UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
Commission file number 1-6680
Kenwin Shops, Inc.
(Exact name of registrant as specified in its charter.)
New York 13-5607936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4747 Granite Drive, Tucker, Georgia 30084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 938-0451
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), 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 practical
date:
As of June 30, 1996, there were 556,350 shares outstanding of the
registrant's common stock.
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
KENWIN SHOPS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
For the Six Months Ended For the Quarters Ended
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
------------------------ -----------------------
<S> <C> <C>
REVENUES
Retail sales (Note 5) $ 6,637,021 $ 8,156,154 $ 3,667,914 $ 4,514,828
Other income, principally
finance charges 13,580 431,673 3,399 235,643
----------- ----------- ----------- -----------
TOTAL REVENUES 6,650,601 8,587,827 3,671,313 4,750,471
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold,
including occupancy and
distribution expenses 4,198,137 5,331,349 2,164,135 3,001,940
Selling, general and
administrative expenses 3,442,228 3,488,829 1,744,275 1,733,276
Depreciation 145,862 171,609 73,086 85,636
Interest expense 30,369 83,087 13,517 44,393
----------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 7,816,596 9,074,774 3,995,013 4,865,245
----------- ----------- ----------- -----------
LOSS BEFORE REORGANIZATION
ITEMS AND INCOME TAXES (1,165,995) (486,947) (323,700) (114,774)
----------- ----------- ----------- -----------
REORGANIZATION ITEMS (Note 6)
Professional fees - 304,400 - 167,617
Other costs and fees - 73,847 - 34,206
----------- ----------- ----------- -----------
TOTAL REORGANIZATION ITEMS - 378,247 - 201,823
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX
EXPENSE (1,165,995) (865,194) (323,700) (316,597)
----------- ---------- ----------- -----------
INCOME TAX EXPENSE (183,453) (87,817) (183,453) (87,817)
----------- ----------- ----------- -----------
NET LOSS $(1,349,448) $ (953,011) $ (507,153) $ (404,414)
=========== ========== =========== ===========
NET LOSS PER SHARE $ (2.43) $ (2.34) $ (0.91) $ (0.99)
========== ========== =========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
KENWIN SHOPS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 370,163 $ 274,177
Accounts receivable, less allowance
for doubtful accounts of $401,801
and $1,019,409, respectively (Note 3) 88,552 364,662
Merchandise inventories 1,677,704 2,042,880
Prepaid expenses and refundable taxes 129,125 129,632
-------------- --------------
TOTAL CURRENT ASSETS 2,265,544 2,811,351
-------------- --------------
PROPERTY AND EQUIPMENT, at cost 4,097,190 4,080,571
Less accumulated depreciation and
amortization 3,083,596 2,946,385
-------------- --------------
PROPERTY AND EQUIPMENT, net (Note 3) 1,013,594 1,134,186
-------------- --------------
OTHER ASSETS
Other assets 69,022 68,872
Deferred income taxes (Note 4) - 183,453
-------------- --------------
TOTAL OTHER ASSETS 69,022 252,325
-------------- --------------
TOTAL ASSETS $ 3,348,160 $ 4,197,862
============== ==============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Bank overdraft $ 226,052 $ 182,897
Line of credit (Note 3) 733,544 -
Accounts payable, trade 406,494 534,129
Accrued expenses and other
liabilities 157,515 259,470
Taxes withheld and accrued 82,045 129,408
Customers' deposits on layaways 78,489 78,489
-------------- --------------
TOTAL CURRENT LIABILITIES 1,684,139 1,184,393
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value;
authorized, 1,000,000 shares;
issued 613,472 shares 613,472 613,472
Additional paid-in capital 991,819 991,819
Retained earnings 961,847 2,311,295
-------------- --------------
2,567,138 3,916,586
Less treasury stock, at cost,
57,122 shares 903,117 903,117
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 1,664,021 3,013,469
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,348,160 $ 4,197,862
============== ==============
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
KENWIN SHOPS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Six Months Ended
------------------------------
June 30, 1996 July 2, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,349,448) $ (953,011)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities
Depreciation and amortization 181,814 202,018
Loss on disposal of property and
equipment - 574
Provision for doubtful accounts 183,240 92,151
Deferred income taxes, net 183,453 87,817
Changes in assets (increase) decrease
Accounts receivable, net 92,870 491,321
Merchandise inventories 365,176 (132,372)
Prepaid expenses and refundable taxes (35,445) (27,783)
Other assets (150) 4,924
Changes in liabilities increase (decrease)
Accounts payable, trade (127,635) 187,465
Bank overdraft 43,155 -
Accrued expenses and other liabilities (101,955) 91,302
Taxes withheld and accrued (47,363) (60,794)
------------ -------------
NET CASH USED BY OPERATING
ACTIVITIES (612,288) (16,388)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (27,842) (37,314)
Proceeds from sale of property and equipment 2,572 6,218
------------ -------------
NET CASH USED BY INVESTING ACTIVITIES (25,270) (31,096)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings 4,807,000 967,379
Repayments of bank borrowings (4,073,456) (791,233)
------------ -------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 733,544 176,146
------------ -------------
NET INCREASE IN CASH 95,986 128,662
CASH, BEGINNING OF PERIOD 274,177 507,164
------------ -------------
CASH, END OF PERIOD $ 370,163 $ 635,826
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the period $ 30,369 $ 83,087
============= =============
Income taxes paid during the period $ - $ -
============= =============
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
KENWIN SHOPS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 In the opinion of Kenwin Shops, Inc. (the "Company"), the accompanying
unaudited consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position as of June 30, 1996 and the
results of operations for the six months and quarters ended June 30,
1996 and July 2, 1995 and cash flows for the six months ended June 30,
1996 and July 2, 1995. These statements are condensed and therefore
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial state-
ments. The statements should be read in conjunction with the
consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1995. The results of operations for the six months ended June 30,
1996 and July 2, 1995 are not necessarily indicative of the results
to be expected for the full year.
Note 2 There were 102 stores in operation on June 30, 1996 and on July 2,
1995 (see Note 10).
Note 3 At June 30, 1996, the Company's earnings before interest, taxes,
depreciation and amortization (EBITDA), and minimum net worth, as
defined in the loan agreement with Sterling National Bank and Trust
("Sterling"), were less than the amounts required. Therefore, the
Company failed to fulfill a loan covenant requiring a zero balance
for a 30-day period during the quarter ended June 30, 1996. There-
fore, the Company was in default of its loan agreement for the period
ended June 30, 1996. The Company was also in default based on the
earnings and minimum net worth covenants at December 31, 1995.
Management has requested a waiver from Sterling of these covenants
for the two periods.
Note 4 The following is a summary of the net deferred tax asset account
recognized in the accompanying consolidated condensed balance
sheet as of June 30, 1996:
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
Deferred tax assets $ 1,749,334 $ 1,310,380
Valuation allowance (1,749,334) (1,126,927)
------------- -------------
Net deferred taxes $ - $ 183,453
============= =============
Note 5 Leased department sales included in net sales:
Six Months Ended Quarters Ended
------------------------------ --------------------------------
June 30, 1996 July 2, 1995 June 30, 1996 July 2, 1995
--------------- -------------- --------------- --------------
$ 532,800 $ 446,400 $ 324,100 $ 271,000
============== ============= ============= =============
<PAGE>
KENWIN SHOPS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6 The accompanying consolidated condensed financial statements include
reorganization charges of $378,247 and $201,823 for the six months
and quarter ended July 2, 1995, respectively. The charges related to
a Chapter 11 reorganization which was completed October 12, 1995.
Reorganization items representing outflows of cash for the six months
and quarter ended July 2, 1995 are as follows:
Six Months Ended Quarter Ended
---------------- -------------
Professional fees paid $ 153,429 $ -
Other costs and fees paid 17,670 6,500
------------- -----------
Total $ 171,099 $ 6,500
============= ===========
Note 7 Shares issuable upon the exercise of stock options have not been
included in the earnings per share computations for the six months and
quarters ended June 30, 1996, and July 2, 1995, because the effect of
such would be immaterial.
The weighted average number of common shares entering into the
calculation of earnings per share was 556,350 and 407,090 for the
six months and quarters ended June 30, 1996 and July 2, 1995,
respectively.
Note 8 As presented in the accompanying financial statements, the Company
incurred losses before income taxes of $1,165,995 and $323,700 for the
six months and quarter ended June 30, 1996, respectively. The Company
also experienced difficulty obtaining sufficient credit from its bank
and it suppliers during these peirod.
During 1996, management intends to closely monitor the operations of
its existing locations and streamline administrative overhead. One of
the key factors in the Company's recent financial difficulties is an
increasing inability to obtain adequate credit with which to finance
inventory purchases. The condition impacts the quantity and selection
of goods in the stores, with the result being an expanding cycle of
lost sales and customers. Management believes the current line of
credit will no longer be adequate to finance the operating requirements
of the Company. The Company has embarked upon a plan to seek an
infusion of funds through an equity investment by an outside source.
Negotiations are currently underway with a possible investor. The
Company anticipates that with the necessary capital infusion, it can
increase the flow of merchandise to its stores and thereby increase
sales volume.
<PAGE>
KENWIN SHOPS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The ability of the Company to continue as a going concern is dependent
on obtaining adequate funding for the purchase of inventory and the
ability of management to return the Company's operations to
profitability. The financial statements do not include any adjust-
ments that might be necessary if the Company is unable to continue
as a going concern.
Note 9 Certain items in 1995 have been reclassified in the accompanying
financial statements in order to conform with the 1996 presentation.
Note 10 Subsequent to the quarter ended June 30, 1996, the Company closed six
of its existing stores. The inventory from the stores that were
closed has been relocated to the more profitable stores.
<PAGE>
KENWIN SHOPS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES decreased $1,519,100 (18.6%) for the six months ended
June 30, 1996 and decreased $846,900 (18.8%) for the quarter ended
June 30, 1996 as compared to the corresponding 1995 periods.
Management attributes the majority of the decrease to the Company's
inability to adequately stock its stores with merchandise. Poor
cash flow, the lack of vendor support and the continuing weak
economic conditions in the retail industry continue to produce weak
sales. The Easter season, one of the busiest with regard to sales,
was split between the first and second quarters in 1996 and fell
entirely in the second quarter in 1995, the effect of which was an
estimated reduction in sales of approximately $350,000 during the
second quarter of this year.
COST OF GOODS SOLD, INCLUDING OCCUPANCY AND DISTRIBUTION EXPENSES as
a percentage of sales, decreased from 65.4 % and 66.5% for the six
months and quarter ended July 2, 1995 to 63.3% and 59.0% for the six
months and quarter ended June 30, 1996, respectively. These decreases
were primarily due to the increase in the Company's maintained markup,
derived through lower inventory markdowns.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $46,601 (1.3%)
and $10,999 (0.6%) for the six months and quarter ended June 30, 1996
as compared to the corresponding 1995 period. These decreases were
principally due to reductions in advertising expenditures and credit
related expenses.
INTEREST EXPENSE is primarily the result of short-term bank
borrowings.
INCOME TAX EXPENSES results from an increase in the deferred tax asset
valuation account due to uncertainty regarding the Company's ability
to realize future benefit from its net operating loss carryforwards.
As a result of the factors mentioned above, the Company's consolidated
net loww for the six months ended June 30, 1996 amounted to $1,349,400
($2.43 per share), compared to a loss of $953,000 ($2.34 per share) for
the corresponding 1995 period and the consolidated net loss for the
quarter ended June 30, 1996 amounted to $507,200 ($.91 per share),
compared to a loss of $404,400 ($.99 per share) for the corresponding
1995 period.
<PAGE>
KENWIN SHOPS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities as well as an available line
of credit with a bank for short-term borrowings are the Company's primary
sources of liquidity and capital. The increase in cash for the six months
ended June 30, 1996 is attributable to the decrease in the Company's net
investment in inventory, decrease in inventory, plus additional bank borrowings.
The line of credit for short-term borrowings and the anticipated funds
from operations are current financial resources available to the Company.
These funds have in the past been adequate to finance the operating require-
ments of the Company. However, due to faltering sales and poor economic
conditions, these funds no longer appear to be adequate to finance the
requirements of the Company in the future. The Company has embarked upon a
plan to seek an infusion of funds through an equity investment by an outside
source. Negotiations are currently underway with a possible investor. The
Company anticipates that with the necessary capital infusion, it can increase
the flow of merchandise to its stores and thereby increase sales volume.
Retail stores in operation since January 1, 1995 to date have
consistently been at 102. However, in an attempt to cut operating costs and
other expenses, the Company has embarked upon a plan to close some of its
locations leaving 96 currently in operation. Dependent upon the outcome of
the aforementioned negotiations, additional stores may be closed.
The following items measure the Company's ability to meet its short-
term obligations:
June 30, 1996 December 31, 1995
-------------- -----------------
Working capital $ 581,400 $ 1,626,000
Working capital ratio 1.3 2.4
<PAGE>
PART II - OTHER INFORMATION
KENWIN SHOPS, INC.
Item 3, Defaults by the Company on its senior securities.
Part (a). At December 31, 1995 and June 30, 1996, the Company's
earnings before interest, taxes, and depreciation and amortization
(EBITDA), cumulative EBITDA, and minimum net worth, as defined in the
loan agreement with Sterling, were less than the amounts required.
In addition, the Company failed to fulfill a loan covenant requiring
a zero balance for a thirty-day period during the quarter ended June 30
1996. Therefore, the Company was in default of its loan agreement.
Management has requested a waiver of these requirements for the periods
ended December 31, 1995 and June 30, 1996.
Item 6(b), Reports on Form 8-K
No Form 8-K, Current Report, forms were filed during the quarter ended
June 30, 1996.
<PAGE>
KENWIN SHOPS, INC.
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.
KENWIN SHOPS, INC.
(Registrant)
August 14, 1996 /s/ Robert Schwartz
Date Robert Schwartz
President
August 14, 1996 /s/ Kenneth G. Sauer
Date Kenneth G. Sauer, Treasurer
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-29-1996
<PERIOD-START> Apr-01-1996
<PERIOD-END> Jun-30-1996
<CASH> 370,163
<SECURITIES> 0
<RECEIVABLES> 88,552
<ALLOWANCES> 401,801
<INVENTORY> 1,677,704
<CURRENT-ASSETS> 2,265,544
<PP&E> 4,097,190
<DEPRECIATION> 3,083,596
<TOTAL-ASSETS> 3,348,160
<CURRENT-LIABILITIES> 1,684,139
<BONDS> 0
<COMMON> 613,472
0
0
<OTHER-SE> 1,050,549
<TOTAL-LIABILITY-AND-EQUITY> 3,348,160
<SALES> 3,667,914
<TOTAL-REVENUES> 3,671,313
<CGS> 2,164,135
<TOTAL-COSTS> 3,995,013
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (323,700)
<INCOME-TAX> (183,453)
<INCOME-CONTINUING> (507,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507,153)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
