<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 March 31, 1998
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 14,740,940
---------------------------- ------------------
(Class) (Outstanding at March 31, 1998)
<PAGE>
DONNKENNY, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(FORM 10-Q)
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION Page
----
Consolidated financial statements:
Independent Accountants' Report
Balance sheets as of March 31, 1998 and December 31, 1997....................I-1
Statements of operations for the three months ended
March 31, 1998 and March 31, 1997............................................II-1
Statements of cash flows for the three months ended
March 31, 1998 and March 31, 1997............................................III-1
Notes to Consolidated Financial Statements...................................IV-1 - IV-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................V-1 - V-3
PART II - OTHER INFORMATION
Legal Proceedings............................................................VI-1
Exhibits and Reports on Form 8-K.............................................VI-1
Signatures...................................................................VI-2
</TABLE>
<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 March 31, 1998, and the related consolidated statements
of operations and cash flows for the three-month periods ended March 31, 1998
and 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, 1997, 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 March 20, 1998 (March 31, 1998 as to note 8),
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, 1997 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
May 13, 1998
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------------- ----------------------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 518 $ 257
Accounts receivable - net of allowances of
$697 and $720 35,201 24,453
Recoverable income taxes 1,181 1,181
Inventories 23,996 27,248
Deferred tax assets 5,109 5,109
Prepaid expenses and other current assets 2,640 2,146
---------------------- ----------------------
TOTAL CURRENT ASSETS 68,645 60,394
Property, plant and equipment, net 9,969 9,620
Other assets 833 -
Intangible assets 32,125 32,446
---------------------- ----------------------
TOTAL ASSETS $ 111,572 $ 102,460
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,058 $ 5,000
Revolving credit facility 31,111 -
Accounts payable 9,559 9,320
Accrued expenses and other current liabilities 6,504 7,720
Income taxes payable 948 -
---------------------- ----------------------
TOTAL CURRENT LIABILITIES 52,180 22,040
LONG-TERM DEBT - 22,048
DEFFERRED TAX LIABILITIES 5,286 5,286
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value. Authorized 20,000 shares;
issued and outstanding 14,075 shares 141 141
Additional paid-in capital 47,360 47,360
Retained earnings 6,605 5,585
---------------------- ----------------------
Total Stockholders' Equity 54,106 53,086
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,572 $ 102,460
====================== ======================
</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
--------------------------------------------
March 31, March 31,
1998 1997
----------------- ------------------
<S> <C> <C>
Net sales $ 52,527 $ 62,285
Cost of sales 39,576 47,303
-------------------- ---------------------
Gross profit 12,951 14,982
Selling, general and administrative expenses 9,982 11,378
Amortization of excess cost over fair value of net assets
acquired and other related acquisition costs 321 364
-------------------- ---------------------
Operating income 2,648 3,240
Interest expense
(Net of interest income of $110 in 1998) 686 1,557
-------------------- ---------------------
Income before income taxes 1,962 1,683
Income taxes 942 672
-------------------- ---------------------
Net income $ 1,020 $ 1,011
==================== =====================
Basic and diluted net income per common share $ 0.07 $ 0.07
==================== =====================
Weighted average number of common shares outstanding 14,074,940 14,064,000
==================== =====================
</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>
Three Months Ended
-----------------------------------------------------
March 31, March 31,
1998 1997
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,020 $ 1,011
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization of fixed assets 395 449
Amortization of intangibles 321 364
Provision for losses on accounts receivable 96 101
Changes in assets and liabilities:
(Increase) in accounts receivable (10,844) (7,779)
Decrease in recoverable income taxes - 670
Decrease (increase) in inventories 3,252 (1,275)
(Increase) in prepaid expenses and
other current assets (494) (623)
(Increase) in other assets (833) -
Increase (decrease) in accounts payable 239 (2,548)
(Decrease) increase in accrued expenses and
other current liabilities (1,216) 1,808
Increase in income taxes payable 948 -
------------------ -------------------
Net cash (used) in operating activities (7,116) (7,822)
------------------ -------------------
Purchase of fixed assets (750) (97)
Proceeds from sale of fixed assets 6 -
------------------ -------------------
Net cash used in investing activities (744) (97)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (1,450) (1,250)
Net borrowings under revolving credit line 9,571 7,587
------------------ -------------------
Net cash provided by financing activities 8,121 6,337
------------------ -------------------
NET INCREASE/(DECREASE) IN CASH 261 (1,582)
CASH, AT BEGINNING OF QUARTER 257 3,998
------------------ -------------------
CASH, AT END OF QUARTER $ 518 $ 2,416
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
III - 1
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands)
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, 1997 Form 10-K. Balance
sheet data as of December 31, 1997 have been derived from audited financial
statements of the Company.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials $ 4,362 $ 4,209
-------------------------------
Work-in-process 4,325 5,584
-----------------------------
Finished goods 15,309 17,455
------------------------------ ------ ------
$ 23,996 $ 27,248
====== ======
</TABLE>
NOTE 3 - 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 $5,000 over a three year
period to help defray claims, if any. At March 31, 1998, $833 has been
deposited.
NOTE 4 - SHAREHOLDERS RIGHTS PLAN
On April 2, 1998, the Company's board of directors authorized a
shareholder rights plan. Under the terms of the plan, shareholders of record at
the close of business on April 13, 1998, received a dividend distribution of
one preferred stock purchase right for each outstanding share of the Company's
common stock held. The rights will become exercisable only in the event, with
certain exceptions, an acquiring party accumulates 15 percent or more of the
Company's voting stock, or if a party announces an offer to acquire 15 percent
or more. The rights will expire on April 1, 2008.
IV - 1
<PAGE>
Each right will entitle shareholders to buy one one-hundredth of a
share of a new series of preferred stock at an exercise price of $14.00. In
addition, upon the occurrence of certain events, holders of the rights will be
entitled to purchase either the company's stock or shares in an "acquiring
entity" at half of market-value. Further, at any time after a person or group
acquires 15 percent or more (but less than 50 percent) or the Company's
outstanding voting stock, the Board of Directors may, at its option, exchange
part or all of the rights (other than rights held by the acquiring person or
group, which will become void) for shares of the Company's common stock on a
one-for-one basis. The company will be entitled to redeem the rights at $0.01
per right at any time until the tenth day following the acquisition of a
15 percent position in its voting stock.
IV - 2
<PAGE>
DONNKENNY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
COMPARISON OF QUARTERS ENDED MARCH 31, 1998, AND MARCH 31, 1997
- ---------------------------------------------------------------
Net sales decreased by $9.8 million, or 15.7% from $62.3 million in
the first quarter of fiscal 1997 to $52.5 in the first quarter of fiscal 1998.
The decrease in the company's net sales was primarily due to a $7.9 million
decrease in sales of License Characters products as a result of the Company's
exiting those businesses, a $2.9 million decrease in the Victoria Jones
Division and a $1.2 million decrease in the Donnkenny Apparel division. The
decreases were partially offset by increases in the Casey & Max and Pierre
Cardin Divisions of $1.7 million and $1.2 million respectively.
Gross profit for the first quarter of fiscal 1998 was $13.0 million or
24.7% of net sales compared to $15.0 million or 24.1% of net sales during the
first quarter of fiscal 1997. The percentage increase in gross profit was
primarily attributable to the $7.9 million decrease in sales of lower margin
Licensed Character apparel as a result of the Company's exit of those
businesses and to a lesser extent, increased gross profit in the Donnkenny
Apparel division.
Selling, general and administrative expenses decreased from $11.4
million in the first quarter of fiscal 1997 to $10.0 million in the first
quarter of fiscal 1998. As a percentage of net sales, these expenses increased
from 18.3% in the first quarter of fiscal 1997 to 19.0% in the first quarter of
fiscal 1998. The decrease in the selling, general and administrative expenses
of $1.4 million was due primarily to the Company's exiting from the Licensed
Character business, which accounted for $1.6 million of the decrease, and a
decrease in professional fees of $0.7 million, resulting from expenses incurred
in the first quarter of fiscal 1997 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, which
were not incurred in 1998. These reductions were partially offset by increased
financing costs related to the Company's factoring agreement of $0.3 million,
which were not incurred in the first quarter of fiscal 1997 and by increases in
design and sample expense.
Interest expense decreased from $1.6 million during the first quarter
of fiscal 1997 to $0.7 million during the first quarter of fiscal 1998. The
decrease was primarily the result of lower average borrowings and to a lesser
extent, interest income of $0.1 million resulting from interest on income tax
refunds. The decrease was partially offset by higher interest rates under the
Company's credit facility to finance additional working capital needs.
V - 1
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity requirements arise from the funding of working
capital needs, primarily accounts receivable, accrued expenses, 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 $0.8 million, which included $0.7 million
for upgrading computer systems, for the first quarter of fiscal 1998 compared
to $0.1 million in the first quarter of fiscal 1997. The Company may spend up
to $3.5 million annually on capital investments in accordance with the
Revolving Credit Agreement as described below. The Company has committed to
spend an additional $1.4 million in 1998 for upgrading computer systems to
increase efficiencies and become Year 2000 compliant.
On April 30, 1997 the Company entered into an amended Credit Facility
(the "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
Credit Facility is to provide for general working capital needs of the Company
including the issuance of letters of credit. The Credit Facility will expire on
March 31, 1999. Under the Credit Facility, the Chase Manhattan Bank serves as
agent, the CIT Group/Commercial Services Inc. ("CIT") serves as collateral
agent, and each of Fleet Bank, N.A. and the Bank of New York are co-lenders.
The Company believes that it will renew or negotiate a new credit facility over
the next four to six months that will replace the current facility that expires
on March 31, 1999.
As of March 31, 1998, the balance of the Term Loan was $4.1 million.
The interest rate is equal to the prime rate plus 1 1/2% per annum. 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
$0.3 million primarily from the proceeds of tax refunds received by the
Company. An excess cash flow recapture is payable annually within 15 days after
receipt of the Company's audited fiscal year-end financial statements. In
addition, any tax refunds received in Fiscal 1998 will be applied to reduce the
term loan. The default interest rate, if applicable, would be equal to 2% above
the otherwise applicable rate. The Term Loan does not carry any prepayment
penalty.
As of March 31, 1998, borrowings under the Revolving Credit Agreement
amounted to $31.1 million. On March 31, 1998, in support of the Company's 1998
business plan, the Credit Facility was amended as follows: the total amount
available under the Revolving Credit Agreement is $85 million subject to an
asset based borrowing formula, with sublimits of $60 million for direct
borrowings, $35 million for letters of credit and required seasonal
overadvances. 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. Any tax refunds applicable to 1997 and prior years and proceeds
from the sales of fixed assets are to be applied to reduce the balloon payment
on the Term Loan.
V - 2
<PAGE>
In April 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 conversion to a factored receivable arrangement.
Collateral for the 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.
During the first quarter of fiscal 1998, the Company's operating
activities used cash principally as the result of increases in accounts
receivable and decreases in accrued expenses offset by decreases in
inventories. During the first quarter of fiscal 1997, the Company's operating
activities used cash principally as the result of increases in accounts
receivable, inventories and decreases in accounts payables, partially offset by
increases in accrued expenses. Cash use in investing activities in the first
quarter of fiscal 1998 amounted to $0.8 million relating to the upgrades in
computer systems as discussed above. In the first quarter of fiscal 1997 cash
used in investing activities amounted to $0.1 million for the purchase of fixed
assets.
The Company believes that cash flows from operations and amounts under
the Revolving Credit Agreement will be sufficient for its needs in the
foreseeable future.
V - 3
<PAGE>
PART II. OTHER INFORMATION
Item 1. Not Applicable.
- -------
Item 2. Not Applicable.
- -------
Item 3. Not Applicable.
- -------
Item 4. Not Applicable.
- -------
Item 5. Not Applicable.
- -------
Item 6. Exhibits and Reports on Form 8-K
- -------
(a) Exhibit
-------
27. Financial data schedule (filed herewith)
(b) Reports on Form 8-K
-------------------
Form 8-K, filed on April 14, 1998, reporting matters under
Item 5 (Other Events) and Item 7 (Exhibit).
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
/s/ Harvey Appelle
Date: May 15, 1998 ---------------------------
Harvey Appelle
Chairman of the Board,
Chief Executive Officer
/s/ Stuart S. Levy
Date May 15, 1998 ---------------------------
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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 518
<SECURITIES> 0
<RECEIVABLES> 35,201
<ALLOWANCES> 697
<INVENTORY> 23,996
<CURRENT-ASSETS> 68,645
<PP&E> 18,807
<DEPRECIATION> 8,838
<TOTAL-ASSETS> 111,572
<CURRENT-LIABILITIES> 52,180
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 53,965
<TOTAL-LIABILITY-AND-EQUITY> 111,572
<SALES> 52,527
<TOTAL-REVENUES> 0
<CGS> 39,576
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 686
<INCOME-PRETAX> 1,962
<INCOME-TAX> 942
<INCOME-CONTINUING> 1,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,020
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
