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 September 30, 1996
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from December 3, 1995 to December 31, 1995
Commission file number 0-21940
Donnkenny, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0228891
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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
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
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 14,044,940
------------------------------ ---------------------
(Class) (Outstanding at November 15, 1996)
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-Q)
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Consolidated financial statements:
Balance sheets as of September 30, 1996 and December 2, 1995 .................................. I-1
Statements of income for the three months ended and nine months ended September 30, 1996
and September 2, 1995 .......................................................................... II-1
Statements of cash flows for the nine months ended September 30, 1996
and September 2, 1995 .......................................................................... III-1
Notes to Consolidated Financial Statements ..................................................... IV-1 to IV-5
Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................................................... V-1 to V-3
PART II - OTHER INFORMATION
Legal Proceedings .............................................................................. VI-1
Defaults Upon Senior Securities ................................................................ VI-1
Exhibits and reports on Form 8-K ............................................................... VI-2
Signatures ..................................................................................... VII-1
</TABLE>
-2-
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in Thousands, Except Per Share Data)
September 30, 1996 and December 2, 1995
<TABLE>
<CAPTION>
December 2,
1995
September 30, (RESTATED -
ASSETS 1996 SEE NOTE 1)
-------- ----------------------- -----------------------
<S> <C> <C>
CURRENT:
Cash $734 $2,688
Accounts receivable - net of allowances of $4,183 and
$3,138 in 1996 and 1995, respectively 56,708 51,610
Recoverable income taxes 4,595 6,512
Inventories (Note 2) 66,309 48,012
Prepaid expenses and other current assets 3,234 1,484
----------------------- -----------------------
TOTAL CURRENT ASSETS 131,580 110,286
Property, plant and equipment, net 13,937 12,670
Intangible assets 45,307 37,374
----------------------- -----------------------
$190,824 $160,330
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
CURRENT:
Current portion of long-term debt $75,702 $ 7,092
Accounts payable 27,014 13,178
Accrued expenses and other current liabilities 8,811 13,439
----------------------- -----------------------
TOTAL CURRENT LIABILITIES 111,527 33,709
Long-term debt, net of current portion 1,936 55,519
Deferred income taxes 4,471 4,059
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value. Authorized 500 shares;
issued none
Common stock $.01 par value. Authorized 20,000
shares; issued (includes 170 shares issuable)
and outstanding 14,215 and 13,968 shares in
1996 and 1995, respectively 140 140
Additional paid-in capital 49,342 45,743
Retained earnings 23,408 21,160
----------------------- -----------------------
Total stockholders' equity (Note 3) 72,890 67,043
$190,824 $160,330
======================= =======================
</TABLE>
See accompanying notes to consolidated financial statements.
I-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Share and Per Share Data)
for the three months ended and nine months ended
September 30, 1996
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Three Months Nine Months September 2, September 2,
Ended Ended 1995 1995
September September 30, (RESTATED - (RESTATED -
30, 1996 1996 SEE NOTE 1) SEE NOTE 1)
----------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $86,562 $189,774 $66,679 $111,570
Cost of sales 65,070 140,261 47,612 77,058
----------------- ------------------ ---------------- -----------------
Gross profit 21,492 49,513 19,067 34,512
Selling, general and administrative expenses 11,923 37,244 10,673 24,864
Amortization of goodwill and other related
acquisition costs 402 1,137 298 674
----------------- ------------------ ---------------- -----------------
Operating income 9,167 11,132 8,096 8,974
Interest expense 1,402 3,544 1,102 2,341
----------------- ------------------ ---------------- -----------------
Income before income taxes 7,765 7,588 6,994 6,633
Income taxes 3,182 3,110 2,785 2,657
----------------- ------------------ ---------------- -----------------
Net income $4,583 $4,478 $4,209 $3,976
================= ================== ================ =================
Income per common share $0.33 $0.32 $0.30 $0.29
================= ================== ================ =================
Weighted average number of common and
common equivalent shares outstanding 14,100,000 14,000,000 13,900,000 13,800,000
================= ================== ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
II-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash flows
(In Thousands)
For the nine months ended
September 30, 1996 and September 2, 1995
<TABLE>
<CAPTION>
September 2,
1995
September 30, (RESTATED -
1996 SEE NOTE 1)
-------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $4,478 $3,978
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in deferred income taxes 402 645
Depreciation and amortization of fixed assets 1,448 1,049
Amortization of intangibles 1,128 667
Accretion of intangibles 6
Provision for losses on accounts receivable 1,045 330
Changes in assets and liabilities:
Increase in accounts receivable (24,109) (7,925)
Decrease (increase) in recoverable income taxes 3,487 (2,442)
Increase in inventories (10,668) (11,332)
Decrease (increase) in prepaid expenses and other current
assets (231) 232
(Decrease) increase in accounts payable 11,791 (3,182)
Decrease in accrued expenses and other current liabilities (5,106) (2,334)
Increase in income taxes payable 1,282
-------------------- -----------------
Net cash provided by (used in) operating activities (16,335) (19,026)
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of fixed assets (767) (496)
Investment in acquisitions, net of cash acquired (6,071) (30,726)
-------------------- -----------------
Net cash used in investing activity (6,838) (31,222)
-------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (5,735) (18,540)
Net (decrease) increase in revolving loan balance 17,000 66,000
Note payable related to acquisition, net 6,579
Exercise of stock options 598 2,033
-------------------- -----------------
Net cash (used in) provided by financing activities 18,442 49,493
-------------------- -----------------
NET DECREASE IN CASH (4,731) (755)
-------------------- -----------------
CASH, at beginning of year 5,465 1,606
-------------------- -----------------
CASH, at end of nine months $734 $851
==================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
III-1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Data)
(Information as of September 30, 1996 and for the nine months ended
September 2, 1995 and September 30, 1996)
NOTE 1 - BASIS OF FINANCIAL STATEMENTS
The financial data are subject to year-end audit and do not purport to be a
complete presentation in as much as all disclosures required under generally
accepted accounting principles are not included. Reference is made to the
Annual Report on Form 10-K for the fiscal year ended December 2, 1995. The
financial data for the comparative nine month period ended September 2, 1995
have been restated based on adjustments to the timing of the recognition of
sales revenues, cost of goods sold and other expenses. Such restated financial
data are unaudited and do not purport to be a complete presentation of the
adjustments so made. As previously reported in the Company's Form 8-K dated
September 6, 1996, the Company will be amending its 10-K for the fiscal year
ended December 2, 1995 to reflect such adjustments.
The results of operations for the quarters are not necessarily indicative
of those for the full year.
In the opinion of management, the accompanying unaudited financial
statements are presented on a basis consistent with audited statements and
all adjustments, consisting only of normal recurring adjustments, which are
necessary to present fairly the financial position and the results of
operations for the periods indicated have been reflected.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 2,
1995
September 30, (RESTATED - SEE
1996 NOTE 1)
---------------- ------------------
<S> <C> <C>
Raw Materials $14,331 $11,071
Work-in-process 4,757 4,783
Finished goods 47,221 32,158
---------------- ------------------
$66,309 $48,012
================ ==================
</TABLE>
IV-1
<PAGE>
NOTE 3 - ACQUISITIONS
In June 1995, the Company acquired all of the issued and outstanding shares
of Beldoch Industries Corporation ("Beldoch") for $13,000 in cash and a $2,000
note payable, due within one year of the closing date and bearing 6% interest.
The transaction was financed by a portion of the proceeds of a $25,000 term
note and a $60,000 revolving note. The excess of the fair market value of net
assets acquired of approximately $979 was recorded as goodwill and is being
amortized over 20 years.
In July 1995, the Company completed the purchase of certain assets of the
Sportswear Division of Oak Hill Sportswear Corporation ("Oak Hill") for
$14,600, financed by additional borrowings under the Company's revolving
credit line. The excess of the fair market value of net assets acquired of
approximately $6,200 was recorded as goodwill and is being amortized over 20
years.
In September 1996, the Company acquired all of the issued and outstanding
stock of Fashion Avenue Knits Inc. and related companies ("Fashion Avenue")
for the following consideration (which is subject to reduction under certain
circumstances): (i) an $8,000 note payable due January 31, 1997 bearing 6%
interest and (ii) an aggregate of 170,213 shares of the Common Stock of the
Company to be issued in three equal installments on each of the first, second
and third anniversaries of the closing of the acquisition. Such shares have been
accounted as if such shares have been issued. The excess of the fair market
value of net assets acquired of approximately $9.1 million was recorded as
goodwill and is being amortized over 20 years. Under certain circumstances, the
Seller has the right to require the Company to repurchase such shares at a price
of $9.79 per share.
The operating results of each acquisition are included in the Company's
consolidated results of operations from the respective dates of acquisition.
The following unaudited pro forma information assumed the acquisitions of
Beldoch and Oak Hill were completed as of December 5, 1993. These results have
been presented for comparative purposes only and do not purport to be
indicative of results that would have been incurred if they had been made at the
beginning of each of the respective years, or results that may occur in the
future. Pro forma financial data for Fashion Avenue, which is not yet available,
is not included in the pro forma information below.
<TABLE>
<CAPTION>
Nine Months
Ended
September 2, 1995
(RESTATED-SEE
NOTE 1)
-------------
<S> <C>
Net Sales $166,962
Operating income $ 4,262
Net loss ($ 1,152)
Loss per share ($ 0.08)
</TABLE>
IV-2
<PAGE>
NOTE 4 - CHANGE OF FISCAL YEAR
The Company determined on September 11, 1996 to change its fiscal from one
ending on the first Saturday of each year on or after November 30th to a
fiscal year ending on December 31st of each year. The statement of operations
and cash flow for the transition period beginning December 3, 1995 and ending
December 31, 1995 is presented on pages IV-4 and IV-5 of this report. Such
financial data have been restated. (See Note 1). The financial data for such
transition period are subject to year-end audit and do not purport to be a
complete presentation. Audited financial data for such transition period will be
presented in the Company's 10-K for the fiscal year ended December 31, 1996.
IV-3
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In Thousands, Except Share and Per Share Data)
For the period beginning December 3, 1995
and ended December 31, 1995
<TABLE>
<CAPTION>
For the period beginning
December 3, 1995
and Ended
December 31, 1995
(RESTATED - SEE NOTE 1)
------------------------------
<S> <C>
Net sales $7,054
Cost of sales 6,073
------------------------------
Gross profit 981
Selling, general and administrative expenses 4,225
Amortization of goodwill and other related acquisition costs 114
------------------------------
Operating income (3,358)
------------------------------
Interest expense 422
------------------------------
Income before income taxes (3,780)
Income taxes (1,550)
------------------------------
Net income ($2,230)
==============================
Income per common share ($0.16)
==============================
Weighted average number of common and
common equivalent shares outstanding 13,968,840
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
IV-4
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the period beginning December 3, 1995
and ended December 31, 1995
<TABLE>
<CAPTION>
For the period beginning
December 3, 1995
and Ended
December 31, 1995
(RESTATED - SEE NOTE 1)
------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($2,230)
Adjustments to reconcile net income
to net cash provided by operating activities:
Decrease in deferred income taxes
Depreciation and amortization of fixed assets 177
Amortization of intangibles 115
Provision for losses on accounts receivable 193
Changes in assets and liabilities:
Decrease in accounts receivable 18,597
Increase in recoverable income taxes (1,570)
Increase in inventories (2,586)
Increase in prepaid expenses and other current assets (1,547)
Decrease in accounts payable (1,818)
Decrease in accrued expenses and other
current liabilities (1,503)
--------
Net cash provided by (used in) operating activities 7,828
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of fixed assets (11)
--------
Net cash used in investing activity (11)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (40)
Net (decrease) increase in revolving loan balance (5,000)
Exercise of stock options
--------
Net cash (used in) provided by financing activities (5,040)
--------
NET DECREASE IN CASH 2,777
--------
CASH, at beginning of year 2,688
--------
CASH, at end of one month $5,465
========
</TABLE>
See accompanying notes to consolidated financial statements.
IV-5
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Quarters Ended September 30, 1996 and September 2, 1995
Net sales for the third quarter of fiscal 1996 were $86.5 million, an
increase of $19.9 million, compared to $66.7 million for the third quarter of
fiscal 1995. Approximately 18% of the increase related to Fashion Avenue,
which was acquired on September 3, 1996. The remainder of the increase relates
to stronger sales in all product categories and inclusion of the month of
September results in the fiscal 1996 third quarter as compared to June results
in the fiscal 1995 third quarter, as a result of the Company's change in
fiscal reporting periods.
Gross profit increased to $21.5 million (24.8% of sales) for the third
quarter of fiscal 1996 as compared to $19.1 million (28.6% of sales) for the
third quarter of fiscal 1995. The decrease in percentage relates to pricing
pressures at one acquired division and the mix of product sold, offset by
margin improvements in other product lines.
Selling, general and administrative expenses increased to $11.9 million
(13.8% of sales) for the third quarter of fiscal 1996 from $10.7 million
(16.0% of sales) in the third quarter of fiscal 1995. The dollar increase
relates to the costs of Fashion Avenue, which was acquired on September 3, 1996,
start up costs associated with a new distribution facility in South Carolina,
increased headcount for sourcing, distribution and design, higher sales
commissions due to increased volume, offset by savings resulting from the
consolidation of administrative functions of businesses acquired in fiscal 1995.
Interest expense increased by $.3 million during the third quarter of
fiscal 1996 to $1.0 million from $1.4 million during the third quarter of
fiscal 1995 due principally to higher borrowings under the revolving credit
line to finance the July 1995 acquisition of Oak Hill Industries and higher
average borrowings to finance increases in working capital. Interest rates
were comparable in both periods.
Comparison of Nine Months Ended September 30, 1996 and September 2, 1995
Net sales for the first nine months of fiscal 1996 were $189.8 million,
an increase of $78.2 million or 70.1%, compared to sales of $111.6 million for
the first nine months of fiscal 1995. Approximately $66 million of the increase
relates to businesses acquired during fiscal 1995 and 1996. The balance of the
increase relates to stronger sales in all product lines.
Gross profit increased to $49.5 million (26.1% of sales) for the first
nine months of fiscal 1996 as compared to $34.5 million (30.9% of sales) for
the first nine months of fiscal 1995. The decrease in gross profit percentage
relates to pricing pressures at one division, as well as the mix of products
sold.
Selling, general and administrative expenses increased to $37.2
million (19.6% of sales) for the first nine months of fiscal 1996 from $24.9
million (22.3% of sales) for the first nine months of fiscal 1995. The dollar
increase relates to the acquired businesses.
V-1
<PAGE>
Amortization of goodwill increased to $1.1 million for the first nine
months of fiscal 1996 from $.7 million for the first nine months of fiscal
1995, due to the inclusion of the businesses acquired in 1995 for the entire
nine month period in fiscal 1996.
Interest expense increased to $3.5 million for the first nine months
of fiscal 1996 compared to $2.3 million for the first nine months of fiscal
1995 due to higher borrowings to finance the July 1995 Oak Hill acquisition
and higher average borrowings to finance the increase in working capital.
Interest rates were comparable in both periods.
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 fluctuate throughout
the year.
Capital expenditures were $.8 million for the nine months ended
September 30, 1996 compared to $.5 million for the nine months ended
September 2, 1995. The Company may spend up to $3.0 million annually on
capital expenditures 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 "Borrowers"), the
Company and the Company's other two subsidiaries as guarantors and The Chase
Manhattan Bank, The Bank of New York and Fleet Bank, N.A. as lenders, are
parties to a credit facility entered into in June 1995 (such credit facility, as
amended to date, the "Credit Facility"). The Company was in default under the
Credit Facility with respect to certain representations and covenants regarding
the timeliness and accuracy of the Company's financial information.
Additionally, as a result of the acquisition by the Company, effective on
September 3, 1996, of the outstanding capital stock of Fashion Avenue, the
Company was in default of certain other provisions of the Credit Facility,
including the financial covenant regarding the Company's leverage ratio. As a
result of such defaults, approximately $64 million of the Company's long-term
debt under the Credit Facility as at September 30, 1996 has been reclassified as
current debt. Effective November 20, 1996, the Company entered into a Fifth
Amendment and Waiver Agreement (the "Fifth Amendment"), which includes a waiver
of such defaults through February 27, 1997. In the event that the Company,
following such period, is unsuccessful in obtaining a further waiver, the
lenders thereof could declare the entire outstanding amount to be due and
payable, which could have a material adverse effect on the Company.
The Fifth Amendment, among other provisions, also (i) reduces the amount
of funds available under the revolving credit portion of the Credit
Facility from a maximum of $60 million to a maximum of $43 million at
November 20, 1996, subject to incremental reductions to $31 million at
February 21, 1997, and subject to further reductions based upon alternative
formulas; (ii) restricts the Borrowers from utilizing Eurodollar loans
and increases the interest rate on prime rate loans by 1% during the waiver
period; (iii) imposes additional reporting requirements on the Company; and
(iv) requires the execution by the Borrowers and their bankers of blocked
account and lockbox agreements. The foregoing discussion is qualified in
its entirety by reference to the full text of the Fifth Amendment, which
is filed as part of this report.
During the nine months ended September 30, 1996, the Company's
operating activities used $16.3 million more cash than was generated
principally as the result of increases in inventory and accounts receivable
and a decrease in accrued expenses, offset by increases in accounts payable
and recoverable income taxes. Net cash used in investing activities amounted
to $6.8 million, of which $6.1 million related to the Fashion Avenue
acquisition and the balance for the purchase of fixed assets. Cash flow from
financing activities of $18.4 million primarily reflects increases in revolving
loan borrowings of $17.0 million, notes payable in connection with the Fashion
Avenue acquisition of $6.6 million and repayment of long-term debt of $5.7
million. The Company believes (i) that amounts available
V-2
<PAGE>
under the revolving credit facility provided under the Credit Facility (as
amended by the Fifth Amendment) will be sufficient to offset any negative
operating cash flows and capital expenditures and will provide the Company with
sufficient cash for its needs through February 27, 1997, and (ii) that
thereafter it will be successful in extending the Credit Facility or obtaining
financing from other sources; however, there can be no assurance in either
regard.
V-3
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 12, 1996, a shareholder of the Company, Ellen
Grauer, filed a lawsuit in the United States District Court in
the Southern District of New York seeking class-action status
on behalf of all purchasers of the Company's Common Stock
between February 14, 1995 and November 6, 1996. The Complaint
alleges that the Company violated federal securities laws and
concealed material facts about the Company's financial
statements during such period.
The Company is aware of the existence of a lawsuit
filed on November 18, 1996 in the United States District Court in
the Southern District of New York seeking class-action status on
behalf of all purchasers of the Company's Common Stock between
September 24, 1996 and November 13, 1996. The Company is also
aware of a lawsuit filed on November 20, 1996 in the United
States District Court in the Southern District of New York
seeking class-action status on behalf of all purchasers of the
Company's Common Stock between February 14, 1995 and November 15,
1996. The Company has not been formally served with complaints by
the plaintiffs in either of such suits. According to press
reports, at least one other similar case has been, or is in the
process of being, filed.
Item 2. Not Applicable.
Item 3. Defaults Upon Senior Securities
The Company was in default under the Credit Facility
with respect to certain representations and covenants
regarding the timeliness and accuracy of the Company's
financial information under the Credit Facility.
Additionally, as a result of the acquisition by the
Company, effective as of September 3, 1996, of the
outstanding capital stock of Fashion Avenue, the Company
was in default of certain other provisions of the Credit
Facility, including the financial covenant regarding the
Company's leverage ratio. Effective November 20, 1996, the
Company entered into the Fifth Amendment, which includes a
waiver of such defaults through February 27, 1997. In the
event that the Company, following such period, has not
corrected such defaults as required by the Fifth Amendment
and is unsuccessful in obtaining a further waiver, the
lenders could declare the entire outstanding amount to be due
and payable, which could have a material adverse effect
on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 4. Not Applicable.
Item 5. Not Applicable.
VI-1
<PAGE>
Item 6. Exhibits and reports on Form 8-K.
(a) The following document is filed as part of this report:
1. Fifth Amendment Agreement dated as of November 20, 1996 to the
Credit Agreement dated as of June 5, 1995, among Donnkenny
Apparel, Inc., Beldoch Industries Corporation, the Guarantors
named therein, the Lenders named therein, and The Chase
Manhattan Bank, as agent.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K having a report
date of September 6, 1996.
VI-2
<PAGE>
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.
<TABLE>
<S> <C>
Donnkenny, Inc.
-------------------------------
Registrant
Date: November 22, 1996 /s/ Richard Rubin
---------------------- -------------------------------
Richard Rubin
Chairman of the Board,
President and Chief
Executive Officer
Date: November 22, 1996 /s/ Stuart S. Levy
---------------------- -------------------------------
Stuart S. Levy
Vice-President - Finance
and Chief Financial Officer,
(Principal Financial and
Chief Accounting Officer)
</TABLE>
VII-1
Fifth Amendment and Waiver Agreement
Fifth Amendment and Waiver Agreement, dated as of November 20, 1996, to
the Credit Agreement, dated as of June 5, 1995 (as the same has heretofore or
may be hereafter amended, supplemented or modified from time to time in
accordance with its terms, the "Credit Agreement"), among Donnkenny Apparel,
Inc., a Delaware corporation and Beldoch Industries Corporation, a Delaware
corporation (collectively, the "Borrowers"), the Guarantors named therein and
signatories thereto, the lenders named in Schedules 2.01(a) and (b) of the
Credit Agreement (collectively, the "Lenders"), and The Chase Manhattan Bank
(formerly known as Chemical Bank) as agent for the Lenders (in such capacity,
the "Agent"). Capitalized terms used herein but not otherwise defined herein
shall have the meanings attributed thereto in the Credit Agreement.
WHEREAS, Borrowers have informed the Agent of the existence of certain
Events of Default under the Credit Agreement; and
WHEREAS, Lenders have agreed to waive such Events of Default for a
limited period subject to Borrower's agreement to modify the Credit Agreement in
certain respects.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, and subject to the fulfillment of the
conditions set forth below, the parties hereto agree as follows:
SECTION 1. WAIVERS UNDER CREDIT AGREEMENT
1.1 The Lenders hereby waive, solely for the period through February
27, 1997 ("Waiver Period"): (a) the provisions of Section 7.09 of the Credit
Agreement with respect to the Leverage Ratio for the fiscal quarter period ended
September 30, 1996 provided that the Leverage Ratio for such period was in no
event greater than 4.28:1.00, and (b) the other Defaults or Events of Default as
described in the letter from the Borrowers to the Lenders dated as of November
20, 1996, a copy of which is annexed hereto.
1.2 Except for the specific waivers set forth in Section 1.1 and then
only for the Waiver Period, nothing herein shall be deemed to be a waiver of any
covenant or agreement contained in the Credit Agreement, and the Borrowers
hereby agree that all of the covenants and agreements contained in the Credit
Agreement are ratified and confirmed in all respects.
SECTION 2. AMENDMENTS TO THE CREDIT AGREEMENT
2.1 The defined terms "Availability" and "Letter of Credit Usage"
contained in Section 1.01 of the Credit Agreement are amended to read as follows
and the defined terms "Debt Sublimit" and "Waiver Period" are added to Section
1.01 of the Credit Agreement in their alphabetical order to read as follows:
<PAGE>
"Availability" shall mean at any time (i) the lesser at such
time of (x) the Total Revolving Credit Commitment less the Letter of
Credit Usage, (y) the Borrowing Base and (z) Debt Sublimit minus (ii)
the unpaid principal balance of, and past due interest and fees on the
Revolving Credit Loans.
"Debt Sublimit" shall mean $43,000,000 for the period November
20, 1996 to December 12, 1996; $41,500,000 from December 13, 1996 to
December 16, 1996; $38,500,000 from December 17, 1996 to December 19,
1996; $35,500,000 from December 20, 1996 to January 2, 1997; $33,000,000
from January 3, 1997 to February 6, 1997; $32,000,000 from February 7,
1997 to February 20, 1997; $31,000,000 from February 21, 1997 and
thereafter.
"Letter of Credit Usage" shall mean at any time, (i) the
aggregate undrawn amount of all outstanding Letters of Credit at such
time, together with letters of credit issued by Chemical Bank on behalf
of Beldoch Industries Corporation outstanding on the Closing Date and
indemnities, if any, issued by the Agent to a financial institution
which has opened letters of credit relating to the assets being acquired
pursuant to the Asset Purchase Agreement plus (ii) the unreimbursed
drawings at such time under all such Letters of Credit; provided,
however, that during the Waiver Period the Letter of Credit Usage shall
not exceed $27,000,000 at any one time outstanding and Letters of Credit
may only be opened to support international purchases.
"Waiver Period" shall mean the period from November 20, 1996 to
February 28, 1997 with respect to existing Events of Default as waived
for such period pursuant to Fifth Amendment and Waiver Agreement dated
as of November 20, 1996 as the same may be extended with the consent of
the Required Lenders."
2.2 Subparagraph (b) of Section 2.01 of the Credit Agreement is amended
by changing the phrase "(C) $60,000,000" to "(C) the Debt Sublimit."
2.3 Section 2.05 of the Credit Agreement is amended by adding thereto a
new subsection (d) to read as follows:
"(d) Notwithstanding subsections (a) and (b) hereof, during the
Waiver Period, the Borrower shall not request Eurodollar Loans, each
Prime Rate Loan, which is a Term Loan, shall bear interest at a rate per
annum equal to the Prime Rate plus 1% and each Prime Rate Loan, which is
a Revolving Credit Loan, shall bear interest at a rate per annum equal
to the Prime Rate plus 1/2 of 1%."
2.4 Section 6.05(i) of the Credit Agreement is amended by adding the
following at the end thereof:
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"Notwithstanding the generality of the foregoing, the Borrowers shall
deliver to the Agent the following information or documents no later than the
dates indicated without the benefit of any grace period provided for in
subparagraph (d) of Article VIII hereof:
By November 22, 1996, a blocked account letter in the form
provided by the Agent executed by the Borrowers and Nationsbank, N.A.
By November 25, 1996, a list of all bank accounts not maintained
with the Lenders which shall include the account name, number, bank and
current balance.
By November 29, 1996, weekly cash flow and L/C usage budgets for
the period December 1, 1996 to January 4, 1997.
By December 31, 1996, weekly cash flow and L/C usage budgets for
the period January 5, 1997 to February 7, 1997.
By January 31, 1997, weekly cash flow and L/C usage budgets for
the period February 8, 1997 to February 28, 1997.
By January 6, 1997, the audited (without qualification) restated
financial statements for the 1994 and 1995 Fiscal Years.
By January 6, 1997, the August 31, 1996 audited financial
statements for Fashion Avenue Knits, Inc. and its subsidiaries for
the Fiscal Year then ended.
By December 20, 1996, monthly projected balance sheets, profit
and loss statements and cash flows for the 1997 Fiscal Year, and showing
projected Indebtedness, including, without limitation, Letters of
Credit, outstanding.
By December 16, 1996, a triparty lockbox agreement providing the
Agent with dominion and control over Borrowers' collections and
receivables in the form provided by the Agent.
By December 29, 1996, modification of any promissory notes in
excess of $100,000 coming due from Donnkenny Apparel, Inc. during the
Waiver Period extending the maturity thereof to no earlier than March 4,
1997.
Following receipt by the Borrower from the Agent of a revised
borrowing base formula based on the results and
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recommendations of an audit presently being conducted by The CIT Group,
a Borrowing Base compliance certificate based on such revised formula, in form
and substance satisfactory to the Lenders, is to be delivered no later than 20
days after the end of each month, without giving effect to any grace period."
2.5 Article VIII of the Credit Agreement is hereby amended by adding a
new subsection (o) to read in its entirety as follows:
"(o) if any information, statement or findings from whatever
source (including, without limitation, an audit conducted by CIT) with
respect to the Borrowers' financial condition for the 1994 and 1995
Fiscal Years or the first two fiscal quarters of 1996 shall vary in any
material respect from the preliminary restated financial statements for
such periods heretofore delivered to the Lenders or the other
information delivered to the Lenders as set forth on the Schedule
annexed to the Fifth Amendment and Waiver Agreement dated as of November
20, 1996."
SECTION 3. CONDITIONS PRECEDENT
Upon the execution and delivery of counterparts of this Amendment and
Waiver Agreement (the "Agreement") by the parties listed below and the
fulfillment of the following conditions, this Agreement shall be deemed to
have become effective as of the date hereof:
3.1 All representations and warranties contained in this Agreement, the
Credit Agreement or otherwise made in writing to the Agent or any Lender in
connection herewith shall be true and correct in all material respects after
giving effect to the waivers under this Agreement.
3.2 No unwaived event shall have occurred and be continuing which
constitutes a Default or an Event of Default.
3.3 The Agent shall have received an amendment fee for the ratable
benefit of the Lenders in the amount of $175,000.
SECTION 4. MISCELLANEOUS
4.1 Each of the Borrowers reaffirms and restates the representations and
warranties set forth in the Credit Agreement, as applicable, and all such
representations and warranties shall be true and correct on the date hereof
with the same force and effect as if made on such date after giving effect to
the waivers under this Agreement.
4.2 Except as herein expressly amended, the Credit Agreement and the
other documents executed and delivered in connection therewith are each ratified
and confirmed in all respects and shall remain in full force and effect in
accordance with their respective terms.
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4.3 Except as specifically set forth herein, nothing herein contained
shall constitute a waiver or be deemed to be a waiver, of any existing
Defaults or Events of Default, and the Lenders and Agent reserve all rights
and remedies granted to them by the Credit Agreement, the other documents
executed and delivered in connection therewith, by law and otherwise.
4.4 This Agreement may be executed by the parties hereto individually
or in combination, in one or more counterparts, each of which shall be an
original and all of which shall constitute one and the same agreement. A
facsimile signature page shall constitute an original for the purposes
hereof.
4.5 During the Waiver Period, Borrowers, in addition to paying the
reasonable fees and expenses of counsel to the Agent, shall also pay the
reasonable fees and expenses of counsel retained by any of the Lenders.
4.6 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
DONNKENNY APPAREL, INC.
By: /s/ Richard Rubin
------------------------------
Name: Richard Rubin
Title: President
BELDOCH INDUSTRIES CORPORATION
By: /s/ Richard Rubin
------------------------------
Name: Richard Rubin
Title: President
FASHION AVENUE KNITS INC.
By: /s/ Richard Rubin
------------------------------
Name: Richard Rubin
Title: President
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THE SWEATER COMPANY, INC.
By: /s/ Richard Rubin
-------------------------------
Name: Richard Rubin
Title: President
CHRISTIANSBURG GARMENT
COMPANY INCORPORATED
By: /s/ Richard Rubin
-------------------------------
Name: Richard Rubin
Title: President
MEGAKNITS, INC.
By: /s/ Richard Rubin
-------------------------------
Name: Richard Rubin
Title: President
THE CHASE MANHATTAN BANK
(formerly known as Chemical Bank),
as Agent and Lender
By: /s/ Joseph Abruzzo
--------------------------------
Name: Joseph Abruzzo
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Ronald Pagoto
---------------------------------
Name: Ronald Pagoto
Title: Vice President
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FLEET BANK, N.A.
By: /s/ Anthony Santoro
---------------------------------
Name: Anthony Santoro
Title: Vice President
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