<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 1, 1996
------------
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21940
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Donnkenny, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 51-022889
------------------------------ ----------------
(State or other 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
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 13,996,640
------------------------------ -----------------------------
(Class) (Outstanding at June 1, 1996)
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-QA)
PART I - FINANCIAL INFORMATION Page
Consolidated financial statements:
Balance sheets as of June 1, 1996 (unaudited) and December 2, 1995..I-1
Statements of operations for the three months ended
June 1, 1996 and June 3, 1995 (unaudited).........................II-1
Statements of cash flows for the six months ended
June 1, 1996 and June 3, 1995 (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
Exhibit Index.....................................................VII-1
Exhibit 10.33
Exhibit 10.34
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
June 1, 1996 and December 2, 1995
<TABLE>
<CAPTION>
June 1, December 2,
1996 1995
-------- --------
(Restated
unaudited) (Restated)
ASSETS
------
CURRENT:
<S> <C> <C>
Cash $ 1,298 $ 2,688
Accounts receivable - net of allowances of
$1,815 and $1,946 in 1996 and 1995, respectively 30,193 49,834
Recoverable income taxes 8,446 6,921
Inventories (Note 2) 50,311 47,660
Deferred Tax Assets 2,414 2,414
Prepaid expenses and other current assets 1,924 1,464
-------- --------
TOTAL CURRENT ASSETS 94,586 110,981
Property, plant and equipment, net 12,216 12,670
Intangible assets 33,299 34,013
-------- --------
Total Assets $140,101 $157,664
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT:
Current portion of long-term debt $ 6,095 $ 7,092
Accounts payable 12,559 13,178
Accrued expenses and other current liabilities 8,673 10,354
-------- --------
TOTAL CURRENT LIABILITIES 27,327 30,624
Long-term debt, net of current portion 45,463 55,519
Deferred income taxes 6,287 6,287
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000 shares;
issued and outstanding 13,997 and 13,968
shares in 1996 and 1995, respectively 139 139
Additional paid-in capital 45,997 45,744
Retained earnings 14,888 19,351
-------- --------
Total stockholders' equity 61,024 65,234
Total Liabilities and Stockholders' Equity $140,101 $157,664
======== ========
</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 Six Months Ended
---------------------------- ----------------------------
6/1/96 6/3/95 6/1/96 6/3/95
---------------------------- ----------------------------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Net sales $ 52,407 $ 20,893 $ 94,944 $ 45,595
Cost of sales 41,019 14,173 71,836 32,503
------------ ------------ ------------ ------------
Gross profit 11,388 6,720 23,108 13,092
Selling, general and administrative expenses 14,619 6,944 27,611 12,691
Amortization of excess cost over fair value of net assets
acquired and other related acquisition costs 368 175 729 376
------------ ------------ ------------ ------------
Operating (loss) income (3,599) (399) (5,232) 25
Interest expense 1,108 568 2,221 1,239
------------ ------------ ------------ ------------
Loss before income taxes (4,707) (967) (7,453) (1,214)
Income tax benefit (1,907) (376) (2,990) (469)
------------ ------------ ------------ ------------
Net loss $ (2,800) $ (591) $ (4,463) $ (745)
============ ============ ============ ============
Net loss per common share $ (0.20) $ (0.04) $ (0.32) $ (0.05)
============ ============ ============ ============
Weighted average number of common shares outstanding
and common stock equivalents 13,985,831 13,645,640 13,979,012 13,645,640
============ ============ ============ ============
</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
----------------------
June 1, June 3,
1996 1995
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated) (Restated)
<S> <C> <C>
Net loss $ (4,463) $ (745)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization of fixed assets 848 547
Amortization of intangibles 729 376
Accretion of debt discount -- 6
Provision for losses on accounts receivable 131 306
Changes in assets and liabilities:
Decrease in accounts receivable 19,510 21,532
Increases in recoverable income taxes (1,525) (1,880)
Increase in inventories (2,651) (14,137)
Increase in prepaid expenses and
other current assets (475) (116)
Decrease in accounts payable (619) (7,413)
(Decrease) increase in accrued expenses and other
current liabilities (1,681) 899
-------- --------
Net cash provided by (used in) operating activities 9,804 (625)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (394) (412)
-------- --------
Net cash used in investing activities (394) (412)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (3,553) (15,416)
Long-term borrowings 16,000
Net repayments under revolving credit line (7,500) --
Exercise of stock options 253 --
-------- --------
Net cash (used in) provided by financing activities (10,800) 584
-------- --------
NET DECREASE IN CASH (1,390) (453)
CASH, AT BEGINNING OF YEAR 2,688 1,606
-------- --------
CASH, AT END OF QUARTER $ 1,298 $ 1,153
======== ========
</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 2, 1995 has been derived from audited financial statements
of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
June 1, December 2,
1996 1995
------- -------
(Restated see Note1)
Raw materials $ 11,131 $ 11,071
Work-in-process 5,600 4,783
Finished goods 33,580 31,806
--------- --------
$ 50,311 $ 47,660
========= ========
NOTE 3 - ACQUISITIONS
In June 1995, the Company completed its acquisition of Beldoch
Industries Corporation ("Beldoch"). In July 1995, the Company completed the
purchase of certain assets of the Sportswear Division of Oak Hill Sportswear
Corporation ("Oak Hill").
NOTE 4 - 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.
IV - 1
<PAGE>
NOTE 5 - 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:
<TABLE>
<CAPTION>
3 MONTHS ENDED June 1, 1996 June 3, 1995
- -------------- ------------------------- -----------------------
(As Originally (As Originally
STATEMENT OF OPERATIONS Reported) (Restated) Reported) (Restated)
- ----------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales...................................... $ 54,996 $ 52,407 $ 40,145 $ 20,893
Gross Profit................................... 15,473 11,388 11,672 6,720
Operating Income (Loss)........................ 5,979 (3,599) 4,253 (399)
Net Income (Loss).............................. 2,879 (2,800) 2,175 (591)
Per common share:
Net Income (Loss)...................... $ 0.20 ($ 0.20) $ 0.16 ($ 0.04)
</TABLE>
<TABLE>
<CAPTION>
6 MONTHS ENDED June 1, 1996 June 3, 1995
- -------------- ------------------------- -----------------------
(As Originally (As Originally
STATEMENT OF OPERATIONS Reported) (Restated) Reported (Restated)
- ----------------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Net Sales...................................... $ 107,190 $ 94,944 $ 79,257 $ 45,595
Gross Profit................................... 30,350 23,108 23,058 13,092
Operating Income (Loss)........................ 11,554 (5,232) 8,492 25
Net Income (Loss(.............................. 5,534 (4,463) 4,281 (745)
Per common share:
Net Income (Loss)...................... $ 0.39 ($ 0.32) $ 0.31 ($ 0.05)
</TABLE>
<TABLE>
<CAPTION>
June 1, 1996 December 2, 1995
------------------------ ------------------------
(As Originally (As Originally
BALANCE SHEET Reported) (Restated) Reported) (Restated)
- ------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current Assets................................. $ 99,695 $ 94,586 $ 111,603 $ 110,981
Total Assets................................... 148,571 140,101 161,647 157,664
Total Liabilities.............................. 74,424 79,077 93,287 92,430
Stockholders' Equity........................... 74,147 61,024 68,360 65,234
</TABLE>
IV-2
<PAGE>
DONNKENNY, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 1, 1996 AND JUNE 3, 1995
Net sales increased by $49.3 million or 108.2% from $45.6 million in the
first half of fiscal 1995 to $94.9 million in the first half of fiscal 1996.
Net sales increased in the Company's sportswear category led by sales from Oak
Hill Sportswear and Beldoch Industries acquired during the third quarter of
fiscal 1995 whose net sales contribution of $52.2 million in fiscal 1996 which
more than offset sales declines in the other divisions.
Gross profit for the first half of fiscal 1996 was $23.1 million or 24.3%
of net sales compared to $13.1 million or 28.7% of net sales during the first
half of fiscal 1995. The percentage decline was primarily attributable to the
lower gross margin percentages from the sales of Beldoch and Oak Hill products
and the sell off of discontinued licensed apparel at low margins.
Selling, general and administrative expenses increased from $12.7 million
in the first half of fiscal 1995 to $27.6 million in the first half of fiscal
1996. As a percentage of net sales, these expenses increased from 27.8% in the
first half of fiscal 1995 to 29.1% in the first half of fiscal 1996. The
increase in SG&A expenses in dollars and as a percentage of net sales was due
primarily to the higher selling, general and administrative expenses related to
Beldoch and Oak Hill which were acquired in June and July 1995, respectively.
The amortization of goodwill and other related acquisition costs were $0.7
million during the first half of fiscal 1996 compared to $0.4 million during
the first half of fiscal 1995, due to the businesses acquired in June and July
of fiscal 1995 being included for the entire six month period in fiscal 1996.
Interest expense increased from $1.2 million during the first half of
fiscal 1995 to $2.2 million during the first half of fiscal 1996. The increase
was the net result of higher average borrowings under the Company's credit
facility required to finance the acquisitions of Beldoch Industries in June
1995 and Oak Hill Sportswear in July 1995 and to finance additional working
capital needs.
The Company provided for taxes at an effective rate of 40.1% for the first
half of fiscal 1996 and 38.6% for the first half of fiscal 1995.
COMPARISON OF QUARTERS ENDED JUNE 1, 1996 AND JUNE 3, 1995
Net sales increased by $31.5 million or 150.8% from $20.9 million in the
second quarter of fiscal 1995 to $52.4 million in the second quarter of fiscal
1996. Fiscal 1996 includes net sales from Beldoch and Oak Hill which were
acquired in the third quarter of fiscal 1995. Sales from Beldoch and Oak Hill
accounted for $34.1 million of the net sales increase, which more than offset
declines in the other divisions.
Gross profit for the second quarter of fiscal 1996 was $11.4 million, or
21.7% of net sales compared to $6.7 million or 32.2% of net sales during the
second quarter of fiscal 1995. The percentage decline was primarily
attributable to the lower gross margin percentages from the sales of Beldoch
and Oak Hill products and the sell off of discontinued licensed apparel at low
margins.
Selling, general and administrative expenses increased from $6.9 million in
the second quarter of fiscal 1995 to $14.6 million in the second quarter of
fiscal 1996. The increase in dollar terms was due to additional expenses
associated with Beldoch and Oak Hill which were acquired in June and July 1995,
respectively. As a percentage of net sales, these expenses declined from 33.2%
in the second quarter of fiscal 1995 to 27.9% in the second quarter of fiscal
1996. The decline in SG&A expenses as a percentage of net sales was due
primarily to the fact that design and sales expenses increased at a lower rate
than the percentage of increase in net sales.
The amortization of goodwill and other related acquisition costs was $0.4
million during the second quarter of fiscal 1996 compared to $0.2 million
during the second quarter or fiscal 1995, due to the businesses acquired in
June and July of fiscal 1995 being included for the second quarter in fiscal
1996.
V - 1
<PAGE>
Interest expense increased from $0.6 million during the second quarter of
fiscal 1995 to $1.1 million during the second quarter of fiscal 1996. The
increase was the net result of higher average borrowings under the Company's
credit facility required to finance the acquisitions of Beldoch Industries in
June 1995 and Oak Hill Sportswear in July 1995 and to finance additional
working capital needs.
The Company provided for taxes at an effective rate of 40.5% for the second
quarter of fiscal 1996 and 38.9% for the second quarter of fiscal 1995.
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 $0.4 million for the first half of fiscal 1996
compared to $0.4 million in the first half fiscal 1995. The Company may spend
up to $3.0 million annually on capital investments in accordance with the
Chemical Bank Revolving Credit Agreement described below. The Company has no
material capital expenditure commitments.
Donnkenny Apparel, Inc. and Beldoch Industries Corporation (Both
wholly-owned subsidiaries of the Company) as borrowers, the Company and the
Company's other two subsidiaries as guarantors and Chemical Bank, Bank of New
York and Chase Manhattan Bank as lenders are parties to a credit facility
entered into in June 1995 for an initial maximum aggregate principal amount of
$85.0 million which was increased to $100.0 million in May 1996 to provide the
Company with the ability to open additional letters of credit (such credit
facility as amended to date, the "Chemical Bank Credit Facility"). The Chemical
Bank Credit Facility is comprised of a $75 million revolving credit facility
and a $25 million term loan facility. The Chemical Bank Credit Facility
requires compliance with certain financial performance tests on a quarterly
basis that the Company expects to be able to meet. As of June 24, 1996, $17.3
million was available under the revolving credit facility provided under the
Chemical Bank Credit Facility.
During the first half of fiscal 1996, the Company's operating activities
generated cash principally as the result of decreases in accounts receivable
offset by a net loss, increases in inventories and decreases in accrued
expenses. During the first half of fiscal 1995, the Company's operating
activities used cash principally as a result of increases in inventories and
decreases in accounts payable, offset by decreases in accounts receivables. The
Company believes that amounts avai1able under the revolving credit facility
provided under the Chemical Bank Credit Facility 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.
V - 2
<PAGE>
PART II. OTHER INFORMATION
Items 1 - 3. Not applicable
- ------------
Item 4. Submission of matters to vote of security holders.
- -------
The Company's annual meeting of stockholders was held on April 19, 1996. The
following directors were elected:
Name For Withholding Authority
- ---- --- ---------------------
Harvey Appelle 11,322,253 0
James Crystal 11,322,253 0
Sidney Eagle 11,320,853 1,400,000
Harvey Horowitz 11,320,853 1,400,000
Richard Rubin 11,320,851 1,402,000
The appointment of KPMG Peat Marwick as independent auditors for the fiscal year
ended November 30, 1996 was ratified with 11,387,751 shares voting in favor,
4,350 shares against and 7,529 shares abstaining.
The adoption of the Donnkenny, Inc. Restricted Stock Plan was approved with
5,066,854 shares voting in favor, 2,861,984 shares against, 57,583 abstaining
and 5,987,419 broker non-votes.
Item 5. Not applicable
- -------
Item 6. Exhibits and reports on form 8-K.
- -------
(a) The following documents are filed as part of this report:
---------------------------------------------------------
1. First Amendment Agreement dated as of April 12, 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 Chemical Bank as agent.
2. Second Amendment Agreement dated as of May 13, 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 Chemical Bank as agent.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by Company during the
quarter ended June 1, 1996.
VI-1
<PAGE>
S I G NA 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
------------------- -------------------------
Stuart S. Levy
Vice President - Finance
and Chief Financial Officer,
(Principal Financial Officer)
VI-2
<PAGE>
EXHIBIT INDEX
Exhibit Description of Sequentially
No. Exhibit Numbered Page
- ----- ------------- -------------
10.33 First Amendment Agreement dated as of
April 12, 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 Chemical Bank as Agent. (1)
Exhibit No. 10.34 Second Amendment Agreement dated as of
May 13, 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 Chemical Bank as Agent. (1)
(1) Incorporated herein by reference to the Company's Report on Form 10-Q for
the quarterly period ended June 1, 1996 as filed with the Commission on
July 10, 1996
VII-1
