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 September 29, 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.)
6200 Memorial Drive, Suite K, Stone Mountain, GA 30083
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 498-2733
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 September 29, 1996, there were 614,282 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 Nine Months Ended For the Quarters Ended
September October 1, September October 1,
29, 1996 1995 29, 1996 1995
------------------------ -----------------------
<S> <C> <C> <C> <C>
REVENUES
Retail sales (Note 6) $ 9,925,733 $11,316,701 $ 3,288,712 $ 3,160,547
Other income, principally
finance charges 17,129 520,750 3,549 89,077
----------- ----------- ----------- -----------
TOTAL REVENUES 9,942,862 11,837,451 3,292,261 3,249,624
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold,
including occupancy and
distribution expenses 6,785,420 7,556,410 2,587,283 2,286,755
Selling, general and
administrative expenses 5,398,640 5,342,151 1,956,412 1,792,302
Depreciation 201,984 260,522 56,122 88,913
Loss (gain) on disposal of
property and equipment - (585,514) - (586,088)
Losses on disposal of
property and equipment
and expenses incurred from
store closures (Note 2) 123,202 - 123,202 -
Interest expense 46,319 115,359 15,950 32,272
----------- ----------- ----------- ----------
TOTAL COSTS AND EXPENSES 12,555,565 12,688,928 4,738,969 3,614,154
----------- ----------- ----------- ----------
LOSS BEFORE REORGANIZATION
ITEMS AND INCOME TAXES (2,612,703) (851,477) (1,446,708) (364,530)
----------- ----------- ----------- -----------
REORGANIZATION ITEMS (Note 7)
Professional fees - 406,081 - 101,681
Other costs and fees - 117,544 - 43,697
----------- ----------- ----------- -----------
TOTAL REORGANIZATION ITEMS - 523,625 - 145,378
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX
EXPENSE (2,612,703) (1,375,102) (1,446,708) (509,908)
INCOME TAX EXPENSE (183,453) (87,817) - -
----------- ----------- ----------- -----------
NET LOSS $(2,796,156) $(1,462,919) $(1,446,708) $ (509,908)
----------- ----------- ----------- -----------
NET LOSS PER SHARE
(NOTE 9) $ (4.56) $ (3.59) $ (2.36) $ (1.25)
=========== =========== =========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
KENWIN SHOPS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 29, December 31,
1996 1995
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 356,312 $ 274,177
Accounts receivable, less allowance
for doubtful accounts of $464,265
and $1,019,409, respectively - 359,850
Miscellaneous other accounts receivable 480 4,812
Merchandise inventories (Note 3) 197,980 2,042,880
Prepaid expenses and refundable taxes 88,358 129,632
-------------- --------------
TOTAL CURRENT ASSETS 643,130 2,811,351
-------------- --------------
PROPERTY AND EQUIPMENT, at cost 3,675,103 4,080,571
Less accumulated depreciation and
amortization 2,824,110 2,946,385
-------------- --------------
PROPERTY AND EQUIPMENT, net (Note 2) 850,993 1,134,186
-------------- --------------
OTHER ASSETS
Other assets 65,913 68,872
Deferred income taxes (Note 5) - 183,453
-------------- --------------
TOTAL OTHER ASSETS 65,913 252,325
-------------- --------------
TOTAL ASSETS $ 1,560,036 $ 4,197,862
============== ==============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Bank overdraft $ 162,429 $ 182,897
Line of credit (Note 4) 352,911 -
Accounts payable, trade 474,582 534,129
Accrued expenses and other
liabilities 187,807 259,470
Taxes withheld and accrued 84,075 129,408
Customers' deposits on layaways 78,489 78,489
-------------- --------------
TOTAL CURRENT LIABILITIES 1,340,293 1,184,393
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value;
authorized, 1,000,000 shares;
issued 614,282 shares at September 29,
1996, and 613,472 shares at
December 31, 1995 614,282 613,472
Additional paid-in capital 993,439 991,819
Retained earnings (484,861) 2,311,295
-------------- --------------
1,122,860 3,916,586
Less treasury stock, at cost,
57,122 shares 903,117 903,117
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 219,743 3,013,469
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,560,036 $ 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 Nine Months Ended
------------------------------
September 29, October 1,
1996 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,796,156) $(1,462,919)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities
Depreciation and amortization 258,948 290,931
(Gain) Loss on disposal of property and
equipment 113,523 (585,514)
Deferred income taxes, net 183,453 87,817
Changes in assets (increase) decrease
Accounts receivable, net 359,850 2,781,307
Miscellaneous other accounts receivable 4,332 297
Merchandise inventories 1,844,900 304,384
Prepaid expenses and refundable taxes (15,690) 61,786
Other assets 2,959 (2,767)
Changes in liabilities increase (decrease)
Bank overdraft (20,468) -
Accounts payable, trade (59,547) 8,622
Accrued expenses and other liabilities (69,233) 126,282
Taxes withheld and accrued (45,333) (76,204)
------------ -------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (238,462) 1,534,022
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (38,036) (101,897)
Proceeds from sale of property and equipment 5,722 772,085
------------ -------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (32,314) 670,188
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings 6,593,000 1,528,613
Repayments of bank borrowings (6,240,089) (1,757,769)
------------ -------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 352,911 (229,156)
------------ -------------
NET INCREASE IN CASH 82,135 1,975,054
CASH, BEGINNING OF PERIOD 274,177 507,164
------------ -------------
CASH, END OF PERIOD $ 356,312 $ 2,482,218
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the period $ 48,442 $ 115,359
============ =============
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 September 29, 1996 and
the results of operations for the nine months and quarters ended
September 29, 1996 and October 1, 1995 and cash flows for the nine
months ended September 29, 1996 and October 1, 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 statements. 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 nine months ended
September 29, 1996 and October 1, 1995 are not necessarily indicative
of the results to be expected for the full year.
Note 2 There were 89 stores in operation on September 29, 1996 as compared to
102 stores in operation on October 1, 1995. Thirteen (13) stores were
closed during the current quarter. The costs associated with these
store closings amounted to $123,202 of which $113,523 was due to loss
on abandonment of property, $8,800 was the result of lease buyouts, and
$879 was due to other costs. The Company transferred inventory from
the closed stores to stores that remained open. Receivables were not
affected by the closings.
On September 18, 1996, the Company incorporated Kenwin Shops of
Atlanta, Inc. as a new subsidiary.
Note 3 Pursuant to an agreement dated August 16, 1996, the Company obtains
substantially all its inventory on a consignment basis. (See Note 12.)
Included in net sales for the nine months and quarter ended September
29, 1996, is $548,519 from sales of consignment goods with related
cost of $325,199 included in cost of goods sold.
Note 4 The Company renewed the loan agreement with Sterling National Bank
and Trust ("Sterling") on August 21, 1996, for a period through and
including June 30, 1997. The original terms of the agreement remain
in effect. At September 29, 1996, the Company was in violation of
various covenants of its loan agreement with Sterling. Therefore, the
Company was in default of its loan agreement for the period ended
September 29, 1996. Management has requested a waiver from Sterling
of these covenants.
Note 5 The following is a summary of the net deferred tax asset account
recognized in the accompanying consolidated condensed balance
sheet as of September 29, 1996:
Nine Months Ended Year Ended
September 29, 1996 December 31, 1995
Deferred tax assets $ 2,299,407 $ 1,310,380
Valuation allowance (2,299,407) (1,126,927)
------------- -------------
Net deferred taxes $ - $ 183,453
============= =============
Note 6 Leased department sales included in net sales:
Nine Months Ended Quarters Ended
------------------------------ --------------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
--------------- -------------- --------------- --------------
$ 705,100 $ 602,000 $ 172,300 $ 156,000
============== ============= ============= =============
<PAGE>
KENWIN SHOPS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 7 The accompanying consolidated condensed financial statements include
reorganization charges of $523,625 and $145,378 for the nine months
and quarter ended October 1, 1995, respectively. The charges related
to a Chapter 11 reorganization which was completed October 12, 1995.
Reorganization items representing outflows of cash for the nine months
and quarter ended October 1, 1995 are as follows:
Nine Months Ended Quarter Ended
----------------- -------------
Professional fees paid $ 261,012 $ 107,583
Other costs and fees paid 21,643 3,973
------------- -----------
Total $ 282,655 $ 111,556
============= ===========
Note 8 On September 20, 1996, the Company signed a new lease for retail
and office space in Stone Mountain, Georgia. This location will be
used as a store as well as corporate headquarters. The five-year lease
requires monthly rental payments of $5,817 during the first two years
of occupancy and $6,786 during the last three years. Additional
monthly payments for taxes, insurance, common area maintenance and
utilities are also required.
Note 9 Shares issuable upon the exercise of stock options have not been
included in the earnings per share computations for the nine months
and quarters ended September 29, 1996 and October 1, 1995 because the
effect of such would be antidilutive.
The weighted average number of common shares entering into the calcu-
lation of earnings per share was 613,606 and 407,090 for the nine
months ended September 29, 1996 and October 1, 1995, respectively.
The weighted average number of common shares entering into the calcu-
lation of earnings per share was 613,873 and 407,090 for the quarters
ended September 29, 1996 and October 1, 1995, respectively.
Note 10 As presented in the accompanying financial statements, the Company
incurred losses before income taxes of $2,612,703 and $1,446,708 for
the nine months and quarter ended September 29, 1996, respectively.
The Company also experienced difficulty obtaining sufficient credit
from its bank and its suppliers during these periods.
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 profit-
ability. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.
<PAGE>
KENWIN SHOPS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 11 On October 15, 1996, the Company terminated its Tucker, Georgia, ware-
house and office lease agreement. The Company paid $8,000 to obtain a
release from all further obligations and responsibilities pertaining to
the lease.
Note 12 A special meeting of the common stockholders of the Company will be
held on November 21, 1996. A proposal to approve and adopt a Manage-
ment Agreement dated August 16, 1996 between the Company and D&A
Funding Corporation ("D&A"), as modified (the "Management Agreement")
pursuant to which D&A has been managing the day-to-day business of the
Company. As compensation for its management services, D&A will receive
$50,000 per annum and will purchase 350,000 shares of authorized but
unissued common stock of the Company at a purchase price of $.01 per
share. Upon consummation of this purchase of common stock, and taking
into account prior open market purchases by affiliates of D&A,
purchases by D&A of 83,978 shares of common stock from certain inside
stockholders of the Company and the grant to D&A by such inside stock-
holders of irrevocable proxies to vote other shares owned by them, D&A
will own 48.8% of the issued and outstanding shares of common stock,
and will have the right to vote 58.1% of the issued and outstanding
shares of common stock.
In addition, in accordance with a separate consignment agreement dated
August 16, 1996, D&A is furnishing inventory to the Company. A fee of
two (2%) percent of the aggregate original cost of goods shipped to the
Company will be paid to D&A.
Note 13 The American Stock Exchange has announced its intention to delist the
Company's common stock. The Company is appealing the Exchange's
decision.
Note 14 Certain items in 1995 have been reclassified in the accompanying
financial statements in order to conform with the 1996 presentation.
<PAGE>
KENWIN SHOPS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES decreased $1,390,968 (12.3%) for the nine months ended
September 29, 1996 and increased $128,165 (4.1%) for the quarter ended
September 29, as compared to the corresponding 1995 period. Compara-
tive store sales decreased $1,027,938 and increased $252,481 for the
nine months and quarter ended September 29, 1996, respectively.
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 increase in same store sales for the quarter is due
primarily to the infusion of consignment goods from D&A Funding
Corporation ("D&A") which has proposed to continue to supply the
Company with goods in return for certain concessions by the Company.
COST OF GOODS SOLD, INCLUDING OCCUPANCY AND DISTRIBUTION EXPENSES as
a percentage of sales, increased from 66.8 % and 72.4% for the nine
months and quarter ended October 1, 1995 to 68.4% and 78.7% for the
nine months and quarter ended September 29, 1996, respectively. These
increases were primarily due to the large number of markdowns taken
during the quarter. These markdowns were taken in an attempt to sell
older merchandise that the Company possessed at the time D&A began
managing the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $56,489 (1.1%)
and $164,110 (9.2%) for the nine months and quarter ended September 29,
1996 as compared to the corresponding 1995 periods. These increases
were principally due to increases in bad debts for the periods offset
by decreases in advertising expenditures.
INTEREST EXPENSE is primarily the result of short-term bank
borrowings.
INCOME TAX EXPENSE 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 loss for the nine months ended September 29, 1996 amounts to
$2,796,156 ($4.56 per share), compared to a loss of $1,462,919 ($3.59
per share) for the corresponding 1995 period and the consolidated net
loss for the quarter ended September 29, 1996 amounted to $1,446,708
($2.36 per share), compared to a loss of $509,908 ($1.25 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 nine months
ended September 29, 1996 is attributable to the decrease in the inventory,
net of the decrease in accounts payable, and 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, these funds may no
longer be adequate to finance the requirements of the Company in the future.
In an attempt to obtain inventory and improve operations, the Company
entered into a management agreement with D&A effective August 16, 1996. The
agreement allows for the day-to-day operation of the Company by D&A, including
but not limited to negotiating or preparing any and all documents that may
benefit the Company, providing warehousing services, purchasing, and giving
pertinent supervisory advice to the Company. In addition, the Company entered
into a consignment agreement with D&A which allows for the infusion of 75,000
garments into the Company on a consignment basis. The agreement stipulates
that the Company pay for each garment sold and that ownership of the garment
remains with D&A until sold to the customer. The Company anticipates that with
this agreement it can increase sales volume and maintain a steady flow of goods
into the stores.
To cut operating costs and other expenses, the Company embarked upon a
plan to close some of its nonproductive locations. During the current quarter,
the Company closed 13 of its locations, leaving 89 stores in operation at
September 29, 1996. Depending upon the outcome of future negotiations,
additional stores may be closed. Subsequent to September 29, 1996, the
Company further reduced its operating costs by terminating its leasing
arrangement for its warehouse facility in Tucker, Georgia. Also, the Company
opened one new, larger store.
The following items measure the Company's ability to meet its short-
term obligations:
September 29, 1996 December 31, 1995
------------------ -----------------
Working capital $ (697,000) $ 1,626,000
Working capital ratio 0.5 2.4
The reduction in working capital is primarily due to the conversion of
the inventory from being Company-owned to being on consignment.
<PAGE>
PART II - OTHER INFORMATION
KENWIN SHOPS, INC.
Item 3, Defaults by the Company on its senior securities.
Part (a). At September 29, 1996, the Company was in violation of
various covenants of its loan agreement with Sterling National Bank
and Trust. Therefore, the Company was in default of its loan agreement.
Management has requested a waiver of these requirements for the period
ended September 29, 1996.
Item 5, Other Information
The American Stock Exchange has announced its intention to delist the
Company's common stock. The Company is appealing the Exchange's
decision.
Item 6(b), Reports on Form 8-K
Form 8-K, Current Report, was filed on August 16, 1996, describing the
transfer of control of the Company's day-to-day business activities to
D&A Funding Corporation.
<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)
November 11, 1996 /s/ Richard Moskowitz,
Date Richard Moskowitz
President
November 11, 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> Jul-01-1996
<PERIOD-END> Sep-29-1996
<CASH> 356,312
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 464,265
<INVENTORY> 197,980
<CURRENT-ASSETS> 643,130
<PP&E> 3,675,103
<DEPRECIATION> 2,824,110
<TOTAL-ASSETS> 1,560,036
<CURRENT-LIABILITIES> 1,340,293
<BONDS> 0
<COMMON> 614,282
0
0
<OTHER-SE> (394,539)
<TOTAL-LIABILITY-AND-EQUITY> 1,560,036
<SALES> 9,925,733
<TOTAL-REVENUES> 9,942,862
<CGS> 6,785,420
<TOTAL-COSTS> 12,555,565
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,319
<INCOME-PRETAX> (2,612,703)
<INCOME-TAX> (183,453)
<INCOME-CONTINUING> (2,796,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,796,156)
<EPS-PRIMARY> (456)
<EPS-DILUTED> 0
</TABLE>
