-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SZCB+pBxSlnrfTJGOzz/wOoOb75FeRgmckNeq8Ljt6OOWH//IOvymy9pV6lz554J jIzrmSjeUzPxTS2dsAL6dQ== 0000950136-96-001122.txt : 19961126 0000950136-96-001122.hdr.sgml : 19961126 ACCESSION NUMBER: 0000950136-96-001122 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961125 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNKENNY INC CENTRAL INDEX KEY: 0000029693 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 510228891 STATE OF INCORPORATION: DE FISCAL YEAR END: 1204 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21940 FILM NUMBER: 96671411 BUSINESS ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 5402286181 MAIL ADDRESS: STREET 1: 1411 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 10-Q 1 FORM 10-Q 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 September 30, 1996 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from December 3, 1995 to December 31, 1995 Commission file number 0-21940 Donnkenny, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 51-0228891 - -------------------------------------------------------------------------------- (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 14,044,940 ------------------------------ --------------------- (Class) (Outstanding at November 15, 1996) DONNKENNY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (FORM 10-Q)
PART I - FINANCIAL INFORMATION Page ---- Consolidated financial statements: Balance sheets as of September 30, 1996 and December 2, 1995 .................................. I-1 Statements of income for the three months ended and nine months ended September 30, 1996 and September 2, 1995 .......................................................................... II-1 Statements of cash flows for the nine months ended September 30, 1996 and September 2, 1995 .......................................................................... III-1 Notes to Consolidated Financial Statements ..................................................... IV-1 to IV-5 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................................... V-1 to V-3 PART II - OTHER INFORMATION Legal Proceedings .............................................................................. VI-1 Defaults Upon Senior Securities ................................................................ VI-1 Exhibits and reports on Form 8-K ............................................................... VI-2 Signatures ..................................................................................... VII-1
-2- DONNKENNY, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in Thousands, Except Per Share Data) September 30, 1996 and December 2, 1995
December 2, 1995 September 30, (RESTATED - ASSETS 1996 SEE NOTE 1) -------- ----------------------- ----------------------- CURRENT: Cash $734 $2,688 Accounts receivable - net of allowances of $4,183 and $3,138 in 1996 and 1995, respectively 56,708 51,610 Recoverable income taxes 4,595 6,512 Inventories (Note 2) 66,309 48,012 Prepaid expenses and other current assets 3,234 1,484 ----------------------- ----------------------- TOTAL CURRENT ASSETS 131,580 110,286 Property, plant and equipment, net 13,937 12,670 Intangible assets 45,307 37,374 ----------------------- ----------------------- $190,824 $160,330 ======================= ======================= LIABILITIES AND STOCKHOLDERS' EQUITY -------------------------------------- CURRENT: Current portion of long-term debt $75,702 $ 7,092 Accounts payable 27,014 13,178 Accrued expenses and other current liabilities 8,811 13,439 ----------------------- ----------------------- TOTAL CURRENT LIABILITIES 111,527 33,709 Long-term debt, net of current portion 1,936 55,519 Deferred income taxes 4,471 4,059 STOCKHOLDERS' EQUITY: Preferred stock $.01 par value. Authorized 500 shares; issued none Common stock $.01 par value. Authorized 20,000 shares; issued (includes 170 shares issuable) and outstanding 14,215 and 13,968 shares in 1996 and 1995, respectively 140 140 Additional paid-in capital 49,342 45,743 Retained earnings 23,408 21,160 ----------------------- ----------------------- Total stockholders' equity (Note 3) 72,890 67,043 $190,824 $160,330 ======================= =======================
See accompanying notes to consolidated financial statements. I-1 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Income (In Thousands, Except Share and Per Share Data) for the three months ended and nine months ended September 30, 1996
Three Months Nine Months Ended Ended Three Months Nine Months September 2, September 2, Ended Ended 1995 1995 September September 30, (RESTATED - (RESTATED - 30, 1996 1996 SEE NOTE 1) SEE NOTE 1) ----------------- ------------------ ---------------- ----------------- Net sales $86,562 $189,774 $66,679 $111,570 Cost of sales 65,070 140,261 47,612 77,058 ----------------- ------------------ ---------------- ----------------- Gross profit 21,492 49,513 19,067 34,512 Selling, general and administrative expenses 11,923 37,244 10,673 24,864 Amortization of goodwill and other related acquisition costs 402 1,137 298 674 ----------------- ------------------ ---------------- ----------------- Operating income 9,167 11,132 8,096 8,974 Interest expense 1,402 3,544 1,102 2,341 ----------------- ------------------ ---------------- ----------------- Income before income taxes 7,765 7,588 6,994 6,633 Income taxes 3,182 3,110 2,785 2,657 ----------------- ------------------ ---------------- ----------------- Net income $4,583 $4,478 $4,209 $3,976 ================= ================== ================ ================= Income per common share $0.33 $0.32 $0.30 $0.29 ================= ================== ================ ================= Weighted average number of common and common equivalent shares outstanding 14,100,000 14,000,000 13,900,000 13,800,000 ================= ================== ================ =================
See accompanying notes to consolidated financial statements. II-1 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Cash flows (In Thousands) For the nine months ended September 30, 1996 and September 2, 1995
September 2, 1995 September 30, (RESTATED - 1996 SEE NOTE 1) -------------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $4,478 $3,978 Adjustments to reconcile net income to net cash provided by operating activities: Increase in deferred income taxes 402 645 Depreciation and amortization of fixed assets 1,448 1,049 Amortization of intangibles 1,128 667 Accretion of intangibles 6 Provision for losses on accounts receivable 1,045 330 Changes in assets and liabilities: Increase in accounts receivable (24,109) (7,925) Decrease (increase) in recoverable income taxes 3,487 (2,442) Increase in inventories (10,668) (11,332) Decrease (increase) in prepaid expenses and other current assets (231) 232 (Decrease) increase in accounts payable 11,791 (3,182) Decrease in accrued expenses and other current liabilities (5,106) (2,334) Increase in income taxes payable 1,282 -------------------- ----------------- Net cash provided by (used in) operating activities (16,335) (19,026) CASH FLOWS FROM INVESTING ACTIVITY: Purchase of fixed assets (767) (496) Investment in acquisitions, net of cash acquired (6,071) (30,726) -------------------- ----------------- Net cash used in investing activity (6,838) (31,222) -------------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (5,735) (18,540) Net (decrease) increase in revolving loan balance 17,000 66,000 Note payable related to acquisition, net 6,579 Exercise of stock options 598 2,033 -------------------- ----------------- Net cash (used in) provided by financing activities 18,442 49,493 -------------------- ----------------- NET DECREASE IN CASH (4,731) (755) -------------------- ----------------- CASH, at beginning of year 5,465 1,606 -------------------- ----------------- CASH, at end of nine months $734 $851 ==================== =================
See accompanying notes to consolidated financial statements. III-1 DONNKENNY, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (In Thousands, Except Share and Per Share Data) (Information as of September 30, 1996 and for the nine months ended September 2, 1995 and September 30, 1996) NOTE 1 - BASIS OF FINANCIAL STATEMENTS The financial data are subject to year-end audit and do not purport to be a complete presentation in as much as all disclosures required under generally accepted accounting principles are not included. Reference is made to the Annual Report on Form 10-K for the fiscal year ended December 2, 1995. The financial data for the comparative nine month period ended September 2, 1995 have been restated based on adjustments to the timing of the recognition of sales revenues, cost of goods sold and other expenses. Such restated financial data are unaudited and do not purport to be a complete presentation of the adjustments so made. As previously reported in the Company's Form 8-K dated September 6, 1996, the Company will be amending its 10-K for the fiscal year ended December 2, 1995 to reflect such adjustments. The results of operations for the quarters are not necessarily indicative of those for the full year. In the opinion of management, the accompanying unaudited financial statements are presented on a basis consistent with audited statements and all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position and the results of operations for the periods indicated have been reflected. NOTE 2 - INVENTORIES Inventories consist of the following:
December 2, 1995 September 30, (RESTATED - SEE 1996 NOTE 1) ---------------- ------------------ Raw Materials $14,331 $11,071 Work-in-process 4,757 4,783 Finished goods 47,221 32,158 ---------------- ------------------ $66,309 $48,012 ================ ==================
IV-1 NOTE 3 - ACQUISITIONS In June 1995, the Company acquired all of the issued and outstanding shares of Beldoch Industries Corporation ("Beldoch") for $13,000 in cash and a $2,000 note payable, due within one year of the closing date and bearing 6% interest. The transaction was financed by a portion of the proceeds of a $25,000 term note and a $60,000 revolving note. The excess of the fair market value of net assets acquired of approximately $979 was recorded as goodwill and is being amortized over 20 years. In July 1995, the Company completed the purchase of certain assets of the Sportswear Division of Oak Hill Sportswear Corporation ("Oak Hill") for $14,600, financed by additional borrowings under the Company's revolving credit line. The excess of the fair market value of net assets acquired of approximately $6,200 was recorded as goodwill and is being amortized over 20 years. In September 1996, the Company acquired all of the issued and outstanding stock of Fashion Avenue Knits Inc. and related companies ("Fashion Avenue") for the following consideration (which is subject to reduction under certain circumstances): (i) an $8,000 note payable due January 31, 1997 bearing 6% interest and (ii) an aggregate of 170,213 shares of the Common Stock of the Company to be issued in three equal installments on each of the first, second and third anniversaries of the closing of the acquisition. Such shares have been accounted as if such shares have been issued. The excess of the fair market value of net assets acquired of approximately $9.1 million was recorded as goodwill and is being amortized over 20 years. Under certain circumstances, the Seller has the right to require the Company to repurchase such shares at a price of $9.79 per share. The operating results of each acquisition are included in the Company's consolidated results of operations from the respective dates of acquisition. The following unaudited pro forma information assumed the acquisitions of Beldoch and Oak Hill were completed as of December 5, 1993. These results have been presented for comparative purposes only and do not purport to be indicative of results that would have been incurred if they had been made at the beginning of each of the respective years, or results that may occur in the future. Pro forma financial data for Fashion Avenue, which is not yet available, is not included in the pro forma information below.
Nine Months Ended September 2, 1995 (RESTATED-SEE NOTE 1) ------------- Net Sales $166,962 Operating income $ 4,262 Net loss ($ 1,152) Loss per share ($ 0.08)
IV-2 NOTE 4 - CHANGE OF FISCAL YEAR The Company determined on September 11, 1996 to change its fiscal from one ending on the first Saturday of each year on or after November 30th to a fiscal year ending on December 31st of each year. The statement of operations and cash flow for the transition period beginning December 3, 1995 and ending December 31, 1995 is presented on pages IV-4 and IV-5 of this report. Such financial data have been restated. (See Note 1). The financial data for such transition period are subject to year-end audit and do not purport to be a complete presentation. Audited financial data for such transition period will be presented in the Company's 10-K for the fiscal year ended December 31, 1996. IV-3 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statement of Operations (In Thousands, Except Share and Per Share Data) For the period beginning December 3, 1995 and ended December 31, 1995
For the period beginning December 3, 1995 and Ended December 31, 1995 (RESTATED - SEE NOTE 1) ------------------------------ Net sales $7,054 Cost of sales 6,073 ------------------------------ Gross profit 981 Selling, general and administrative expenses 4,225 Amortization of goodwill and other related acquisition costs 114 ------------------------------ Operating income (3,358) ------------------------------ Interest expense 422 ------------------------------ Income before income taxes (3,780) Income taxes (1,550) ------------------------------ Net income ($2,230) ============================== Income per common share ($0.16) ============================== Weighted average number of common and common equivalent shares outstanding 13,968,840 ==============================
See accompanying notes to consolidated financial statements. IV-4 DONNKENNY, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands) For the period beginning December 3, 1995 and ended December 31, 1995
For the period beginning December 3, 1995 and Ended December 31, 1995 (RESTATED - SEE NOTE 1) ------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income ($2,230) Adjustments to reconcile net income to net cash provided by operating activities: Decrease in deferred income taxes Depreciation and amortization of fixed assets 177 Amortization of intangibles 115 Provision for losses on accounts receivable 193 Changes in assets and liabilities: Decrease in accounts receivable 18,597 Increase in recoverable income taxes (1,570) Increase in inventories (2,586) Increase in prepaid expenses and other current assets (1,547) Decrease in accounts payable (1,818) Decrease in accrued expenses and other current liabilities (1,503) -------- Net cash provided by (used in) operating activities 7,828 CASH FLOWS FROM INVESTING ACTIVITY: Purchase of fixed assets (11) -------- Net cash used in investing activity (11) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (40) Net (decrease) increase in revolving loan balance (5,000) Exercise of stock options -------- Net cash (used in) provided by financing activities (5,040) -------- NET DECREASE IN CASH 2,777 -------- CASH, at beginning of year 2,688 -------- CASH, at end of one month $5,465 ========
See accompanying notes to consolidated financial statements. IV-5 DONNKENNY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Quarters Ended September 30, 1996 and September 2, 1995 Net sales for the third quarter of fiscal 1996 were $86.5 million, an increase of $19.9 million, compared to $66.7 million for the third quarter of fiscal 1995. Approximately 18% of the increase related to Fashion Avenue, which was acquired on September 3, 1996. The remainder of the increase relates to stronger sales in all product categories and inclusion of the month of September results in the fiscal 1996 third quarter as compared to June results in the fiscal 1995 third quarter, as a result of the Company's change in fiscal reporting periods. Gross profit increased to $21.5 million (24.8% of sales) for the third quarter of fiscal 1996 as compared to $19.1 million (28.6% of sales) for the third quarter of fiscal 1995. The decrease in percentage relates to pricing pressures at one acquired division and the mix of product sold, offset by margin improvements in other product lines. Selling, general and administrative expenses increased to $11.9 million (13.8% of sales) for the third quarter of fiscal 1996 from $10.7 million (16.0% of sales) in the third quarter of fiscal 1995. The dollar increase relates to the costs of Fashion Avenue, which was acquired on September 3, 1996, start up costs associated with a new distribution facility in South Carolina, increased headcount for sourcing, distribution and design, higher sales commissions due to increased volume, offset by savings resulting from the consolidation of administrative functions of businesses acquired in fiscal 1995. Interest expense increased by $.3 million during the third quarter of fiscal 1996 to $1.0 million from $1.4 million during the third quarter of fiscal 1995 due principally to higher borrowings under the revolving credit line to finance the July 1995 acquisition of Oak Hill Industries and higher average borrowings to finance increases in working capital. Interest rates were comparable in both periods. Comparison of Nine Months Ended September 30, 1996 and September 2, 1995 Net sales for the first nine months of fiscal 1996 were $189.8 million, an increase of $78.2 million or 70.1%, compared to sales of $111.6 million for the first nine months of fiscal 1995. Approximately $66 million of the increase relates to businesses acquired during fiscal 1995 and 1996. The balance of the increase relates to stronger sales in all product lines. Gross profit increased to $49.5 million (26.1% of sales) for the first nine months of fiscal 1996 as compared to $34.5 million (30.9% of sales) for the first nine months of fiscal 1995. The decrease in gross profit percentage relates to pricing pressures at one division, as well as the mix of products sold. Selling, general and administrative expenses increased to $37.2 million (19.6% of sales) for the first nine months of fiscal 1996 from $24.9 million (22.3% of sales) for the first nine months of fiscal 1995. The dollar increase relates to the acquired businesses. V-1 Amortization of goodwill increased to $1.1 million for the first nine months of fiscal 1996 from $.7 million for the first nine months of fiscal 1995, due to the inclusion of the businesses acquired in 1995 for the entire nine month period in fiscal 1996. Interest expense increased to $3.5 million for the first nine months of fiscal 1996 compared to $2.3 million for the first nine months of fiscal 1995 due to higher borrowings to finance the July 1995 Oak Hill acquisition and higher average borrowings to finance the increase in working capital. Interest rates were comparable in both periods. 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 fluctuate throughout the year. Capital expenditures were $.8 million for the nine months ended September 30, 1996 compared to $.5 million for the nine months ended September 2, 1995. The Company may spend up to $3.0 million annually on capital expenditures 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 "Borrowers"), the Company and the Company's other two subsidiaries as guarantors and The Chase Manhattan Bank, The Bank of New York and Fleet Bank, N.A. as lenders, are parties to a credit facility entered into in June 1995 (such credit facility, as amended to date, the "Credit Facility"). The Company was in default under the Credit Facility with respect to certain representations and covenants regarding the timeliness and accuracy of the Company's financial information. Additionally, as a result of the acquisition by the Company, effective on September 3, 1996, of the outstanding capital stock of Fashion Avenue, the Company was in default of certain other provisions of the Credit Facility, including the financial covenant regarding the Company's leverage ratio. As a result of such defaults, approximately $64 million of the Company's long-term debt under the Credit Facility as at September 30, 1996 has been reclassified as current debt. Effective November 20, 1996, the Company entered into a Fifth Amendment and Waiver Agreement (the "Fifth Amendment"), which includes a waiver of such defaults through February 27, 1997. In the event that the Company, following such period, is unsuccessful in obtaining a further waiver, the lenders thereof could declare the entire outstanding amount to be due and payable, which could have a material adverse effect on the Company. The Fifth Amendment, among other provisions, also (i) reduces the amount of funds available under the revolving credit portion of the Credit Facility from a maximum of $60 million to a maximum of $43 million at November 20, 1996, subject to incremental reductions to $31 million at February 21, 1997, and subject to further reductions based upon alternative formulas; (ii) restricts the Borrowers from utilizing Eurodollar loans and increases the interest rate on prime rate loans by 1% during the waiver period; (iii) imposes additional reporting requirements on the Company; and (iv) requires the execution by the Borrowers and their bankers of blocked account and lockbox agreements. The foregoing discussion is qualified in its entirety by reference to the full text of the Fifth Amendment, which is filed as part of this report. During the nine months ended September 30, 1996, the Company's operating activities used $16.3 million more cash than was generated principally as the result of increases in inventory and accounts receivable and a decrease in accrued expenses, offset by increases in accounts payable and recoverable income taxes. Net cash used in investing activities amounted to $6.8 million, of which $6.1 million related to the Fashion Avenue acquisition and the balance for the purchase of fixed assets. Cash flow from financing activities of $18.4 million primarily reflects increases in revolving loan borrowings of $17.0 million, notes payable in connection with the Fashion Avenue acquisition of $6.6 million and repayment of long-term debt of $5.7 million. The Company believes (i) that amounts available V-2 under the revolving credit facility provided under the Credit Facility (as amended by the Fifth Amendment) will be sufficient to offset any negative operating cash flows and capital expenditures and will provide the Company with sufficient cash for its needs through February 27, 1997, and (ii) that thereafter it will be successful in extending the Credit Facility or obtaining financing from other sources; however, there can be no assurance in either regard. V-3 PART II. OTHER INFORMATION Item 1. Legal Proceedings On November 12, 1996, a shareholder of the Company, Ellen Grauer, filed a lawsuit in the United States District Court in the Southern District of New York seeking class-action status on behalf of all purchasers of the Company's Common Stock between February 14, 1995 and November 6, 1996. The Complaint alleges that the Company violated federal securities laws and concealed material facts about the Company's financial statements during such period. The Company is aware of the existence of a lawsuit filed on November 18, 1996 in the United States District Court in the Southern District of New York seeking class-action status on behalf of all purchasers of the Company's Common Stock between September 24, 1996 and November 13, 1996. The Company is also aware of a lawsuit filed on November 20, 1996 in the United States District Court in the Southern District of New York seeking class-action status on behalf of all purchasers of the Company's Common Stock between February 14, 1995 and November 15, 1996. The Company has not been formally served with complaints by the plaintiffs in either of such suits. According to press reports, at least one other similar case has been, or is in the process of being, filed. Item 2. Not Applicable. Item 3. Defaults Upon Senior Securities The Company was in default under the Credit Facility with respect to certain representations and covenants regarding the timeliness and accuracy of the Company's financial information under the Credit Facility. Additionally, as a result of the acquisition by the Company, effective as of September 3, 1996, of the outstanding capital stock of Fashion Avenue, the Company was in default of certain other provisions of the Credit Facility, including the financial covenant regarding the Company's leverage ratio. Effective November 20, 1996, the Company entered into the Fifth Amendment, which includes a waiver of such defaults through February 27, 1997. In the event that the Company, following such period, has not corrected such defaults as required by the Fifth Amendment and is unsuccessful in obtaining a further waiver, the lenders could declare the entire outstanding amount to be due and payable, which could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Item 4. Not Applicable. Item 5. Not Applicable. VI-1 Item 6. Exhibits and reports on Form 8-K. (a) The following document is filed as part of this report: 1. Fifth Amendment Agreement dated as of November 20, 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 The Chase Manhattan Bank, as agent. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K having a report date of September 6, 1996. VI-2 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: November 22, 1996 /s/ Richard Rubin ---------------------- ------------------------------- Richard Rubin Chairman of the Board, President and Chief Executive Officer Date: November 22, 1996 /s/ Stuart S. Levy ---------------------- ------------------------------- Stuart S. Levy Vice-President - Finance and Chief Financial Officer, (Principal Financial and Chief Accounting Officer)
VII-1 EX-99.1 2 FIFTH AMENDMENT AND WAIVER AGREEMENT Fifth Amendment and Waiver Agreement Fifth Amendment and Waiver Agreement, dated as of November 20, 1996, to the Credit Agreement, dated as of June 5, 1995 (as the same has heretofore or may be hereafter amended, supplemented or modified from time to time in accordance with its terms, the "Credit Agreement"), among Donnkenny Apparel, Inc., a Delaware corporation and Beldoch Industries Corporation, a Delaware corporation (collectively, the "Borrowers"), the Guarantors named therein and signatories thereto, the lenders named in Schedules 2.01(a) and (b) of the Credit Agreement (collectively, the "Lenders"), and The Chase Manhattan Bank (formerly known as Chemical Bank) as agent for the Lenders (in such capacity, the "Agent"). Capitalized terms used herein but not otherwise defined herein shall have the meanings attributed thereto in the Credit Agreement. WHEREAS, Borrowers have informed the Agent of the existence of certain Events of Default under the Credit Agreement; and WHEREAS, Lenders have agreed to waive such Events of Default for a limited period subject to Borrower's agreement to modify the Credit Agreement in certain respects. NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and subject to the fulfillment of the conditions set forth below, the parties hereto agree as follows: SECTION 1. WAIVERS UNDER CREDIT AGREEMENT 1.1 The Lenders hereby waive, solely for the period through February 27, 1997 ("Waiver Period"): (a) the provisions of Section 7.09 of the Credit Agreement with respect to the Leverage Ratio for the fiscal quarter period ended September 30, 1996 provided that the Leverage Ratio for such period was in no event greater than 4.28:1.00, and (b) the other Defaults or Events of Default as described in the letter from the Borrowers to the Lenders dated as of November 20, 1996, a copy of which is annexed hereto. 1.2 Except for the specific waivers set forth in Section 1.1 and then only for the Waiver Period, nothing herein shall be deemed to be a waiver of any covenant or agreement contained in the Credit Agreement, and the Borrowers hereby agree that all of the covenants and agreements contained in the Credit Agreement are ratified and confirmed in all respects. SECTION 2. AMENDMENTS TO THE CREDIT AGREEMENT 2.1 The defined terms "Availability" and "Letter of Credit Usage" contained in Section 1.01 of the Credit Agreement are amended to read as follows and the defined terms "Debt Sublimit" and "Waiver Period" are added to Section 1.01 of the Credit Agreement in their alphabetical order to read as follows: "Availability" shall mean at any time (i) the lesser at such time of (x) the Total Revolving Credit Commitment less the Letter of Credit Usage, (y) the Borrowing Base and (z) Debt Sublimit minus (ii) the unpaid principal balance of, and past due interest and fees on the Revolving Credit Loans. "Debt Sublimit" shall mean $43,000,000 for the period November 20, 1996 to December 12, 1996; $41,500,000 from December 13, 1996 to December 16, 1996; $38,500,000 from December 17, 1996 to December 19, 1996; $35,500,000 from December 20, 1996 to January 2, 1997; $33,000,000 from January 3, 1997 to February 6, 1997; $32,000,000 from February 7, 1997 to February 20, 1997; $31,000,000 from February 21, 1997 and thereafter. "Letter of Credit Usage" shall mean at any time, (i) the aggregate undrawn amount of all outstanding Letters of Credit at such time, together with letters of credit issued by Chemical Bank on behalf of Beldoch Industries Corporation outstanding on the Closing Date and indemnities, if any, issued by the Agent to a financial institution which has opened letters of credit relating to the assets being acquired pursuant to the Asset Purchase Agreement plus (ii) the unreimbursed drawings at such time under all such Letters of Credit; provided, however, that during the Waiver Period the Letter of Credit Usage shall not exceed $27,000,000 at any one time outstanding and Letters of Credit may only be opened to support international purchases. "Waiver Period" shall mean the period from November 20, 1996 to February 28, 1997 with respect to existing Events of Default as waived for such period pursuant to Fifth Amendment and Waiver Agreement dated as of November 20, 1996 as the same may be extended with the consent of the Required Lenders." 2.2 Subparagraph (b) of Section 2.01 of the Credit Agreement is amended by changing the phrase "(C) $60,000,000" to "(C) the Debt Sublimit." 2.3 Section 2.05 of the Credit Agreement is amended by adding thereto a new subsection (d) to read as follows: "(d) Notwithstanding subsections (a) and (b) hereof, during the Waiver Period, the Borrower shall not request Eurodollar Loans, each Prime Rate Loan, which is a Term Loan, shall bear interest at a rate per annum equal to the Prime Rate plus 1% and each Prime Rate Loan, which is a Revolving Credit Loan, shall bear interest at a rate per annum equal to the Prime Rate plus 1/2 of 1%." 2.4 Section 6.05(i) of the Credit Agreement is amended by adding the following at the end thereof: 2 "Notwithstanding the generality of the foregoing, the Borrowers shall deliver to the Agent the following information or documents no later than the dates indicated without the benefit of any grace period provided for in subparagraph (d) of Article VIII hereof: By November 22, 1996, a blocked account letter in the form provided by the Agent executed by the Borrowers and Nationsbank, N.A. By November 25, 1996, a list of all bank accounts not maintained with the Lenders which shall include the account name, number, bank and current balance. By November 29, 1996, weekly cash flow and L/C usage budgets for the period December 1, 1996 to January 4, 1997. By December 31, 1996, weekly cash flow and L/C usage budgets for the period January 5, 1997 to February 7, 1997. By January 31, 1997, weekly cash flow and L/C usage budgets for the period February 8, 1997 to February 28, 1997. By January 6, 1997, the audited (without qualification) restated financial statements for the 1994 and 1995 Fiscal Years. By January 6, 1997, the August 31, 1996 audited financial statements for Fashion Avenue Knits, Inc. and its subsidiaries for the Fiscal Year then ended. By December 20, 1996, monthly projected balance sheets, profit and loss statements and cash flows for the 1997 Fiscal Year, and showing projected Indebtedness, including, without limitation, Letters of Credit, outstanding. By December 16, 1996, a triparty lockbox agreement providing the Agent with dominion and control over Borrowers' collections and receivables in the form provided by the Agent. By December 29, 1996, modification of any promissory notes in excess of $100,000 coming due from Donnkenny Apparel, Inc. during the Waiver Period extending the maturity thereof to no earlier than March 4, 1997. Following receipt by the Borrower from the Agent of a revised borrowing base formula based on the results and 3 recommendations of an audit presently being conducted by The CIT Group, a Borrowing Base compliance certificate based on such revised formula, in form and substance satisfactory to the Lenders, is to be delivered no later than 20 days after the end of each month, without giving effect to any grace period." 2.5 Article VIII of the Credit Agreement is hereby amended by adding a new subsection (o) to read in its entirety as follows: "(o) if any information, statement or findings from whatever source (including, without limitation, an audit conducted by CIT) with respect to the Borrowers' financial condition for the 1994 and 1995 Fiscal Years or the first two fiscal quarters of 1996 shall vary in any material respect from the preliminary restated financial statements for such periods heretofore delivered to the Lenders or the other information delivered to the Lenders as set forth on the Schedule annexed to the Fifth Amendment and Waiver Agreement dated as of November 20, 1996." SECTION 3. CONDITIONS PRECEDENT Upon the execution and delivery of counterparts of this Amendment and Waiver Agreement (the "Agreement") by the parties listed below and the fulfillment of the following conditions, this Agreement shall be deemed to have become effective as of the date hereof: 3.1 All representations and warranties contained in this Agreement, the Credit Agreement or otherwise made in writing to the Agent or any Lender in connection herewith shall be true and correct in all material respects after giving effect to the waivers under this Agreement. 3.2 No unwaived event shall have occurred and be continuing which constitutes a Default or an Event of Default. 3.3 The Agent shall have received an amendment fee for the ratable benefit of the Lenders in the amount of $175,000. SECTION 4. MISCELLANEOUS 4.1 Each of the Borrowers reaffirms and restates the representations and warranties set forth in the Credit Agreement, as applicable, and all such representations and warranties shall be true and correct on the date hereof with the same force and effect as if made on such date after giving effect to the waivers under this Agreement. 4.2 Except as herein expressly amended, the Credit Agreement and the other documents executed and delivered in connection therewith are each ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. 4 4.3 Except as specifically set forth herein, nothing herein contained shall constitute a waiver or be deemed to be a waiver, of any existing Defaults or Events of Default, and the Lenders and Agent reserve all rights and remedies granted to them by the Credit Agreement, the other documents executed and delivered in connection therewith, by law and otherwise. 4.4 This Agreement may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. A facsimile signature page shall constitute an original for the purposes hereof. 4.5 During the Waiver Period, Borrowers, in addition to paying the reasonable fees and expenses of counsel to the Agent, shall also pay the reasonable fees and expenses of counsel retained by any of the Lenders. 4.6 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. DONNKENNY APPAREL, INC. By: /s/ Richard Rubin ------------------------------ Name: Richard Rubin Title: President BELDOCH INDUSTRIES CORPORATION By: /s/ Richard Rubin ------------------------------ Name: Richard Rubin Title: President FASHION AVENUE KNITS INC. By: /s/ Richard Rubin ------------------------------ Name: Richard Rubin Title: President 5 THE SWEATER COMPANY, INC. By: /s/ Richard Rubin ------------------------------- Name: Richard Rubin Title: President CHRISTIANSBURG GARMENT COMPANY INCORPORATED By: /s/ Richard Rubin ------------------------------- Name: Richard Rubin Title: President MEGAKNITS, INC. By: /s/ Richard Rubin ------------------------------- Name: Richard Rubin Title: President THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as Agent and Lender By: /s/ Joseph Abruzzo -------------------------------- Name: Joseph Abruzzo Title: Vice President THE BANK OF NEW YORK By: /s/ Ronald Pagoto --------------------------------- Name: Ronald Pagoto Title: Vice President 6 FLEET BANK, N.A. By: /s/ Anthony Santoro --------------------------------- Name: Anthony Santoro Title: Vice President 7 -----END PRIVACY-ENHANCED MESSAGE-----