime rate and shall be further increased by 1/8 of 1% on each of July 1, 1999, August 1, 1999 and September 1, 1999; and the applicable percentage shall be increased by 1/4 of 1% on the first day of each month thereafter, commencing October 1, 1999. A fee of $150,000 is payable on June 30, 1999. 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, 1999 the principal balance of this loan amounted to $373. 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 - STOCKHOLDERS' EQUITY The Company issued 200,000 options to purchase common stock at the fair market value on the date of grant to certain key employees during the quarter ended March 31, 1999, which will become exercisable on various dates commencing March 2, 2000 through the year 2004. NOTE 5 - COMMITMENTS AND CONTINGENCIES a. In November 1996, ten designated class action lawsuits were commenced against the Company and certain former officers in the United States District Court for the Southern District of New York. The complaints in these actions allege various violations of the federal securities laws and seek an unspecified amount of monetary damages and other monetary relief. These actions have now been consolidated pursuant to court order and the plaintiffs filed a consolidated amended complaint. The Company is not presently in a position to determine the ultimate outcome of these legal proceedings or their impact on the financial condition of the Company. IV-2 b. In connection with contingent liabilities arising from the Company's alleged inaccuracies in the reporting of revenues and expenses for certain reporting periods, the Company has agreed to deposit $5,000 in an escrow account with the Company's insurance carrier over a three year period to help defray claims, if any. At March 31, 1999, $2,500 has been deposited and has been included in other assets. 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 - SUBSEQUENT EVENTS On May 14, 1999, the Company and its operating subsidiaries signed a commitment letter to enter into a new credit agreement with CIT Group/Commercial Services to replace the existing $75 million Amended Credit Facility. The new three year agreement will provide 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 and certain overadvances and a $3 million term loan. The new credit agreement will bear interest at the prime rate plus one half percent. The new credit agreement will provide for advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 25% of eligible WIP up to a maximum of $2 million, plus (iv) allowable overadvances. The Company expects to close the new credit agreement within the next 60 days. IV-3 DONNKENNY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF QUARTERS ENDED MARCH 31, 1999, AND MARCH 31, 1998 Net sales decreased by $1.5 million, or 2.8% from $52.5 million in the first quarter of fiscal 1998 to $51.0 million in the first quarter of fiscal 1999. The decrease in the Company's net sales was primarily due to a $1.6 million decrease in sales of License Character products as a result of the Company's exiting these businesses with all other labels netting to an increase of $0.1 million. Gross profit for the first quarter of fiscal 1999 was $12.0 million, or 23.6% of net sales, compared to $13.0 million, or 24.7% of net sales, during the first quarter of fiscal 1998. The decrease in gross profit in dollars and as a percentage of net sales was primarily attributable to the Company's reduced sales from exiting the Licensed Character business in fiscal 1998 and lower margins from the Donnkenny Apparel label. Selling, general and administrative expenses decreased from $10.0 million in the first quarter of fiscal 1998 to $9.3 million in the first quarter of fiscal 1999. As a percentage of net sales, these expenses decreased from 19.0% in the first quarter of fiscal 1998 to 18.2% in the first quarter of fiscal 1999. The decrease in selling, general and administrative expenses was due primarily to lower commissions and synergies created in combining certain business functions, which allowed for reductions in headcount. These reductions were partially offset by higher distribution costs as a result of increased costs associated with the Company's customers requirements for "Floor Ready" merchandise. Net interest expense increased from $0.7 million during the first quarter of fiscal 1998 to $0.8 million during the first quarter of fiscal 1999. The increase was primarily the result of $0.1 million of interest income from income tax refunds in the first quarter of 1998 that was offset against $0.8 million of interest expense. The provision for income taxes decreased from $0.9 million in the first quarter of fiscal 1998 to $0.1 million in the first quarter of fiscal 1999. In the first quarter of fiscal 1999, the provision reflects state and local taxes and the usage of net operating loss carry forwards. 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. Capital expenditures were $0.1 million, primarily for upgrading computer systems during the first quarter of fiscal 1999 compared to $0.8 million in the first quarter of fiscal 1998. The V-1 Company has committed to spend an additional $0.5 million in fiscal 1999 for upgrading computer systems to increase efficiencies as part of the Company's system upgrade plan. In April 1997 the Company entered into an amended Credit Facility (the "Credit Facility") to, among other things, include the Company's operating subsidiaries Donnkenny Apparel, MegaKnits and Beldoch, as borrowers. The Credit Facility consisted of a Term Loan, a Revolving Credit Agreement, and a Factoring Agreement. The purpose of the Credit Facility was for general working capital purposes including the issuance of letters of credit. In April 1997, the Company also entered into a Factoring Agreement with CIT. The Factoring Agreement provides for a factoring commission equal to 0.45% of the gross amount of sales, plus certain customary surcharges. An additional fee of 0.20% was paid upon the conversion to a factored receivable arrangement. In November 1998, the Company and its operating subsidiaries, Donnkenny Apparel, MegaKnits, and Beldoch, entered into an Amended and Restated Credit Facility (the "Amended Credit Facility") to, among other things, provide for general working capital needs of the Company including letters of credit and to extend the Amended Credit Facility to March 31, 2000. The Amended Credit Facility was amended as follows: the total amount available under the Revolving Credit Agreement is $75 million subject to an asset based borrowing formula, with sublimits of $55 million for direct borrowings, $35 million for letters of credit and certain overadvances. Outstanding borrowings under the Revolving Credit agreement in excess of an allowable overadvance will bear interest at the prime rate plus 3 1/2 %. The Revolving Credit Agreement also requires the Company to pay certain letters of credit fees and unused commitment fees. Advances and letters of credit will be limited to (i) up to 85% of eligible accounts receivable plus (ii) up to 60% of eligible inventory, plus (iii) an allowable overadvance. Proceeds from the sale of fixed assets and income tax refunds are to be applied to reduce the overadvance facility. As of March 31, 1999, borrowings under the Revolving Credit Agreement amounted to $38.5 million compared to $31.1 million as of March 31, 1998. Collateral for the Credit Facility includes a first priority lien on all accounts receivable, machinery, equipment, trademarks, intangibles and inventory, a first mortgage on all real property and a pledge of the Company's stock interest in the Company's operating subsidiaries, Donnkenny Apparel, Beldoch, and Megaknits. The Credit Facility 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 maximum cumulative net loss test. In March 1999, the Company entered into a Second Waiver and Amendment Agreement to the Amended Credit Facility effective as of February 28, 1999 to support the Company's 1999 business plan. Pursuant to this amendment, the interest rate on borrowings (10.25% at March 31, 1999) was increased to 2 1/2% above the prime rate and shall be further increased by 1/8 of 1% V-2 on each of July 1, 1999, August 1, 1999 and September 1, 1999; and the applicable percentage shall be increased by 1/4 of 1% on the first day of each month thereafter, commencing October 1, 1999. A fee of $150,000 is payable on June 30, 1999. On May 14, 1999, the Company and its operating subsidiaries signed a commitment letter to enter into a new credit agreement with CIT Group/Commercial Services to replace the existing $75 million Amended Credit Facility. The new three year agreement will provide 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 and certain overadvances and a $3 million term loan. The new credit agreement will bear interest at the prime rate plus one half percent. The new credit agreement will provide for advances of (i) up to 90% of eligible accounts receivable plus (ii) up to 60% of eligible inventory plus (iii) up to 25% of eligible WIP up to a maximum of $2 million, plus (iv) allowable overadvances. The Company expects to close the new credit agreement within the next 60 days. During the first quarter of fiscal 1999, the Company's operating activities used cash principally as a result of increases in accounts receivable and other non-current assets partially offset by decreases in inventory and increases in accounts payable. During the first quarter of fiscal 1998, the Company's operating activities used cash principally as a result of increases in accounts receivable and decreases in accrued expenses partially offset by decreases in inventories. Cash provided by investing activities in the first quarter of fiscal 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. In the first quarter of fiscal 1998 cash used in investing activities amounted to $0.8 million relating to the upgrades in the computer systems. Cash provided by financing activities in the first quarter of fiscal 1999 amounted to $6.8 million, which represented net borrowings under the Revolving Credit Agreement. Cash provided by financing activities in the first quarter of fiscal 1998 amounted to $8.1 million, which primarily consisted of repayments of $1.5 million on the Term Loan and borrowings under the Revolving Credit Agreement of $9.6 million. The company believes that cash flows from operations and amounts available under the Revolving Credit Agreement will be sufficient for its needs in the foreseeable future. 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. V-3 YEAR 2000 ISSUE The Company recognizes the need for, and is in the final phases of implementation of, a comprehensive program intended to upgrade the operating systems, including hardware and software, which should eliminate any issues involving Year 2000 compliance. Certain of the Company's current software systems, without modification, would be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of improving the Company's information systems to provide enhanced support to all operating areas, the Company will upgrade to new financial and operating systems. Such upgrade will provide for or eliminate any issues involving Year 2000 compliance because all software to be implemented is designed to be Year 2000 compliant. The Company anticipates that its cost for such upgrade will be approximately $0.5 million for Fiscal 1999. The Company also anticipates that it will complete its systems conversion in time to accommodate Year 2000 issues. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. The Company does not currently have complete information concerning Year 2000 compliance status of its suppliers and customers. The Company has initiated communications with some of its significant customers, suppliers, and contractors to determine their plans to remedy any Year 2000 issues that arise in their business. The Company plans to complete this project prior to December 31, 1999; however, there can be no assurance that the systems of the other companies on which the Company's systems rely will be timely converted and would not have a material adverse effect on the Company's systems. The Company is currently evaluating its non-information technology systems (embedded technology) issues and is also developing its contingency plans for its information technology systems and believes that it will complete both issues in time to accommodate Year 2000 issues. If the Company is unsuccessful in completing remediation of non-compliant systems, and if customers or vendors cannot rectify Year 2000 issues, the Company could incur additional costs, which may be substantial, to develop alternative methods of managing its business and replacing non-compliant equipment, and may experience delays in receipts from vendors, shipments to customers, or payments to vendors. The Company has not yet established a contingency plan in the event of non-compliance. 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. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has determined that this statement will not have a significant impact on its financial statements or disclosures, as it does not engage in derivative or hedging transactions. V-4 PART II. OTHER INFORMATION Item 1 - 4. Not Applicable. Item 5. Other Information In connection with contingent liabilities arising from the Company's alleged inaccuracies in the reporting of revenues and expenses for certain reporting periods, the Company has agreed to deposit $5 million in an escrow account with the Company's insurance carrier over a three year period to help defray claims, if any. At March 31, 1999, $2.5 million has been deposited and has been included in other assets. 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, 1999. 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 14, 1999 ----------------------------- Harvey Appelle Chairman of the Board, Chief Executive Officer Date: May 14, 1999 ----------------------------- Beverly Eichel Executive Vice President and Chief Financial Officer, (Principal Financial Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 MAR-31-1999 285,599 0 46,807,150 5,297,762 20,985,130 66,500,373 12,343,132 6,139,323 107,963,481 55,305,465 0 0 0 141,809 50,644,209 107,963,481 51,051,040 51,051,040 39,002,350 39,002,350 9,603,318 17,428 800,414 1,627,530 100,000 1,527,530 0 0 0 1,527,530 0.11 0.10
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