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 June 30, 1997
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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 51-0228891
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(State or 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 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 14,069,940
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(Class) (Outstanding at June 30, 1997)
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 June 30, 1997 and December 31, 1996 ...... I-1
Statements of operations for the three and six months ended
June 30, 1997 and June 1, 1996 ................................ II-1
Statements of cash flows for the six months ended
June 30, 1997 and June 1, 1996 ................................ III-1
Notes to Consolidated Financial Statements .................... IV-1-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... V-1-3
PART II - OTHER INFORMATION
Legal Proceedings ............................................. VI-1
Exhibits and Reports on Form 8-K .............................. VI-1-2
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 June 30, 1997, and the related consolidated statements
of operations and cash flows for the three-month and six-month periods then
ended. 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, 1996, 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 April 15, 1997, 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, 1996 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
August 5, 1997
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(IN THOUSANDS)
June 30, 1997 and December 31, 1996
June 30, December 31,
1997 1996
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ASSETS (Unaudited)
CURRENT:
Cash $ 329 $ 3,998
Accounts receivable - net of allowances of
$2,017 and $1,946, respectively 27,970 29,721
Recoverable income taxes 9,353 8,625
Inventories 47,405 46,793
Deferred tax assets 4,439 4,439
Prepaid expenses and other current assets 1,881 1,633
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TOTAL CURRENT ASSETS 91,377 95,209
Property, plant and equipment, net 10,991 11,774
Intangible assets 31,747 32,450
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Total Assets $134,115 $139,433
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Current portion of long-term debt $ 5,094 $ 50,761
Accounts payable 11,335 19,476
Accrued expenses and other current liabilities 7,585 8,055
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TOTAL CURRENT LIABILITIES 24,014 78,292
Long-term debt, net of current portion 50,053 0
Deferred income taxes 5,863 5,863
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000 shares;
issued and outstanding 14,070 and 14,045
shares in 1997 and 1996, respectively 140 140
Additional paid-in capital 46,462 46,344
Retained earnings 7,583 8,794
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Total Stockholders' Equity 54,185 55,278
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $134,115 $139,433
======== ========
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 Six Months Ended
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June 30, 1997 June 1, 1996 June 30, 1997 June 1, 1996
------------ ------------ ------------ ------------
(Restated) (Restated)
Net sales $ 52,041 $ 52,407 $ 114,326 $ 94,944
Cost of sales 41,647 41,019 88,950 71,836
------------ ------------ ------------ ------------
Gross profit 10,394 11,388 25,376 23,108
Selling, general and administrative expenses 12,328 14,619 24,038 27,611
Amortization of intangibles 338 368 702 729
------------ ------------ ------------ ------------
Operating (loss) income (2,272) (3,599) 636 (5,232)
Interest expense 1,375 1,108 2,600 2,221
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Loss before income taxes (3,647) (4,707) (1,964) (7,453)
Income tax benefit (1,425) (1,907) (753) (2,990)
------------ ------------ ------------ ------------
Net loss $ (2,222) $ (2,800) $ (1,211) $ (4,463)
============ ============ ============ ============
Net loss per common share $ (0.16) $ (0.20) $ (0.09) $ (0.32)
============ ============ ============ ============
Weighted average number of common shares outstanding 14,069,940 13,985,831 14,066,901 13,979,012
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
II - 1
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(unaudited)
Six Months Ended
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June 30, June 1,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
Net loss $ (1,211) $ (4,463)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization of fixed assets 892 848
Amortization of intangibles 702 729
Provision for losses on accounts receivable 191 131
Changes in assets and liabilities:
Decrease in accounts receivable 1,560 19,510
Increase in recoverable income taxes (728) (1,525)
Increase in inventories (612) (2,651)
Increase in prepaid expenses and
other current assets (248) (475)
Decrease in accounts payable (8,140) (619)
Decrease in accrued expenses and
other current liabilities (352) (1,681)
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Net cash (used) provided by operating activities (7,946) 9,804
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CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of fixed assets (109) (394)
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Net cash used in investing activity (109) (394)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (2,500) (3,553)
Net borrowings under revolving credit line 6,886 --
Net repayments under revolving credit line -- (7,500)
Exercise of stock options -- 253
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Net cash provided (used) by financing activities 4,386 (10,800)
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NET DECREASE IN CASH (3,669) (1,390)
CASH, AT BEGINNING OF PERIOD 3,998 2,688
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CASH, AT END OF PERIOD $ 329 $ 1,298
======== ========
See accompanying notes to consolidated financial statements.
III - 1
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except 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
December 31, 1996 Form 10-K. Balance Sheet data as of December 31, 1996
have been derived from audited financial statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
1997 1996
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Raw materials .......................... $ 9,808 $12,081
Work-in-process ........................ 3,692 4,808
Finished goods ......................... 33,905 29,904
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$47,405 $46,793
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NOTE 3 - 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 respective quarters
within such years as well as, the first and second quarters of fiscal 1996,
because of errors discovered for those periods subsequent to the issuance of
such financial statements related to the recognition of net sales, cost of
sales and certain expenses. The financial statements for the third quarter of
fiscal 1996 have been restated to reflect the rescission of the Fashion Avenue
acquisition and to reflect additional reserves for sales returns and
allowances. In connection with such rescission the Company Issued
25,000 shares of stock and recorded such issuance at fair market value.
IV - 1
The impact of the restatement on the Company's statement of operations and
balance sheets is summarized as follows:
3 MONTHS ENDED June 1, 1996
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(As Originally
STATEMENT OF OPERATIONS Reported) (Restated)
- ----------------------- --------- ---------
Net Sales ................................... $ 54,996 $ 52,407
Gross Profit ................................ 15,473 11,388
Operating Income (Loss) ..................... 5,979 (3,599)
Net Income (Loss) ........................... 2,879 (2,800)
Per common share:
Net Income (Loss) ................... $ 0.20 ($0.20)
6 MONTHS ENDED June 1, 1996
- -------------- ----------------------------
(As Originally
STATEMENT OF OPERATIONS Reported) (Restated)
- ----------------------- --------- ---------
Net Sales ................................... $107,190 $ 94,944
Gross Profit ................................ 30,350 23,108
Operating Income (Loss) ..................... 11,554 (5,232)
Net Income (Loss( ........................... 5,534 (4,463)
Per common share:
Net Income (Loss) ................... $ 0.39 ($0.32)
NOTE 4 - CHANGE OF FISCAL YEAR
On September 11, 1996 the Company changed its fiscal year from one
ending on the first Saturday of each year on or after November 30th to one
ending on December 31st of each year.
NOTE 5 - CONTINGENCIES
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 $5.0 million over a three
year period to help defray claims, if any.
IV - 2
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997, AND JUNE 1, 1996
Net sales increased by $19.4 million, or 20.4% from $94.9 million in the
first half of fiscal 1996 to $114.3 million in the first half of fiscal 1997.
As a result of the change in fiscal Year end, the inclusion of June 1997 net
sales in the first half of 1997 compared to the inclusion of December 1995 net
sales in the first half of 1996 accounted for $11.0 million of the increase.
The balance of the increase in net sales resulted primarily from growth in the
Beldoch and Oak Hill divisions.
Gross profit for the first half of fiscal 1997 was $25.4 million or 22.2% of
net sales compared to $23.1 million or 24.3% of net sales during the first
half of fiscal 1996. The percentage decline in gross profit was primarily
attributable to lower gross margins in the licensed character lines as a
result of the sell off of off priced excess inventory and the close out of
products with expiring licenses and to a lesser extent lower gross margins
from the sales of Beldoch products.
Selling, general and administrative expenses decreased from $27.6 million in
the first half of fiscal 1996 to $24.0 million in the first half of fiscal
1997. As a percentage of net sales, these expenses decreased from 29.1% in the
first half of fiscal 1996 to 21.0% in the first half of fiscal 1997. The
decrease in selling, general and administrative expenses in dollars and as a
percentage of net sales was due primarily to lower sales expense and design
and sample expenses as a result of greater efficiencies and the synergies
created in combining certain business functions. Additionally, fiscal 1997
headcount reductions resulted in decreased administrative expense. These
reductions were partially offset by higher professional fees, distribution
expenses and costs applicable to our factoring agreement which became effective
April 28, 1997. The increase in professional fees is the result of legal fees
associated with the previously reported class action lawsuits, legal and
accounting fees associated with the restatement of prior year quarterly and
annual financial statements and consulting services related to the Company's
amended Credit Facility discussed below.
The amortization of goodwill and other related acquisition costs were $0.7
million during the first half of fiscal 1997 and 1996.
Interest expense increased from $2.2 million during the first half of fiscal
1996 to $2.6 million during the first half of fiscal 1997. The increase was
the net result of higher average borrowings and higher interest rates under
the Company's credit facility to finance additional working capital needs.
The Company provided for taxes at an effective rate of 38.3% for the first
half of fiscal 1997 and 40.1% for the first half of fiscal 1996.
COMPARISON OF QUARTERS ENDED JUNE 30, 1997 AND JUNE 1, 1996
Net sales decreased by $0.4 million or 0.8% from $52.4 million in the second
quarter of fiscal 1996 to $52.0 million in the second quarter of fiscal 1997.
While net sales were essentially flat, decreases in net sales due to the
change in the fiscal year end offset increases in April and May. As a result
of the change in the fiscal year end, June 1997 net sales were included in the
second quarter of 1997 compared to the inclusion of March 1996 net sales in
the second quarter of 1996. The inclusion of June 1997 versus March 1997 in
the second quarter of fiscal 1997, as a result of the change in fiscal year
end, negatively impacted net sales by $5.7 million.
Gross profit for the second quarter of fiscal 1997 was $10.4 million, or
20.0% of net sales compared to $11.4 million or 21.7% of net sales during the
second quarter of fiscal 1996. The percentage decline in gross profit was
primarily attributable to lower gross margins in the licensed character lines
as a result of the sell off of off priced excess inventory and the close out
of products with expiring licenses and to a lesser extent lower gross margins
from the sales of Beldoch products.
Selling, general and administrative expenses decreased from $14.6 million in
the second quarter of fiscal 1996 to $12.3 million in the second quarter of
fiscal 1997. As a percentage of net sales, these expenses declined from 27.9%
in the second quarter of fiscal 1996 to 23.7% in the second quarter of fiscal
1997. The decrease in dollars and as a percent of net sales is primarily the
result of decreased sales expense, resulting from the consolidation of the
sales operations and decreases in administrative expenses, primarily
attributable to the reductions in personnel costs.
V - 1
These reductions were partially offset by an increase in professional fees and
costs applicable to our factoring agreement which became effective April 28,
1997. The increase in professional fees is the result of legal fees associated
with the previously reported class action lawsuits, legal and accounting fees
associated with the restatement of prior year quarterly and annual financial
statements and consulting services related to the Company's amended Credit
Facility discussed below.
The amortization of goodwill and other related acquisition costs was $0.3
million during the second quarter of fiscal 1997 compared to $0.4 million
during the second quarter of fiscal 1996.
Interest expense increased from $1.1 million during the second quarter of
fiscal 1996 to $1.4 million during the second quarter of fiscal 1997. The
increase was a net result of higher average borrowings and higher average
interest rates under the Company's credit facility required to finance
additional working capital needs.
The Company provided for taxes at an effective rate of 39.1% for the second
quarter of fiscal 1997 and 40.5% for the second quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of working
capital needs, primarily inventory and accounts receivable, and the interest
and principal payments related to certain indebtedness. The Company's
borrowing requirements for working capital fluctuates throughout the year.
Capital expenditures were $0.1 million for the first half of fiscal 1997
compared to $0.4 million in the first half of fiscal 1996. The Company may
spend up to $1.5 million annually on capital investments in accordance with
the Revolving Credit Agreement described below. The Company has no material
capital expenditure commitments.
On April 30, 1997 the Company entered into an amended Credit Facility to,
among other things, include the Company's operating subsidiaries Donnkenny
Apparel, Inc., Megaknits. Inc. and Beldoch Industries Corporation, as
borrowers. The Credit Facility consists of a Term Loan, a Revolving Credit
Agreement, and a Factoring Agreement. The purpose of the amended Credit
Facility is to continue to finance increased working capital needs of the
Company following the 1995 Beldoch and Oak Hill Sportswear acquisitions and
for general working capital purposes including the issuance of letters of
credit. The amended Credit Facility will expire on March 31, 1999. Under the
amended Credit Facility, the Chase Manhattan Bank serves as agent (and holds a
35% interest), the CIT Group/Commercial Services Inc. (CIT) serves as
collateral agent (and holds a 15% interest), and each of Fleet Bank, N.A. and
the Bank of New York are co-lenders (each holding a 25% interest).
As of June 30, 1997, the balance of the Term Loan was $15.0 million. The
interest rate is equal to the prime rate plus 1 1/2% per annum. The
amortization schedule calls for quarterly payments of $1.3 million, with a
balloon payment of $7.5 million due on March 31, 1999. An excess cash flow
recapture is payable annually within 15 days after receipt of the Company's
audited fiscal year-end financial statements. In addition, any tax refunds
received in excess of $2.0 million applicable to fiscal 1996 or prior fiscal
years will be applied to reduce the balloon payment. The default interest
would be equal to 2% above the otherwise applicable rate. The Term Loan does
not carry any prepayment penalty.
The commitment under the Revolving Credit Agreement is $85 million, with
sublimits of $70 million for direct borrowings and $35 million for letters of
credit. The interest rate is equal to the greater of 10% or the prime rate
plus 1 1/2% annum. 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 letter 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.
On April 28, 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 takeover of accounts receivables.
Collateral for the amended 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,
Inc., Beldoch Industries Corporation, and Megaknits, Inc.
V - 2
During the first half of fiscal 1997, the Company's operating activities
used cash principally as the result of increases in inventories and decreases
in accounts payables offset by decreases in accounts receivable. During the
first half of fiscal 1996, the Company's operating activities provided cash
principally as the result of the decrease in accounts receivables, offset by
increases in inventory and decreases in accrued expenses. As a result the
amended Credit Facility discussed above, $44.7 million was reclassed from
short term debt to long term debt. The Company believes that amounts under the
Revolving Credit Agreement will be sufficient to offset any negative operating
cash flows and capital expenditures and will provide the Company with
sufficient cash for its needs for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income - In June 1997, the FASB issued Statement No. 130,
Reporting Comprehensive Income, which establishes standards for reporting
and display of comprehensive income. Management of the Company believes
that adoption of Statement No. 130, which is required for the year ended
December 31, 1998, will not have a significant impact on the Company's present
disclosure.
Segment Information - In June 1997, the FASB issued Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information, which
requires that public companies report certain information about operating
segments in their annual financial statements and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public companies report certain information about their products and services,
the geographic areas in which they operate, and their major customers.
Management of the Company is currently reviewing the impact on their current
level of disclosure.
V - 3
PART II. OTHER INFORMATION
Item 1 - 3. Not Applicable.
Item 4. Submission of matters to vote of security holders.
The Company's annual meeting of stockholders was held on
July 30, 1997. The following directors were elected:
Name For Withholding Authority
---- --- ---------------------
Harvey A. Appelle 10,993,450 129,979
James W. Crystal 10,993,810 128,619
Harvey Horowitz 10,901,350 221,079
Lynn Siemers-Cross 10,996,250 126,179
Herbert L. Ash 10,991,960 130,469
Sheridan C. Biggs 10,990,970 131,459
Robert H. Cohen 10,988,100 134,329
Daniel H. Levy 10,988,210 134,219
Robert. H. Martinsen 10,993,250 129,179
The appointment of Deloitte & Touche LLP as independent
auditors for the fiscal year ended December 31, 1997 was
ratified with 10,792,435 shares voting in favor, 15,469
shares against and 23,500 shares abstaining.
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 $5.0 million over a three year period to
help defray claims, if any.
VI - 1
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
1. Employment agreement between Donnkenny Apparel Inc.
Harvey A. Appelle dated as of April 14, 1997.
2. Employment agreement between Donnkenny Apparel Inc. and
Lynn Siemers-Cross dated as of April 14, 1997.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter
for which this report is filed.
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.
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Registrant
Date: August 6, 1997 /s/ Harvey Appelle
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Harvey Appelle
Chairman of the Board,
President and Chief
Executive Officer
Date: August 6, 1997 /s/ Stuart S. Levy
------------------------------
Stuart S. Levy
Vice President - Finance
and Chief Financial Officer,
(Principal Financial Officer)
VI - 3