SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 2, 1996
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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.
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(Exact name of registrant as specified in its charter)
Delaware 51-022889
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Broadway, New York, NY 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 730-7770
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NOT APPLICABLE
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(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
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 13,973,840
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(Class) (Outstanding at March 2, 1996)
DONNKENNY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-QA)
PART I - FINANCIAL INFORMATION Page
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Consolidated financial statements:
Balance sheets as of March 2, 1996 (unaudited) and December 2, 1995...I-1
Statements of operations for the three months ended
March 2, 1996 and March 4, 1995(unaudited)..........................II-1
Statements of cash flows for the three months ended
March 2, 1996 and March 4, 1995(unaudited).........................III-1
Notes to consolidated financial statements...........................IV-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... V-1
PART II - OTHER INFORMATION
Signatures.........................................................VI-1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
March 2, 1996 and December 2, 1995
March 2, December 2,
1996 1995
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(Restated
unaudited) (Restated)
ASSETS
CURRENT:
Cash $ 432 $ 2,688
Accounts receivable - net of allowances of
$1,678 and $1,946 in 1996 and 1995, respectively 32,113 49,834
Recoverable income taxes 4,573 6,921
Inventories (Note 2) 51,684 47,660
Deferred Tax Assets 2,414 2,414
Prepaid expenses and other current assets 1,554 1,464
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TOTAL CURRENT ASSETS ` 92,770 110,981
Property, plant and equipment, net 12,307 12,670
Intangible assets 33,665 34,013
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Total Assets $138,742 $157,664
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Current portion of long-term debt $ 6,067 $ 7,092
Accounts payable 13,920 13,178
Accrued expenses and other current liabilities 7,610 10,354
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TOTAL CURRENT LIABILITIES 27,597 30,624
Long-term debt, net of current portion 41,245 55,519
Deferred income taxes 6,287 6,287
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000 shares;
issued and outstanding 13,972 and 13,968
shares in 1996 and 1995, respectively 139 139
Additional paid-in capital 45,786 45,744
Retained earnings 17,688 19,351
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Total stockholders' equity 63,613 65,234
Total Liabilities and Stockholders' Equity $138,742 $157,664
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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
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3/2/96 3/4/95
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(Restated) (Restated)
Net sales $ 42,537 $ 24,702
Cost of sales 30,817 18,330
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Gross profit 11,720 6,372
Selling, general and administrative expenses 12,993 5,747
Amortization of goodwill
and other related acquisition costs 360 201
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Operating (loss) income (1,633) 424
Interest expense 1,113 671
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Loss before income taxes (2,746) (247)
Income tax benefit (1,083) (93)
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Net loss $ (1,663) $ (154)
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Net loss per common share $ (0.12) $ (0.01)
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Weighted average number of common shares outstanding
and common stock equivalents 13,972,118 13,645,640
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See accompanying notes to consolidated financial statements.
II - 1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
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March 2, March 4,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES: (Restated) (Restated)
Net loss $ (1,663) $ (154)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization of fixed assets 526 272
Amortization of intangibles 360 201
Accretion of debt discount -- 6
Provision for losses on accounts receivable 268 420
Changes in assets and liabilities:
Decrease in accounts receivable 17,453 15,294
Decrease (increase) in recoverable income taxes 2,348 (146)
Increase in inventories (4,024) (12,105)
Increase in prepaid expenses and
other current assets (90) (207)
Increase (decrease) in accounts payable 742 (3,234)
Decrease in accrued expenses and other
current liabilities (2,756) (165)
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Net cash provided by operating activities $ 13,164 $ 182
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (163) (296)
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Net cash used in investing activities (163) (296)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (18,299) (12,402)
Long-term borrowings 3,000 12,500
Net proceeds from secondary offering 42 --
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Net cash (used in) provided by financing activities (15,257) 98
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NET DECREASE IN CASH $ (2,256) $ (16)
CASH, AT BEGINNING OF YEAR 2,688 1,606
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CASH, AT END OF QUARTER $ 432 $ 1,590
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See accompanying notes to consolidated financial statements.
III - 1
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Per Share Data)
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 December 31, 1996 Form 10-K which
includes restated financial information for the 1994 and 1995 fiscal years.
Balance sheet data as of December 2, 1995 has been derived from audited
financial statement of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
March 2, December 2,
1996 1995
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(Restated see Note 1)
Raw materials $12,115 $11,071
Work-in-process 5,030 4,783
Finished goods 34,719 31,806
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$51,864 $47,660
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NOTE 3 - ACQUISITIONS
In June 1995, the Company completed its acquisition of Beldoch
Industries Corporation ("Beldoch"). In July 1995, the Company completed the
purchase of certain assets of the Sportswear Division of Oak Hill Sportswear
Corporation ("Oak Hill").
NOTE 4 - STOCK SPLIT
On November 17, 1995 , the Board of Directors authorized a two-for-one
stock split which was paid to all holders of record on December 4, 1995. All
references in the accompanying consolidated financial statements to number of
shares, per share amounts, and prices of the Company's common stock for periods
prior to December 4, 1995 have been restated to reflect the stock split.
IV-1
NOTE 5 - RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the years ended
December 2, 1995 and December 3, 1994, as well as the quarters within such
years and the two quarters of fiscal 1996 because of errors discovered for
those periods subsequent to the issuance of such financial statements. The
financial statements for the aforementioned periods required restatement to
correct the reporting for the recognition of net sales, cost of sales and
certain expenses. The third quarter of fiscal 1996 was restated for the
rescission of the Fashion Avenue acquisition and to reflect additional reserves
for sales returns and allowances.
The impact of the restatement on the Company's statement of operations
and balance sheets is summarized as follows:
3 MONTHS ENDED March 2, 1996 March 4, 1995
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(As Originally (As Originally
STATEMENT OF OPERATIONS Reported) (Restated) Reported) (Restated)
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Net sales............................................ $52,194 $42,537 $39,112 $24,702
Gross profit........................................ 14,877 11,720 11,386 6,372
Operating income (loss).......................... 5,575 (1,633) 4,238 424
Net income (loss).................................. 2,655 (1,663) 2,105 (154)
Per common share:
Net income (loss).......................... $0.19 ($0.12) $0.15 ($0.01)
March 2, 1996 December 2, 1995
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(As Originally (As Originally
BALANCE SHEET Reported) (Restated) Reported) (Restated)
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Current Assets..................................... 94,408 $92,770 111,603 $110,981
Total Assets........................................ 143,741 138,742 161,647 157,664
Total Liabilities.................................... 72,684 75,129 93,287 92,430
Stockholders' Equity.............................. 71,057 63,613 68,360 65,234
IV-2
DONNKENNY, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 2, 1996 AND MARCH 4, 1995
Net sales increased by $17.8 million, or 72.2% from $24.7 million in the
first quarter of fiscal 1995 to $42.5 million in the first quarter of fiscal
1996. The increase in net sales was primarily due to $18.1 million of
incremental net sales from Beldoch and Oak Hill which were acquired in June and
July 1995, respectively, which more than offset declines in the other
divisions.
Gross profit for the first quarter of fiscal 1996 was $11.7 million or 27.6%
of net sales compared to $6.4 million or 25.8% of net sales during the first
quarter of fiscal 1995. The increase was primarily due to higher gross margin
from Beldoch and Oak Hill, which were acquired in June and July 1995,
respectively.
Selling, general and administrative expenses increased from $5.7 million in
the first quarter of fiscal 1995 to $13.0 million in the fist quarter of fiscal
1996. As a percentage of net sales, these expenses increased from 23.3% in the
first quarter of fiscal 1995 to 30.5% in the first quarter of fiscal 1996. The
increase in SG&A expenses in the aggregate and as a percentage of net sales was
due primarily to the higher selling, general and administrative expenses
related to Beldoch and Oak Hill, which were acquired in June and July 1995,
respectively.
Amortization of goodwill and other related acquisition costs was $0.4
million during the first quarter of fiscal 1996 compared to $0.2 million during
the first quarter of fiscal 1995, due to the businesses acquired in June and
July of fiscal 1995 being included for the first quarter in fiscal 1996.
Interest expense increased from $0.7 million during the first quarter of
fiscal 1995 to $1.1 million during the first quarter of fiscal 1996. The
increase was the net result of higher average borrowings under the Company's
credit facility required to finance the acquisitions of Beldoch Industries in
June 1995 and Oak Hill Sportswear in July 1995 and to finance additional
working capital needs.
The Company provided for taxes at an effective rate of 39.4% for the first
quarter of fiscal 1996 and 37.7% for the first quarter of fiscal 1995.
LIOUDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily inventory and accounts receivable, and interest and
principal payments related to certain indebtedness. The Company's borrowing
requirements for working capital fluctuates throughout the year.
Capital expenditures were $0.2 million for the first quarter fiscal 1996
compared to $0.3 million in the first quarter of fiscal 1995. The Company may
spend up to $2.0 million annually on capital investments in accordance with the
Chemical Bank Revolving Credit Agreement described below. The company has no
material capital expenditure commitments.
Donnkenny Apparel, Inc. and Beldoch Industries Corporation (Both wholly-owned
subsidiaries of the Company) as borrowers, the Company and the Company's other
two subsidiaries as guarantors and Chemical Bank, Bank of New York and Chase
Manhattan Bank as lenders are parties to a credit facility (The " Chemical Bank
Credit Facility") in a maximum aggregate principal amount of $85.0 million
which was entered into in June 1995. The Chemical Bank Credit Facility is
comprised of a $60.0 million revolving credit facility and a $25.0 million term
loan facility. The Chemical Bank Credit Facility requires compliance with
certain financial performance tests on a quarterly basis that the Company
expects to be able to meet. As of April 3, 1996, $11.6 million was available
under the revolving credit facility provided under the Chemical Bank Credit
Facility.
During the first quarter of fiscal 1996 and fiscal 1995, the Company's
operating activities generated cash principally as the result of decreases in
accounts receivable offsetting increases in inventories in both years and a
decrease in accounts payable in fiscal 1995. The Company believes that amounts
under the revolving credit facility provided under the Chemical Bank Credit
Facility will be sufficient to offset any negative
V - 1
operating cash flows and capital expenditures, and with an adjustment to
accommodate increased outstanding letter of credit facilities which is being
discussed with the lenders under the Chemical Bank facility, will provide the
Company with sufficient cash for its needs for the foreseeable future.
V - 2
S I G N A T U R E S
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
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Registrant
Date: June 11, 1997
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Harvey Appelle
Chairman of the Board
President and Chief
Executive Officer
Date: June 11, 1997
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Stuart S. Levy
Vice President - Finance
and Chief Financial Officer,
(Principal Financial Officer)
VI - 1