<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 June 3, 1995
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.
(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 .
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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 13,645,640 (adjusted for split)
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(Class) (Outstanding at June 3, 1995)
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DONNKENNY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-QA)
<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
Consolidated financial statements:
Balance sheets as of June 3, 1995 (unaudited) and December 3, 1994 ........ I-1
Statements of operations for the three months and the six months ended
June 3, 1995 and June 4, 1994 (unaudited) ................................. II-1
Statements of cash flows for the six months ended
June 3, 1995 and June 4, 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)
June 3, 1995 and December 3, 1994
<TABLE>
<CAPTION>
June 3, December 3,
1995 1994
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(Restated
unaudited) (Restated)
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ASSETS
CURRENT:
Cash $ 1,153 $ 1,606
Accounts receivable - net of allowances of
$971 and $881 in 1995 and 1994, respectively 12,511 34,349
Recoverable income taxes 4,188 2,308
Inventories (Note 2) 48,595 34,458
Deferred tax assets 1,330 1,330
Prepaid expenses and other current assets 1,369 1,260
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TOTAL CURRENT ASSETS 69,146 75,311
Property, plant and equipment, net 9,417 9,552
Intangible assets 23,947 24,316
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Total Assets $102,510 $109,179
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Current portion of long-term debt $ 89 $ 85
Accounts payable 9,546 16,959
Accrued expenses and other current liabilities 4,874 3,975
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TOTAL CURRENT LIABILITIES 14,509 21,019
Long-term debt, net of current portion 28,816 28,230
Deferred income taxes 2,104 2,104
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000 shares;
issued and outstanding 13,644 and 13,644
shares in 1995 and 1994, respectively 137 137
Additional paid-in capital 43,585 43,585
Retained earnings 13,359 14,104
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Total stockholders' equity 57,081 57,826
Total Liabilities and Stockholders' Equity $102,510 $109,179
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</TABLE>
See accompanying notes to consolidated financial statements.
I - 1
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DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
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6/3/95 6/4/94 6/3/95 6/4/94
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(Restated) (Restated) (Restated) (Restated)
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Net sales $ 20,893 $ 32,717 $ 45,595 $ 59,603
Cost of sales 14,173 22,469 32,503 40,706
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Gross profit 6,720 10,248 13,092 18,897
Selling, general and administrative expenses 6,944 6,209 12,691 11,866
Amortization of goodwill
and other related acquisition costs 175 305 376 610
Gain on sale of license (note 4) -- -- -- 1,116
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Operating (loss) income (399) 3,734 25 7,537
Interest expense 568 714 1,239 1,484
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(Loss) income before income taxes (967) 3,020 (1,214) 6,053
Income tax (benefit) provision (376) 1,223 (469) 2,445
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Income before extraordinary item (591) 1,797 (745) 3,608
------------ ------------ ------------ ------------
Extraordinary item (note 3) -- 295 -- 295
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Net (loss) income $ (591) $ 1,502 $ (745) $ 3,313
============ ============ ============ ============
Income per common share:
Net (loss) income before extraordinary item $ (0.04) $ 0.13 $ (0.05) $ 0.28
Extraordinary item -- (0.02) -- (0.02)
------------ ------------ ------------ ------------
Net (loss) income per common share $ (0.04) $ 0.11 $ (0.05) $ 0.26
============ ============ ============ ============
Weighted average number of common shares outstanding
and common stock equivalents 13,645,640 13,238,962 13,645,640 12,928,138
============ ============ ============ ============
</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>
SIX MONTHS ENDED
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June 3, June 4,
1995 1994
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(Restated) (Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income before extraordinary item $ (745) $ 3,608
Extraordinary item -- (295)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of fixed assets 547 505
Amortization of intangibles 376 610
Accretion of debt discount 6 18
Provision for losses on accounts receivable 306 50
Changes in assets and liabilities:
Decrease in accounts receivable 21,532 8,152
Increase in recoverable income taxes (1,880) (710)
Increase in inventories (14,137) (10,493)
(Increase) decreases in prepaid expenses and
other current assets (116) 69
Decrease in other assets -- 243
(Decrease) increases in accounts payable (7,413) 799
Increase (decrease) in accrued expenses and other
current liabilities 899 (1,440)
Decrease in income taxes payable -- (116)
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Net cash (used in) provided by operating activities (625) 1,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (412) (239)
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Net cash used in investing activities (412) (239)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (15,416) (11,215)
Long-term borrowings 16,000 --
Net repayments under revolving credit line -- (11,000)
Net borrowings under revolving credit line -- 11,000
Net proceeds from secondary offering -- 10,667
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Net cash provided by (used in) financing activities 584 (548)
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NET (DECREASE) INCREASE IN CASH (453) 213
CASH, AT BEGINNING OF YEAR 1,606 927
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CASH, AT END OF QUARTER $ 1,153 $ 1,140
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</TABLE>
See accompanying notes to consolidated financial statements.
III - 1
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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:
June 3, December 3,
1995 1994
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(Restated see Note 1)
Raw materials $ 1,245 $ 8,320
Work-in-process 5,672 4,314
Finished goods 31,678 21,824
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$48,595 $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 net 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 half of fiscal 1994.
NOTE 5 - SUBSEQUENT EVENTS
On May 15, 1995, the Company signed letters of intent to acquire all the
outstanding stock of Beldoch Industries Corporation, and to purchase certain
assets, inventories and leasehold improvements of Oak Hill Sportswear
Corporation.
IV-1
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NOTE 5 - SUBSEQUENT EVENTS - continued
On June 5, 1995, the Company completed its acquisition of Beldoch Industries
Corporation. Beldoch, is a manufacturer and marketer of moderate and
better-priced women's knitwear, under the Beldoch-Popper, Alberoy and
Knitmakers labels. Beldoch also holds the license for Pierre Cardin women's
wear manufactured in the U.S.
The Company expects to complete the transaction with Oak Hill Sportswear
Corporation during July, 1995.
On June 5, 1995, the Company's loan facility from Chemical Bank was increased
to $85 million from $35 million to finance these acquisitions and the
additional working capital needs of these businesses.
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
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3 MONTHS ENDED June 3, 1995 June 4, 1994
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(As Originally (As Originally
STATEMENT OF OPERATIONS Reported) (Restated) Reported) (Restated)
- ----------------------- --------- ---------- --------- ----------
Net Sales ................. $ 40,145 $ 20,893 $ 33,164 $ 32,717
Gross Profit .............. 11,672 6,720 9,956 10,248
Operating Income (Loss) ... 4,253 (399) 3,442 3,734
Net Income (Loss) ......... 2,175 (591) 1,333 1,502
Per common share:
Net Income (Loss) .. $ 0.16 ($ 0.04) $ 0.10 $ 0.11
6 MONTHS ENDED June 3, 1995 June 4, 1994
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(As Originally (As Originally
STATEMENT OF OPERATIONS Reported) (Restated) Reported) (Restated)
- ----------------------- --------- ---------- --------- ----------
Net Sales ................. $ 79,275 $ 45,595 $ 63,724 $ 59,603
Gross Profit .............. 23,058 13,092 19,171 18,897
Operating Income .......... 8,492 25 6,695 7,537
Net Income (Loss) ......... 4,281 (745) 3,474 3,313
Per common share:
Net Income (Loss) .. $ 0.31 ($ 0.05) $ 0.27 $ 0.26
June 3, 1995 December 3, 1994
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(As Originally (As Originally
BALANCE SHEET Reported) (Restated) Reported) (Restated)
- -------------- --------- ---------- --------- ----------
Current Assets ............ $ 76,868 $ 69,146 $ 77,758 $ 75,311
Total Assets .............. 110,232 102,510 111,626 109,179
Total Liabilities ......... 45,516 45,429 51,190 51,353
Stockholders' Equity ...... 64,716 57,081 60,436 57,826
IV-3
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DONNKENNY, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 3, 1995 AND JUNE 4, 1994
Net sales decreased by $14.0 million from $59.6 million in the first half
of fiscal 1994 to $45.6 million in the first half of fiscal 1995. The decrease
was due to net sales declines in all of the Company's divisions.
Gross profit for the first half of fiscal 1995 was $13.1 million or 28.7%
of net sales compared to $18.9 million or 31.7% of net sales during the first
half of fiscal 1994. The decrease in gross profit margin was due to a change in
sales mix.
Selling, general, and administrative expenses increased from $11.9
million in the first half of fiscal 1994 to $12.7 million in the first half of
1995. As a percentage of net sales, these expenses increased from 19.9% in the
first half of fiscal 1994 to 27.8% in the first half of fiscal 1995. This
increase is primarily due to relatively fixed sales and design costs being
measured against lower sales volume.
The amortization of goodwill and other related acquisition costs were
$0.4 million during the first six months of fiscal 1995 compared to $0.6
million during the first half of fiscal 1994 as certain related acquisition
costs became fully amortized during February, 1995.
The Company sold the rights to the Ship 'N Shore trademarks during the first
quarter of fiscal 1994 resulting in a one-time pre-tax gain of $1.1 million
that equated to $0.05 per share on an after tax basis. There was no
corresponding gain during fiscal 1995.
Interest expense declined from $1.5 million in the first half of fiscal
1994 to $1.2 million in the first half of fiscal 1995. This was due to 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, offset to a certain extent by
higher average borrowings on the Company's line of credit to support higher
working capital needs.
The Company provided for taxes at an effective rate of 38.6% for the
first half of fiscal 1995 and 40.4% for the first half of fiscal 1994.
COMPARISON OF QUARTERS ENDED JUNE 3,1995 AND JUNE 4, 1994
Net sales decreased by $11.8 million from $32.7 million in the second
quarter of fiscal 1994 to $20.9 million in the second quarter of fiscal 1995.
The decrease was due to declines in all of the Company's divisions.
Gross profit for the second quarter of fiscal 1995 was $6.7 million or
32.2% of net sales, compared to $10.2 million or 31.3% of net sales during
the second quarter of fiscal 1994.
Selling, general and administrative expenses increased from $6.2 million
in the second quarter of fiscal 1994 to $6.9 million in the second quarter of
1995 As a percentage of net sales, these expenses increase from 19.0% in the
second quarter of fiscal 1994 to 33.2% in the second quarter of fiscal 1995.
This increase is primarily due to relatively fixed sales and design costs
being measured against lower sales volume and an increase in administrative
expense.
The amortization of goodwill and other related acquisition costs were
$0.2 million during the second quarter of fiscal 1995 compared to $0.3 million
during the second quarter of fiscal 1994 as certain related acquisition costs
became fully amortized during February, 1995.
Interest expense declined from $0.7 million in the second quarter of
fiscal 1994 to $0.6 million in the second quarter of fiscal 1995. This was due
to 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
V-1
<PAGE>
off on February 2, 1995, and offset to a certain extent by higher average
borrowings on the Company's line of credit to support higher working capital
needs.
The Company provided for taxes at a rate of 38.9% in the second quarter of
1995 and 40.5% in the second quarter of 1994.
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 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. This payment reduced interest
expense, which was partially offset by increased average borrowings on the
Company's line of credit to support higher working capital needs. The
Company's borrowing requirements for working capital fluctuate throughout the
year.
Capital expenditures were $0.4 million in the first half of 1995 compared
to $0.2 in the first half of 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 half of fiscal 1995, the Company's operating activities
used cash principally as the result of decreases in net income and accounts
payable and increases in inventory which more than offset the cash generated
by decreases in accounts receivable. During the first half of fiscal 1994, the
Company's operating activities generated cash principally as the result of
increases in net income and decreases in accounts receivable which offset
increases in inventories. The Company believes that amounts available under
its Chemical Bank revolving credit agreement 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.
On February 2, 1995, the Company entered into a new three year, $35.0
million secured revolving credit facility from Chemical Bank which replaced a
$25.0 million secured line of credit facility with Chemical Bank. On February
2, 1995, the Company drew down on the new Chemical bank revolving credit
facility to make a final principal payment of $12.4 million to retire the
prudential Senior Term Loan. The new Chemical Loan facility requires
compliance with certain financial performance tests on a quarterly basis that
the Company expects to be able to meet. As of June 3, 1995, $6.5 million was
available under the Chemical Bank line of credit facility. As indicated above
in Note 5 - Subsequent Events, on June 5, 1995, the Company's loan facility
with Chemical bank was increased from $35.0 million to $85.0 million.
V-2
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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.
The Company's annual meeting of stockholders was held on April 19,
1995. The following directors were elected:
NAME FOR WITHOLDING AUTHORITY
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Harvey Appelle 5,496,899 145,999
James Crystal 5,498,399 144,449
Sidney Egale 5,498,399 144,449
Harvey Horowitz 5,498,399 144,449
Richard Rubin 5,498,399 144,449
The appointment of KPMG Peat Marwick as independent auditors for the fiscal
year ended December 2, 1995 was ratified with 5,607,798 shares voting in
favor, 3,700 shares against and 31,400 shares abstaining
The amendment to the Donnkenny, Inc. 1992 Stock option Plan to set the maximum
number of shares underlying options that any one person may be granted in any
year at 150,000 and to confirm that directors (in their capacity as such) are
not eligible to participate in such plan was approved with 4,695,438 shares
voting in favor, 799,800 shares against and 97,450 shares abstaining.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
On June 2, 1995, the Company filed a Form 8-K dated May 23, 1995 reporting
that the Company had on May 23, 1995 entered into an agreement with Oak Hill
Sportswear Corporation ("Oak Hill") to acquire certain assets of Oak Hill. On
May 26, 1995 the company had entered into an agreement to acquire all of the
stock of Beldoch Industries Corporation. Copies of such agreement were filed
as exhibits to the Form 8-K.
VI - 1
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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, President and
Chief Executive Officer
Date: June 11, 1997
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Stuart S. Levy
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
VI - 2
