<PAGE>
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, 1997
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 14,069,940
---------------------------- ----------
(Class) (Outstanding at September 30, 1997)
<PAGE>
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 September 30, 1997 and December 31, 1996...I-1
Statements of operations for the three and nine months ended
September 30, 1997 and September 30, 1996.......................II-1
Statements of cash flows for the nine months ended
September 30, 1997 and September 30, 1996.......................III-1
Notes to Consolidated Financial Statements......................IV-1
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
Signatures......................................................VI-2
<PAGE>
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 September 30, 1997, and the related consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1997, and the consolidated statement of cash flows for the
nine-month period ended September 30, 1997. 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
November 12, 1997
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT:
Cash $ 419 $ 3,998
Accounts receivable - net of allowances of
$1,798 and $1,946 in 1997 and 1996, respectively 51,117 29,721
Recoverable income taxes 1,521 8,625
Inventories 42,350 46,793
Deferred tax assets 4,439 4,439
Prepaid expenses and other current assets 2,164 1,633
-------------- -------------
TOTAL CURRENT ASSETS 102,010 95,209
Property, plant and equipment, net 10,613 11,774
Intangible assets 32,702 32,450
-------------- -------------
Total Assets $ 145,325 $ 139,433
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Current portion of long-term debt $ 5,104 $ 50,761
Accounts payable 13,385 19,476
Accrued expenses and other current liabilities 9,670 8,055
-------------- -------------
TOTAL CURRENT LIABILITIES 28,159 78,292
Long-term debt, net of current portion 55,968 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 141 140
Additional paid-in capital 46,459 46,344
Retained earnings 8,735 8,794
-------------- -------------
Total Stockholders' Equity 55,335 55,278
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 145,325 $ 139,433
============== =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
I - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 77,133 $ 82,482 $ 191,459 $ 184,401
Cost of sales 60,764 61,953 149,713 138,777
------------- --------------- -------------- ------------
Gross profit 16,369 20,529 41,746 45,624
Selling, general and administrative expenses 12,617 11,246 36,654 37,110
Amortization of intangibles 245 402 948 1,137
------------- --------------- -------------- ------------
Operating income 3,507 8,881 4,144 7,377
Interest expense 1,642 1,357 4,242 3,499
------------- --------------- -------------- ------------
Income (loss) before income taxes 1,865 7,524 (98) 3,878
Income taxes (benefit) 713 3,086 (39) 1,551
------------- --------------- -------------- ------------
Net income (loss) $ 1,152 $ 4,438 $ (59) $ 2,327
============= =============== ============== ============
Net income (loss) per common share $ 0.08 $ 0.31 $ -- $ 0.17
============= =============== ============== ============
Weighted average number of common shares
outstanding 14,550,000 14,100,000 14,100,000 13,900,000
============= =============== ============== ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
II - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 30, September 30,
1997 1996
----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $ (59) $ 2,327
Adjustments to reconcile net (loss) income to
Net cash used in operating activities:
Increase in deferred income taxes - 402
Depreciation and amortization of fixed assets 1,327 1,416
Amortization of intangibles 948 1,137
Provision for losses on accounts receivable 300 (591)
Changes in assets and liabilities:
Increase in accounts receivable (21,697) (20,150)
Decrease (Increase) in recoverable income taxes 7,104 (652)
Decrease (Increase) in inventories 4,443 (9,103)
Increase in prepaid expenses and
other current assets (531) (163)
(Decrease) Increase in accounts payable (6,091) 11,681
Increase (Decrease) in accrued expenses and
other current liabilities 1,625 (2,196)
----------- -------------
Net cash used in operating activities (12,631) (15,892)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (291) (767)
Proceeds from sale of equipment 232 -
Increase in intangibles (1,200) -
----------- -------------
Net cash used in investing activities (1,259) (767)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (9,142) (4,379)
Net borrowings under revolving credit line 19,453 16,093
Exercise of stock options - 599
----------- -------------
Net cash provided by financing activities 10,311 12,313
----------- -------------
NET DECREASE IN CASH (3,579) (4,346)
CASH, AT BEGINNING OF PERIOD 3,998 5,465
----------- -------------
CASH, AT END OF PERIOD $ 419 $ 1,119
=========== =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
III - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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. 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:
September 30, December 31,
1997 1996
---- ----
Raw materials.................................. $ 9,286 $ 12,081
Work-in-process................................ 3,630 4,808
Finished goods................................. 29,434 29,904
--------- --------
$ 42,350 $ 46,793
========= ========
NOTE 3 - PLANT CLOSING
In September 1997, the Company decided to close a plant it operates
in Haysi, Virginia which is expected to occur in the fourth quarter of this
year for which the Company accrued $0.4 million in the third quarter as a
component of operating expenses.
NOTE 4 - 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 costs of resolution of litigation, if any.
IV - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997, AND SEPTEMBER 30, 1996
Net sales increased by $7.1 million, or 3.9%, from $184.4 million in the
first nine months of fiscal 1996 to $191.5 million in the first nine months of
fiscal 1997. Sales increases of $30.7 million for the Donnkenny, Beldoch and
Oak Hill divisions were partially offset by the sales decrease of $23.6
million in the licensed character business.
Gross profit for the first nine months of fiscal 1997 was $41.7 million or,
21.8% of net sales compared to $45.6 million, or 24.7% of net sales during the
first nine months of fiscal 1996. The decline in gross profit as a percentage
of net sales was primarily attributable to lower gross margins in the licensed
character lines resulting from the sell off of off priced excess inventory,
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 $37.1 million in
the first nine months of fiscal 1996 to $36.7 million in the first nine months
of fiscal 1997. As a percentage of net sales, these expenses decreased from
20.1% in the first nine months of fiscal 1996 to 19.1% in the first nine
months 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 were primarily
responsible for decreased administrative expense. These reductions were
partially offset by higher professional fees, distribution expenses and costs
applicable to the Company's 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. In September 1997, the Company
decided to close a plant it operates in Haysi, Virginia which is expected to
occur in the fourth quarter of this year for which the Company accrued $0.4
million in the third quarter as a component of operating expenses.
The amortization of goodwill and other related acquisition costs were $0.9
million during the first nine months of fiscal 1997 and $1.1 million during
the first nine months of 1996.
Interest expense increased from $3.5 million during the first nine months of
fiscal 1996 to $4.2 million during the first nine months of fiscal 1997. The
increase was the result of higher average interest rates under the Company's
credit facility and higher Revolver borrowings used to finance additional
working capital needs. The increase in the Revolver more than offset the
reductions in the Senior Term Loan balance.
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Net sales decreased by $5.4 million, or 6.4% from $82.5 million in the third
quarter of fiscal 1996 to $77.1 million in the third quarter of fiscal 1997.
Sales increases of $9.7 million for the Donnkenny, Beldoch and Oak Hill
divisions were offset by sales decreases of $15.1 million in the licensed
character business.
Gross profit for the third quarter of fiscal 1997 was $16.4 million, or
21.2% of net sales compared to $20.5 million, or 24.8% of net sales during the
third quarter of fiscal 1996. The decline in gross profit as a percentage of
net sales was primarily due to lower gross margins in the licensed character
lines as a result of the sell off of off priced excess inventory, the close
out of products with expiring licenses and to a lesser extent lower gross
margins from the sales of Donnkenny products.
Selling, general and administrative expenses increased from $11.2 million in
the third quarter of fiscal 1996 to $12.6 million in the third quarter of
fiscal 1997. As a percentage of net sales, these expenses increased from 13.6%
in the third quarter of fiscal 1996 to 16.4% in the third quarter of fiscal
1997. The increase in dollars and as a percent of net sales is primarily the
result of an increase in professional fees and costs applicable to the
Company's Factoring Agreement, which became effective April 28, 1997. The
increase in professional fees is primarily the result of legal fees associated
with the previously reported class action lawsuits. In September 1997, the
Company decided to close a plant it operates in Haysi, Virginia which is
expected to occur in the fourth quarter of this year for which the Company
accrued $0.4 million in the third quarter as a component of operating
expenses.
V - 1
<PAGE>
The amortization of goodwill and other related acquisition costs was $0.2
million during the third quarter of fiscal 1997 compared to $0.4 million
during the third quarter of fiscal 1996.
Interest expense increased from $1.4 million during the third quarter of
fiscal 1996 to $1.6 million during the third quarter of fiscal 1997. The
increase was a result of higher average interest rates under the Company's
credit facility, which was partially offset by lower average outstanding debt.
This reduction was due to the accelerated pay down of the Senior Term Loan and
Revolver, primarily from the proceeds of income tax refunds received by the
Company.
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 $0.3 million for the first nine months of fiscal
1997 compared to $0.8 million in the first nine months 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 September 30, 1997, the balance of the Term Loan was $8.4 million.
The interest rate is equal to the prime rate plus 1 1/2 % per annum and the
amortization schedule calls for quarterly payments of $1.3 million. The
balloon payment, which is due on March 31, 1999 has been reduced from $7.5
million to $2.2 million primarily from the proceeds of tax refunds received by
the Company. Additional tax refunds of $1.7 million were received subsequent
to September 30, 1997, which further reduced the balloon portion of the loan
to $0.5 million. An excess cash flow recapture is payable annually within 15
days after receipt of the Company's audited fiscal year-end financial
statements. The default interest would be equal to 2% above the otherwise
applicable rate. The Term Loan does not carry any prepayment penalty.
As of September 30, 1997 the borrowings under the Revolving Credit Agreement
amounted to $52.4 million. 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
<PAGE>
During the first nine months of fiscal 1997, the Company's operating
activities used cash principally as the result of increases in accounts
receivable and decreases in accounts payable offset by decreases in
recoverable income taxes and inventories. During the first nine months of
fiscal 1996, the Company's operating activities used cash principally as the
result of increases in accounts receivable and inventories, offset by
increases in accounts payable. As a result of the amended Credit Facility
discussed above, $44.7 million was reclassed from short term debt to long term
debt. During the nine months ended September 30, 1997, net borrowings under
the revolving credit line amounted to $19.4 million and the Company repaid
$9.1 million of 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
Earnings per Share - In February 1997, the FASB issued SFAS No. 128,
"Earnings per Share" ("EPS"), which is effective for both interim and annual
periods ending after December 15, 1997. SAFS No. 128 supersedes APB No. 15 and
specifies the computation, presentation and disclosure requirement for basic
and diluted EPS. The Company has determined that the adoption of this new
standard would not have had a material effect on EPS for all periods presented.
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
<PAGE>
PART II. OTHER INFORMATION
Item 1 - 3. Not Applicable.
Item 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 $5.0 million over a three year period to
help defray costs of resolution of litigation, if any.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Not Applicable.
(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 - 1
<PAGE>
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: November 14, 1997 /s/ Harvey A. Appelle
---------------------
Harvey Appelle
Chairman of the Board,
President and Chief
Executive Officer
Date November 14, 1997 /s/ Stuart S. Levy
------------------
Stuart S. Levy
Vice President - Finance
and Chief Financial Officer,
(Principal Financial Officer)
VI - 2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 419
<SECURITIES> 0
<RECEIVABLES> 58,756
<ALLOWANCES> 7,639
<INVENTORY> 42,350
<CURRENT-ASSETS> 102,010
<PP&E> 23,894
<DEPRECIATION> 13,281
<TOTAL-ASSETS> 145,325
<CURRENT-LIABILITIES> 28,159
<BONDS> 55,968
0
0
<COMMON> 141
<OTHER-SE> 55,194
<TOTAL-LIABILITY-AND-EQUITY> 145,325
<SALES> 77,133
<TOTAL-REVENUES> 77,133
<CGS> 60,764
<TOTAL-COSTS> 60,764
<OTHER-EXPENSES> 12,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,642
<INCOME-PRETAX> 1,865
<INCOME-TAX> 713
<INCOME-CONTINUING> 1,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,152
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
