-----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, VyDcigino1k0efP4zwBVCjzgWOE1qpRvmfcoP88fLz95EkO7eVtq6jybRPQE89Aw kUISdsLRfzRrC14TrZRwcw== 0000950136-97-001628.txt : 19971117 0000950136-97-001628.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950136-97-001628 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21940 FILM NUMBER: 97721341 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 QUARTERLY REPORT 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, 1997 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 14,069,940 ---------------------------- ---------- (Class) (Outstanding at September 30, 1997) DONNKENNY, INC AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (FORM 10-Q) PART I - FINANCIAL INFORMATION Page Consolidated Financial Statements: Independent Accountants' Report Balance sheets as of September 30, 1997 and December 31, 1996...I-1 Statements of operations for the three and nine months ended September 30, 1997 and September 30, 1996.......................II-1 Statements of cash flows for the nine months ended September 30, 1997 and September 30, 1996.......................III-1 Notes to Consolidated Financial Statements......................IV-1 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................V-1-3 PART II - OTHER INFORMATION Legal Proceedings ..............................................VI-1 Exhibits and Reports on Form 8-K................................VI-1 Signatures......................................................VI-2 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 September 30, 1997, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 1997, and the consolidated statement of cash flows for the nine-month period ended September 30, 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, 1996, 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 April 15, 1997, 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, 1996 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 November 12, 1997 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) September 30, 1997 and December 31, 1996
September 30, December 31, 1997 1996 -------------- ------------- ASSETS (Unaudited) CURRENT: Cash $ 419 $ 3,998 Accounts receivable - net of allowances of $1,798 and $1,946 in 1997 and 1996, respectively 51,117 29,721 Recoverable income taxes 1,521 8,625 Inventories 42,350 46,793 Deferred tax assets 4,439 4,439 Prepaid expenses and other current assets 2,164 1,633 -------------- ------------- TOTAL CURRENT ASSETS 102,010 95,209 Property, plant and equipment, net 10,613 11,774 Intangible assets 32,702 32,450 -------------- ------------- Total Assets $ 145,325 $ 139,433 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Current portion of long-term debt $ 5,104 $ 50,761 Accounts payable 13,385 19,476 Accrued expenses and other current liabilities 9,670 8,055 -------------- ------------- TOTAL CURRENT LIABILITIES 28,159 78,292 Long-term debt, net of current portion 55,968 0 Deferred income taxes 5,863 5,863 STOCKHOLDERS' EQUITY: Common stock, $.01 par value. Authorized 20,000 shares; issued and outstanding 14,070 and 14,045 shares in 1997 and 1996, respectively 141 140 Additional paid-in capital 46,459 46,344 Retained earnings 8,735 8,794 -------------- ------------- Total Stockholders' Equity 55,335 55,278 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 145,325 $ 139,433 ============== =============
See accompanying notes to unaudited consolidated financial statements. I - 1 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Share and Per Share Data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Net sales $ 77,133 $ 82,482 $ 191,459 $ 184,401 Cost of sales 60,764 61,953 149,713 138,777 ------------- --------------- -------------- ------------ Gross profit 16,369 20,529 41,746 45,624 Selling, general and administrative expenses 12,617 11,246 36,654 37,110 Amortization of intangibles 245 402 948 1,137 ------------- --------------- -------------- ------------ Operating income 3,507 8,881 4,144 7,377 Interest expense 1,642 1,357 4,242 3,499 ------------- --------------- -------------- ------------ Income (loss) before income taxes 1,865 7,524 (98) 3,878 Income taxes (benefit) 713 3,086 (39) 1,551 ------------- --------------- -------------- ------------ Net income (loss) $ 1,152 $ 4,438 $ (59) $ 2,327 ============= =============== ============== ============ Net income (loss) per common share $ 0.08 $ 0.31 $ -- $ 0.17 ============= =============== ============== ============ Weighted average number of common shares outstanding 14,550,000 14,100,000 14,100,000 13,900,000 ============= =============== ============== ============
See accompanying notes to unaudited consolidated financial statements. II - 1 DONNKENNY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Nine Months Ended --------------------------- September 30, September 30, 1997 1996 ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (59) $ 2,327 Adjustments to reconcile net (loss) income to Net cash used in operating activities: Increase in deferred income taxes - 402 Depreciation and amortization of fixed assets 1,327 1,416 Amortization of intangibles 948 1,137 Provision for losses on accounts receivable 300 (591) Changes in assets and liabilities: Increase in accounts receivable (21,697) (20,150) Decrease (Increase) in recoverable income taxes 7,104 (652) Decrease (Increase) in inventories 4,443 (9,103) Increase in prepaid expenses and other current assets (531) (163) (Decrease) Increase in accounts payable (6,091) 11,681 Increase (Decrease) in accrued expenses and other current liabilities 1,625 (2,196) ----------- ------------- Net cash used in operating activities (12,631) (15,892) ----------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (291) (767) Proceeds from sale of equipment 232 - Increase in intangibles (1,200) - ----------- ------------- Net cash used in investing activities (1,259) (767) ----------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (9,142) (4,379) Net borrowings under revolving credit line 19,453 16,093 Exercise of stock options - 599 ----------- ------------- Net cash provided by financing activities 10,311 12,313 ----------- ------------- NET DECREASE IN CASH (3,579) (4,346) CASH, AT BEGINNING OF PERIOD 3,998 5,465 ----------- ------------- CASH, AT END OF PERIOD $ 419 $ 1,119 =========== =============
See accompanying notes to unaudited consolidated financial statements. III - 1 DONNKENNY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In Thousands except Per Share Data) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the Rules of the Securities and Exchange Commission ("SEC") and , in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules. The Company believes the disclosures made are adequate to make such financial statements not misleading. The results for the interim periods presented are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's December 31, 1996 Form 10-K. Balance sheet data as of December 31, 1996 have been derived from audited financial statements of the Company. NOTE 2 - INVENTORIES Inventories consist of the following: September 30, December 31, 1997 1996 ---- ---- Raw materials.................................. $ 9,286 $ 12,081 Work-in-process................................ 3,630 4,808 Finished goods................................. 29,434 29,904 --------- -------- $ 42,350 $ 46,793 ========= ======== NOTE 3 - PLANT CLOSING In September 1997, the Company decided to close a plant it operates in Haysi, Virginia which is expected to occur in the fourth quarter of this year for which the Company accrued $0.4 million in the third quarter as a component of operating expenses. NOTE 4 - 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 $5.0 million over a three year period to help defray costs of resolution of litigation, if any. IV - 1 DONNKENNY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997, AND SEPTEMBER 30, 1996 Net sales increased by $7.1 million, or 3.9%, from $184.4 million in the first nine months of fiscal 1996 to $191.5 million in the first nine months of fiscal 1997. Sales increases of $30.7 million for the Donnkenny, Beldoch and Oak Hill divisions were partially offset by the sales decrease of $23.6 million in the licensed character business. Gross profit for the first nine months of fiscal 1997 was $41.7 million or, 21.8% of net sales compared to $45.6 million, or 24.7% of net sales during the first nine months of fiscal 1996. The decline in gross profit as a percentage of net sales was primarily attributable to lower gross margins in the licensed character lines resulting from the sell off of off priced excess inventory, the close out of products with expiring licenses and to a lesser extent lower gross margins from the sales of Beldoch products. Selling, general and administrative expenses decreased from $37.1 million in the first nine months of fiscal 1996 to $36.7 million in the first nine months of fiscal 1997. As a percentage of net sales, these expenses decreased from 20.1% in the first nine months of fiscal 1996 to 19.1% in the first nine months of fiscal 1997. The decrease in selling, general and administrative expenses in dollars and as a percentage of net sales was due primarily to lower sales expense and design and sample expenses as a result of greater efficiencies and the synergies created in combining certain business functions. Additionally, fiscal 1997 headcount reductions were primarily responsible for decreased administrative expense. These reductions were partially offset by higher professional fees, distribution expenses and costs applicable to the Company's Factoring Agreement, which became effective April 28, 1997. The increase in professional fees is the result of legal fees 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 discussed below. In September 1997, the Company decided to close a plant it operates in Haysi, Virginia which is expected to occur in the fourth quarter of this year for which the Company accrued $0.4 million in the third quarter as a component of operating expenses. The amortization of goodwill and other related acquisition costs were $0.9 million during the first nine months of fiscal 1997 and $1.1 million during the first nine months of 1996. Interest expense increased from $3.5 million during the first nine months of fiscal 1996 to $4.2 million during the first nine months of fiscal 1997. The increase was the result of higher average interest rates under the Company's credit facility and higher Revolver borrowings used to finance additional working capital needs. The increase in the Revolver more than offset the reductions in the Senior Term Loan balance. COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 Net sales decreased by $5.4 million, or 6.4% from $82.5 million in the third quarter of fiscal 1996 to $77.1 million in the third quarter of fiscal 1997. Sales increases of $9.7 million for the Donnkenny, Beldoch and Oak Hill divisions were offset by sales decreases of $15.1 million in the licensed character business. Gross profit for the third quarter of fiscal 1997 was $16.4 million, or 21.2% of net sales compared to $20.5 million, or 24.8% of net sales during the third quarter of fiscal 1996. The decline in gross profit as a percentage of net sales was primarily due to lower gross margins in the licensed character lines as a result of the sell off of off priced excess inventory, the close out of products with expiring licenses and to a lesser extent lower gross margins from the sales of Donnkenny products. Selling, general and administrative expenses increased from $11.2 million in the third quarter of fiscal 1996 to $12.6 million in the third quarter of fiscal 1997. As a percentage of net sales, these expenses increased from 13.6% in the third quarter of fiscal 1996 to 16.4% in the third quarter of fiscal 1997. The increase in dollars and as a percent of net sales is primarily the result of an increase in professional fees and costs applicable to the Company's Factoring Agreement, which became effective April 28, 1997. The increase in professional fees is primarily the result of legal fees associated with the previously reported class action lawsuits. In September 1997, the Company decided to close a plant it operates in Haysi, Virginia which is expected to occur in the fourth quarter of this year for which the Company accrued $0.4 million in the third quarter as a component of operating expenses. V - 1 The amortization of goodwill and other related acquisition costs was $0.2 million during the third quarter of fiscal 1997 compared to $0.4 million during the third quarter of fiscal 1996. Interest expense increased from $1.4 million during the third quarter of fiscal 1996 to $1.6 million during the third quarter of fiscal 1997. The increase was a result of higher average interest rates under the Company's credit facility, which was partially offset by lower average outstanding debt. This reduction was due to the accelerated pay down of the Senior Term Loan and Revolver, primarily from the proceeds of income tax refunds received by the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements arise from the funding of working capital needs, primarily inventory and accounts receivable, and the interest and principal payments related to certain indebtedness. The Company's borrowing requirements for working capital fluctuates throughout the year. Capital expenditures were $0.3 million for the first nine months of fiscal 1997 compared to $0.8 million in the first nine months of fiscal 1996. The Company may spend up to $1.5 million annually on capital investments in accordance with the Revolving Credit Agreement described below. The Company has no material capital expenditure commitments. On April 30, 1997 the Company entered into an amended 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 amended Credit Facility is to continue to finance increased working capital needs of the Company following the 1995 Beldoch and Oak Hill Sportswear acquisitions and for general working capital purposes including the issuance of letters of credit. The amended Credit Facility will expire on March 31, 1999. Under the amended Credit Facility, the Chase Manhattan Bank serves as agent (and holds a 35% interest), the CIT Group/Commercial Services Inc. (CIT) serves as collateral agent (and holds a 15% interest), and each of Fleet Bank, N.A. and the Bank of New York are co-lenders (each holding a 25% interest). As of September 30, 1997, the balance of the Term Loan was $8.4 million. The interest rate is equal to the prime rate plus 1 1/2 % per annum and 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 $2.2 million primarily from the proceeds of tax refunds received by the Company. Additional tax refunds of $1.7 million were received subsequent to September 30, 1997, which further reduced the balloon portion of the loan to $0.5 million. An excess cash flow recapture is payable annually within 15 days after receipt of the Company's audited fiscal year-end financial statements. The default interest would be equal to 2% above the otherwise applicable rate. The Term Loan does not carry any prepayment penalty. As of September 30, 1997 the borrowings under the Revolving Credit Agreement amounted to $52.4 million. The commitment under the Revolving Credit Agreement is $85 million, with sublimits of $70 million for direct borrowings and $35 million for letters of credit. 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. On April 28, 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 takeover of accounts receivables. Collateral for the amended 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. V - 2 During the first nine months of fiscal 1997, the Company's operating activities used cash principally as the result of increases in accounts receivable and decreases in accounts payable offset by decreases in recoverable income taxes and inventories. During the first nine months of fiscal 1996, the Company's operating activities used cash principally as the result of increases in accounts receivable and inventories, offset by increases in accounts payable. As a result of the amended Credit Facility discussed above, $44.7 million was reclassed from short term debt to long term debt. During the nine months ended September 30, 1997, net borrowings under the revolving credit line amounted to $19.4 million and the Company repaid $9.1 million of long term debt. The Company believes that amounts under the Revolving Credit Agreement will be sufficient to offset any negative operating cash flows and capital expenditures and will provide the Company with sufficient cash for its needs for the foreseeable future. RECENT ACCOUNTING PRONOUNCEMENTS Earnings per Share - In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("EPS"), which is effective for both interim and annual periods ending after December 15, 1997. SAFS No. 128 supersedes APB No. 15 and specifies the computation, presentation and disclosure requirement for basic and diluted EPS. The Company has determined that the adoption of this new standard would not have had a material effect on EPS for all periods presented. Comprehensive Income - In June 1997, the FASB issued Statement No.130, Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income. Management of the company believes that adoption of Statement No. 130, which is required for the year ended December 31, 1998, will not have a significant impact on the Company's present disclosure Segment Information - In June 1997, the FASB issued Statement No. 131, Disclosure about Segments of an Enterprise and Related Information, which requires that public companies report certain information about operating segments in their annual financial statements and in condensed financial statements of interim periods issued to shareholders. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management of the company is currently reviewing the impact on their current level of disclosure. V - 3 PART II. OTHER INFORMATION Item 1 - 3. Not Applicable. Item 4. Not Applicable. Item 5. Other Information 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 $5.0 million over a three year period to help defray costs of resolution of litigation, if any. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Not Applicable. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the quarter for which this report is filed. VI - 1 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 Date: November 14, 1997 /s/ Harvey A. Appelle --------------------- Harvey Appelle Chairman of the Board, President and Chief Executive Officer Date November 14, 1997 /s/ Stuart S. Levy ------------------ Stuart S. Levy Vice President - Finance and Chief Financial Officer, (Principal Financial Officer) VI - 2 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 419 0 58,756 7,639 42,350 102,010 23,894 13,281 145,325 28,159 55,968 0 0 141 55,194 145,325 77,133 77,133 60,764 60,764 12,862 0 1,642 1,865 713 1,152 0 0 0 1,152 0.08 0.08
-----END PRIVACY-ENHANCED MESSAGE-----