<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 2, 1995
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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
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Commission file number 0-21940
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Donnkenny, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 51-022889
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Broadway, New York, NY 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 730-7770
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NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes _X_ No ___ and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Common Stock $0.01 par value 13,951,240 (adjusted for split)
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(Class) (Outstanding at September 2, 1995)
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DONNKENNY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-QA)
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<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
Consolidated financial statements:
Balance sheets as of September 2, 1995 (unaudited) and December 3, 1994 ..... I-1
Statements of operations for the three months and nine months ended
September 2, 1995 and September 3, 1994 (unaudited).......................... II-1
Statements of cash flows for the nine months ended
September 2, 1995 and September 3, 1994 (unaudited).......................... III-1
Notes to consolidated financial statements................................... IV-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................... V-1
PART II - OTHER INFORMATION ......................................................... VI-1
Signatures .................................................................. VI-2
</TABLE>
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DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
September 2, 1995 and December 3, 1994
<TABLE>
<CAPTION>
September 2, December 3,
1995 1994
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(Restated
unaudited) (Restated)
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ASSETS
CURRENT:
Cash $ 851 $ 1,606
Accounts receivable - net of allowances of
$1,250 and $881 in 1995 and 1994, respectively 47,564 34,349
Recoverable income taxes 5,843 2,308
Inventories (Note 2) 65,724 34,458
Deferred tax assets 1,330 1,330
Prepaid expenses and other current assets 1,540 1,260
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TOTAL CURRENT ASSETS 122,852 75,311
Property, plant and equipment, net 12,775 9,552
Other assets 6,814 0
Intangible assets 24,456 24,316
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Total Assets $166,897 $109,179
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Current portion of long-term debt $ 6,248 $ 85
Accounts payable 16,282 16,959
Accrued expenses and other current liabilities 7,593 3,975
Income tax payable 1,552 0
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TOTAL CURRENT LIABILITIES 31,675 21,019
Long-term debt, net of current portion 69,793 28,230
Deferred income taxes 2,104 2,104
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000 shares;
issued and outstanding 13,952 and 13,644
shares in 1995 and 1994, respectively 139 137
Additional paid-in capital 45,616 43,585
Retained earnings 17,570 14,104
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Total stockholders' equity 63,325 57,826
Total Liabilities and Stockholders' Equity $166,897 $109,179
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</TABLE>
See accompanying notes to 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
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9/2/95 9/3/94 9/2/95 9/3/94
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(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Net sales $ 66,442 $ 42,195 $ 112,037 $ 101,798
Cost of sales 47,079 31,051 79,582 71,757
------------ ------------ ------------ ------------
Gross profit 19,363 11,144 32,455 30,041
Selling, general and administrative expenses 10,968 6,256 23,659 18,122
Amortization of goodwill
and other related acquisition costs 298 306 674 916
Gain on sale of license (note 4) -- -- -- 1,116
------------ ------------ ------------ ------------
Operating income 8,097 4,582 8,122 12,119
Interest expense 1,102 647 2,341 2,131
------------ ------------ ------------ ------------
Income before income taxes 6,995 3,935 5,781 9,988
Income taxes 2,784 1,604 2,315 4,049
------------ ------------ ------------ ------------
Income before extraordinary item 4,211 2,331 3,466 5,939
------------ ------------ ------------ ------------
Extraordinary item (notes 3) -- -- -- 295
------------ ------------ ------------ ------------
Net income $ 4,211 $ 2,331 $ 3,466 $ 5,644
============ ============ ============ ============
Income per common share:
Income before extraordinary item $ 0.30 $ 0.17 $ 0.25 $ 0.45
Extraordinary item -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income per common share $ 0.30 $ 0.17 $ 0.25 $ 0.43
============ ============ ============ ============
Weighted average number of common shares outstanding
and common stock equivalents 13,932,420 13,917,636 13,770,202 13,257,970
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
II - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
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September 2, September 3,
1995 1994
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(Restated) (Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income before extraordinary item $ 3,466 $ 5,939
Extraordinary item -- (295)
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in defered income tax 414 --
Depreciation and amortization of fixed assets 1,049 765
Amortization of intangibles 667 916
Accretion of debt discount 6 18
Provision for losses on accounts receivable 330 61
Changes in assets and liabilities:
Increase in accounts receivable (8,392) (888)
Increase in recoverable income taxes (2,553) (1,377)
Increase in inventories (12,212) (19,424)
Decrease in prepaid expenses and
other current assets 233 130
Increase in other assets -- (27)
(Decrease) increase in accounts payable (3,182) 10,006
Decrease in accrued expenses and other
current liabilities (3,734) (1,016)
Increase in income taxes payable 1,282 1,019
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Net cash used in operating activities (22,626) (4,173)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (496) (522)
Investment in acquistion, net of acquired cash (27,126) --
-------- --------
Net cash used in investing activities (27,622) (522)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (18,540) (12,426)
Long-term Borrowings 66,000 --
Net repayments under revolving credit line -- (12,000)
Net borrowings under revolving credit line -- 20,000
Net proceeds from secondary offering -- 10,991
Exercise of stock options 2,033 --
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Net cash provided by financing activities 49,493 6,565
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NET (DECREASE) INCREASE IN CASH (755) 1,870
CASH, AT BEGINNING OF YEAR 1,606 927
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CASH, AT END OF QUARTER $ 851 $ 2,797
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
III - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands Except Per Share Data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the Rules of the Securities and Exchange
Commission ("SEC") and in the opinion of management, include all adjustments,
(consisting of normal recurring accruals) necessary for the fair presentation
of financial position, results of operations and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules. The Company believes the
disclosures made are adequate to make such financial statements not
misleading. The results for the interim periods presented are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the Company's December 31, 1996
Form 10-K which includes restated financial information for the 1994 and 1995
fiscal years. Balance sheet data as of December 3, 1994 has been derived from
audited financial statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
September 2, December, 3
1995 1994
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(Restated see Note 1)
Raw materials $15,801 $ 8,320
Work-in-process 6,744 4,314
Finished goods 43,179 21,824
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$65,724 $34,458
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NOTE 3 - PUBLIC OFFERING
On May 5, 1994, the Company completed a public offering of 5,060,000
shares of common stock of which 1,177,640 shares were sold by the Company and
3,882,360 shares were sold by certain stockholders. The price per share in the
offering of $10.31 resulted in proceeds of $10,885 to the Company. The net
proceeds were used to repay $10,600 of indebtedness, accrued interest, and a
prepayment penalty of $495.
NOTE 4 - GAIN ON SALE OF LICENSE
The Company sold the rights to the Ship 'N Shore trademarks in December, 1993
resulting in a one time pre-tax gain of $1,116 that equates to $0.05 per share
on an after-tax basis during the first quarter of fiscal 1994 and $0.05 per
share on an after-tax basis during the first nine months of fiscal 1994.
NOTE 5 - ACQUISITIONS
On June 5, 1995, the Company completed its acquisition of Beldoch
Industries Corporation ("Beldoch"). Beldoch, is a manufacturer, importer and
marketer of moderate and better-priced women's knit sportswear, under the
Beldoch-Popper, Alberoy and Knitmakers labels. Beldoch also holds the license
for Pierre Cardin women's wear manufactured in the U.S.
IV - 1
<PAGE>
NOTE 5 - ACQUISITIONS - continued
The Company completed its acquisition of certain of the assets of the
Sportswear Division of Oak Hill Sportswear Corporation (such business, "Oak
Hill Sportswear") on July 24, 1995, effective as of July 1, 1995. Oak Hill
Sportswear designs, imports, manufactures and markets moderately priced
women's sportswear.
On June 5, 1995, the Company's loan facility from Chemical Bank was
increased to $85 million from $35 million to finance the acquisitions and the
additional working capital needs of these businesses.
The pro-forma results of operations for the nine months ended
September 2, 1995, after giving effect to purchase adjustments, as if the
acquisitions had taken place on December 5, 1994 are as follows (in thousands,
except per share data):
Net Sales $167,429
Net Income $ (1,397)
Net income per share $ (0.10)
NOTE 6 - STOCK SPLIT
On November 17, 1995 , the Board of Directors authorized a two-for-one
stock split which was paid to all holders of record on December 4, 1995. All
references in the accompanying consolidated financial statements to number of
shares, per share amounts, and prices of the Company's common stock for
periods prior to December 4, 1995 have been restated to reflect the stock
split.
NOTE 7 - RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the years ended
December 2, 1995 and December 3, 1994, as well as the quarters within such
years and the two quarters of fiscal 1996 because of errors discovered for
those periods subsequent to the issuance of such financial statements. The
financial statements for the aforementioned periods required restatement to
correct the reporting for the recognition of net sales, cost of sales and
certain expenses. The third quarter of fiscal 1996 was restated for the
rescission of the Fashion Avenue acquisition and to reflect additional reserves
for sales returns and allowances.
The impact of the restatement on the Company's statement of operations
and balance sheets is summarized as follows:
IV - 2
<PAGE>
3 MONTHS ENDED September 2, 1995 September 3, 1994
- --------------- ----------------------- ---------------------
(As Originally (As Originally
STATEMENT OF OPERATIONS Reported) (Restated) Reported) (Restated)
- ----------------------- --------- ---------- --------- ---------
Net Sales ................. $ 70,258 $ 66,442 $ 52,396 $ 42,195
Gross Profit .............. 20,458 19,363 15,311 11,144
Operating Income .......... 10,257 8,097 7,730 4,582
Net Income ................ 5,403 4,211 4,216 2,331
Per common share:
Net Income ........ $ 0.39 $ 0.30 $ 0.30 $ 0.17
9 MONTHS ENDED September 2, 1995 September 3, 1994
- --------------- ----------------------- ---------------------
(As Originally (As Originally
STATEMENT OF OPERATIONS Reported) (Restated) Reported) (Restated)
- ----------------------- --------- ---------- --------- ---------
Net Sales ................. $149,515 $112,037 $116,120 $101,798
Gross Profit .............. 43,516 32,455 34,482 30,041
Operating Income .......... 18,749 8,122 14,425 12,119
Net Income ................ 9,684 3,466 7,690 5,644
Per common share:
Net Income ........ $ 0.70 $ 0.25 $ 0.58 $ 0.43
September 2, 1995 December 3, 1994
----------------------- ---------------------
(As Originally (As Originally
BALANCE SHEET Reported) (Restated) Reported) (Restated)
- ------------- --------- ---------- --------- ---------
Current Assets ............ $128,778 $122,852 $ 77,758 $ 75,311
Total Assets .............. 176,423 166,897 111,626 109,179
Total Liabilities ......... 104,270 103,572 51,190 51,353
Stockholders' Equity ...... 72,153 63,325 60,436 57,826
IV-3
<PAGE>
DONNKENNY, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 2, 1995 AND SEPTEMBER 3, 1994
Net sales increased by $10.2 million or 10.1%, from $101.8 million in
the first nine months of fiscal 1994 to $112.0 million in the first nine
months of fiscal 1995. The increase in net sales was primarily due to net
sales of $31.3 million from Beldoch and Oak Hill, which were acquired in June
and July 1995, respectively, which more than offset declines in the other
divisions. The Company continues to stress its strategy of diversifying its
product mix while selling to a broad range of retail stores.
Gross profit for the first nine months of fiscal 1995 was $32.5 million
or 29.0% of net sales compared to $30.0 million or 29.5% of net sales during
the first nine months of fiscal 1994. The decline in gross profit percentage
was due to the lower gross margin percentages in the Donnkenny and Licensed
Character lines in the first two quarters of fiscal 1995 offset in part by
increases attributable to Beldoch and Oak Hill net sales.
Selling, general and administrative expenses increased from $18.1
million in the first nine months of fiscal 1994 to $23.7 million in the first
nine months of 1995. As a percentage of net sales these expenses increased
from 17.8% in the first nine months of fiscal 1994 to 21.1% in the first nine
months fiscal 1995. This increase is primarily due to the increase in expenses
related to Beldoch and Oak Hill.
The amortization of goodwill and other related acquisition costs were
$0.7 million during the first nine months of fiscal 1995 compared to $0.9
million during the first nine months of fiscal 1994. The decrease is the
result of certain acquisition costs related to prior transactions being fully
amortized in February 1995 offset by increases beginning in June 1995 as a
result of the acquisitions of Beldoch and Oak Hill Sportswear.
The Company sold the rights to the Ship 'n Shore trademarks during the
first nine months of fiscal 1994 resulting in a one-time pre-tax gain of $l.1
million that equates to a $0.05 per share on an after tax basis. There was no
corresponding gain during fiscal 1995.
Interest expense increased from $2.1 million in the first nine months
of fiscal 1994 to $2.3 million in the first nine months or fiscal 1995. This
increase was the net result of reduced borrowings under the Company's Senior
Term Loan with the Prudential Insurance Company of America, Pruco Life
Insurance Company of America, Pruco Life Insurance and Prudential Reinsurance
Company (the "Prudential Senior Term Loan") which was paid off on February 2,
1995, and higher average borrowings under the Company's Chemical Bank credit
facility required to support higher working capital needs and to finance the
recent acquisitions of Beldoch and Oak Hill Sportswear.
The Company provided for taxes at an effective rate of 40.0% for the first
nine months of fiscal 1995 and 40.5% for the first nine months of fiscal 1994.
COMPARISON OF QUARTERS ENDED SEPTEMBER 2, 1995 AND SEPTEMBER 3, 1994
Net sales increased by $24.2 million or 57.5%, from $42.2 million in the
third quarter of fiscal 1994 to $66.4 million in the third quarter of fiscal
1995. The increase in net sales was due to net sales of $31.3 million from
Beldoch and Oak Hill, which were acquired in June and July 1995, respectively,
which more than offset declines in the other divisions.
Gross profit for the third quarter of fiscal 1995 was $19.4 million or
29.1% of net sales compared to $11.1 million or 26.4% of net sales during the
third quarter of fiscal 1994. The increase in gross margin is due primarily to
higher gross profit from the Beldoch and Oak Hill lines and a change in the
sales mix.
Selling, general and administrative expenses increased from $6.3
million in the third quarter of fiscal 1994, to $11.0 million in the third
quarter of 1995. As a percentage of net sales, these expenses increased from
14.8% in the third quarter of fiscal 1994 to 16.5% in the third quarter of
fiscal 1995. The increase was
V-1
<PAGE>
primarily due to additional personnel attributable to the Beldoch and Oak Hill
Sportswear acquisitions in June and July 1995, respectively.
Interest expense increased from $0.6 million in the third quarter of
fiscal 1994 to $1.1 million in the third quarter of 1995. Although the
Prudential Senior Term Loan was paid off on February 2, 1995, the Company
incurred greater interest expense in the third quarter or fiscal 1995 than in
the third quarter of fiscal 1994 because of higher average borrowings under
the Company's Chemical Bank credit facility required to support greater
working capital requirements and to finance the recent acquisitions of Beldoch
and Oak Hill Sportswear.
The Company provided for taxes at an effective rate of 39.8% in the
third quarter of 1995 and 40.8% in the third quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the timing 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 $0.5 million in the first nine months of 1995
and 1994. The Company may spend up to $2.0 million annually on capital
investments in accordance with the Chemical Bank Revolving Credit Agreement
described below. The Company has no material capital expenditure commitments.
During the first nine months of fiscal 1994 and fiscal 1995, the Company's
operating activities used cash principally as a result increases in inventory,
accounts receivable, accrued expenses and recoverable income taxes which more
than offset increases in net income. Additionally, in fiscal 1994 the Company
generated cash through increases in accounts payable. The Company believes
that amounts available under the revolving credit facility provided by the New
Chemical Bank Credit Facility will be sufficient to offset any negative
operating cash flows and capital expenditures and to provide the Company with
sufficient cash for its needs for the foreseeable future.
The Company utilized the net proceeds from its second public offering,
which closed on May 5, 1994, to repay $10.6 million of debt, accrued interest
and a prepayment penalty owing pursuant to the Prudential Senior Term Loan. On
February 2, 1995 the Company entered into a three year, $35.0 million secured
revolving credit facility with Chemical Bank which replaced a $25.0 million
secured line of credit facility with the Chemical Bank. On February 2, 1995,
the Company drew down on such Chemical revolving credit facility to make a
final principal payment of $12.4 million to retire the Prudential Senior Term
Loan. On June 5, 1995, Donnkenny Apparel, Inc. and Beldoch Industries
Corporation (both wholly owned subsidiaries of the Company) as borrowers, the
Company and two of its other subsidiaries as guarantors and Chemical Bank,
Bank of New York and Chase Manhattan Bank as lenders entered into a new credit
facility (the "New Chemical Bank Credit Facility") in a maximum aggregate
principal amount of $85 million. The New Chemical Bank Credit Facility, which
replaced the earlier February 2, 1995 credit facility, is comprised of a $60
million revolving credit facility and a $25 million term loan facility. Such
term loan facility was used to finance the Beldoch and Oak Hill Sportswear
acquisitions. The New Chemical Bank Credit Facility requires compliance with
certain financial performance tests on a quarterly basis that the Company
expects to be able to meet. (See the above discussion regarding interest
expense in the first nine months of fiscal 1994 and fiscal 1995 and in the
third quarter of fiscal 1994 and the third quarter of fiscal 1995.) As of
September 2, 1995, $11.5 million was available under the revolving credit
facility provided under the New Chemical Bank Credit Facility.
V-2
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) On June 17, 1995, the Company filed a For 8-K dated June 5, 1995
to report on its completion of its acquisition of all of the issued and
outstanding shares of Beldoch Industries Corporation and the entry into a
credit agreement dated June 5, 1995 among Donnkenny Apparel Inc. (a wholly
owned subsidiary of the Company) and Beldoch Industries Corporation as
borrowers, the company and two of its other subsidiaries as guarantors, and
Chemical Bank, Bank of New York and Chase Manhattan Bank as lenders, which
provides for an $85 million credit facility consisting of a $60 million
revolving credit facility and a $25 million term loan facility (the New
"Chemical Bank Credit Facility"). Copies of the Stock purchase agreement dated
as of May 26, 1995 among Donnkenny Apparel Inc. and the holders of all
outstanding shares of common stock of Beldoch Industries Corporation and the
New Chemical Bank Credit Facility, together with the related Term Notes and
Revolving Notes, Security Agreements and Assignments for Security were filed
as exhibits to such Form 8-K.
(b) On August 8, 1995, the Company filed a Form 8-K dated July 24,
1995 reporting that the Company had on July 24, 1995 completed its acquisition
of certain assets of the Sportswear Division of Oak Hill Sportswear
Corporation.
(c ) On August 18, 1995, the Company filed a Form 8-K/A amending its
Form 8-K dated June 5, 1995 to file the consolidated Financial Statements of
Beldoch Industries Corporation and Subsidiary for the years ended April 2,
1995 and April 3, 1994, historical financial statements of Beldoch Industries
Corporation and Subsidiary for the two month periods ended Jun 5, 1995 and
June 4, 1994 and the pro-forma condensed combined balance sheet of the company
and its subsidiaries as of June 3, 1995 and pro-forma consolidated statement
of operations of the Company and its subsidiaries for the year ended December
3, 1994 and the six months ended June 3, 1995.
VI - 1
<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.
DONNKENNY, INC.
------------------------------
Registrant
Date: June 11, 1997
----------------- ------------------------------
Harvey Appelle
Chairman of the Board
Chief Executive Officer
Date: June 11, 1997
----------------- ------------------------------
Stuart S. Levy
Vice President - Finance and
Chief Financial Officer,
(Principal Financial Officer)
VI - 2
