UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 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 0-20382
Danskin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1284179
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 West 40th Street, New York, NY 10018
----------------------------------------
(Address of principal executive offices)
(212) 764-4630
-------------------------------
(Registrant's telephone number)
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
---- ---
The number of shares outstanding of the issuer's Common Stock, $.01 par
value, as of April 30, 1997, excluding 1,000 shares held by a subsidiary:
6,100,101.
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE FISCAL THREE MONTH PERIODS
ENDED MARCH 30, 1996 AND MARCH 29, 1997
INDEX
-----
Page No.
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets as of
December 28, 1996 and March 29, 1997 (Unaudited) 3
Consolidated Condensed Statements of Operations
for the Fiscal Three Month Periods
Ended March 30, 1996 and March 29, 1997
(Unaudited) 4
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the Fiscal Three Month Periods
Ended March 30, 1996 and March 29, 1997 5
Notes to Consolidated Condensed Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, 1996 March 29, 1997
----------------- --------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,177,000 $ 1,331,000
Accounts receivable, less allowance for doubtful accounts
of $938,000 in December 1996 and $1,001,000 in
March 1997 16,093,000 19,710,000
Inventories 34,075,000 32,916,000
Prepaid expenses and other current assets 3,397,000 3,100,000
----------- -----------
Total current assets 54,742,000 57,057,000
----------- -----------
Property, plant and equipment - net of accumulated depreciation
and amortization of $7,721,000 at December 28, 1996 and
$8,196,000 at March 29, 1997 9,292,000 8,894,000
Other assets 2,906,000 3,138,000
----------- -----------
Total Assets $66,940,000 $69,089,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY/DEFICIT
Current liabilities:
Revolving loan payable $ 9,969,000 $14,220,000
Accounts payable 9,682,000 10,195,000
Accrued expenses 10,532,000 10,754,000
----------- -----------
Total current liabilities 30,183,000 35,169,000
----------- -----------
Long-term debt, net of current maturities 31,589,000 31,256,000
Accrued retirement costs 4,367,000 2,715,000
----------- -----------
35,956,000 33,971,000
----------- -----------
Total Liabilities 66,139,000 69,140,000
----------- -----------
Commitments and contingencies
Stockholders' Equity/Deficit:
Preferred Stock, $.01 par value, 10,000 shares authorized;
1,000 shares issued at December 28, 1996 and 1,000
shares issued at March 29, 1997 10 10
Common Stock, $.01 par value, 20,000,000 shares authorized,
6,047,255 shares issued at December 28, 1996 and
6,100,101 shares issued at March 29, 1997, less 1,000
shares held by subsidiary 60,463 60,991
Additional paid-in capital 18,901,527 19,017,999
Warrants outstanding 764,000 764,000
Accumulated deficit (16,345,000) (17,314,000)
Accumulated translation adjustment (15,000) (15,000)
Minimum pension liability adjustment (2,565,000) (2,565,000)
----------- -----------
Total Stockholders' Equity/Deficit 801,000 (51,000)
----------- -----------
Total Liabilities and Stockholders' Equity/Deficit $66,940,000 $69,089,000
=========== ===========
</TABLE>
These statements should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Three Months Ended
-------------------------
March 30, 1996 March 29, 1997
(Unaudited) (Unaudited)
-------------- --------------
Net revenues $31,421,000 $ 30,785,000
Cost of goods sold 21,032,000 19,955,000
----------- ------------
Gross profit 10,389,000 10,830,000
Selling, general and administrative expenses 11,061,000 10,354,000
Provision for doubtful accounts receivable 138,000 86,000
Interest expense 1,164,000 1,185,000
----------- ------------
12,363,000 11,625,000
----------- ------------
Loss before income tax provision (1,974,000) (795,000)
Provision for income taxes 63,000 49,000
----------- ------------
Net loss (2,037,000) (844,000)
Preferred dividends -- 125,000
----------- ------------
Net loss applicable to Common Stock ($2,037,000) ($ 969,000)
=========== ============
Net loss per share ($0.34) ($0.16)
=========== ============
Weighted average number of common shares 5,933,000 6,064,000
=========== ============
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No.128 requires dual presentation of basic earnings per
share (EPS) and diluted EPS on the face of all statements of earnings ending
after December 15, 1997. The Company does not anticipate the effect on earnings
per share to be material.
These statements should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Three Months Ended
------------------------------
March 30, 1996 March 29, 1997
(Unaudited) (Unaudited)
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($2,037,000) ($ 844,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 653,000 662,000
Provision for doubtful accounts receivable 138,000 86,000
Changes in operating assets and liabilities:
Increase in accounts receivable (3,819,000) (3,703,000)
(Increase) decrease in inventories (184,000) 1,159,000
Decrease in prepaid expenses and other
current assets 301,000 297,000
Increase (decrease) in accounts payable 453,000 513,000
Increase (decrease) in accrued expenses 349,000 (1,430,000)
Financing costs incurred (119,000) (369,000)
----------- -----------
Net cash used in operating activities (4,265,000) (3,629,000)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (72,000) (127,000)
----------- -----------
Net cash used in investing activities (72,000) (127,000)
----------- -----------
Cash Flows From Financing Activities:
Net receipts under revolving notes payable 4,673,000 4,251,000
Payments of long-term debt 0 (333,000)
Purchase of Common Stock (23,000) 0
Sale of Common Stock to Savings Plan 40,000 (8,000)
----------- -----------
Net cash provided by financing activities 4,690,000 3,910,000
----------- -----------
Net increase in Cash and Cash Equivalents 353,000 154,000
Cash and Cash Equivalents, Beginning of Period 1,143,000 1,177,000
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,496,000 $ 1,331,000
=========== ===========
</TABLE>
These statements should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
----------------------------------------------------
1. In the opinion of the management of Danskin, Inc. and
Subsidiaries (the "Company"), the accompanying Consolidated
Condensed Financial Statements have been presented on a basis
consistent with the Company's fiscal year financial statements
and contain all adjustments (all of which were of a normal and
recurring nature) necessary to present fairly the financial
position of the Company as of March 29, 1997, as well as its
results of operations and cash flows for the three months ended
March 30, 1996 and March 29, 1997. Certain information and
footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Operating
results for interim periods may not be indicative of results for
the full fiscal year.
The Company designs, manufactures, distributes and markets
several leading brands of women's activewear clothing, dance
wear, tights and legwear. Danskin(R), Dance France(R) and
Round-the-Clock(R) are the Company's principal proprietary
brands. The Company also manufactures the Givenchy(R) and Anne
Klein(R) women's hosiery brands pursuant to license agreements.
In addition to its branded merchandise, the Company manufactures
and markets private label merchandise, principally legwear, for
many major retailers, including most full line department
stores. The Company also currently operates 46 factory outlet
and two full price retail stores in 19 states. The Company
currently operates as two divisions: Danskin ("Danskin") for
activewear, including retail operations, and Pennaco ("Pennaco")
for legwear.
2. On June 22, 1995, the Company entered into an Amended and
Restated Loan and Security Agreement (the "Loan and Security
Agreement") with First Union National Bank of North Carolina
("First Union") which restructured the terms of its financing
arrangements and provided additional availability under the
revolving credit facility. These restructured provisions
included total term debt of $22,000,000 ($21,589,000 balance
outstanding as of December 28, 1996 and $21,256,000 as of March
29, 1997) and a revolving credit facility under which
$19,969,000 and $24,220,000 were outstanding as of December 28,
1996 and March 29, 1997, respectively. Quarterly amortization
payments of the term debt were scheduled to begin on September
30, 1996 and to progressively increase from $333,000 to
$1,500,000, with a final maturity of March 2002. The Company
classifies $10,000,000 of its revolving obligations as long term
debt. In addition to the scheduled quarterly principal payments
of the term debt, the Loan and Security Agreement provides for a
semi-annual mandatory retirement of term principal if cash flow,
as defined, attains certain levels, payable when availability
under the revolving credit exceeds $5,000,000 to the extent of
such excess.
On March 27, 1997, the Company entered into a Sixth Amendment to
the Loan and Security Agreement with First Union (the "Sixth
Amendment") which (i) increased the revolving credit "cap" from
$25,000,000 to $28,500,000 for the period from March 26, 1997 to
March 31, 1998, (ii) altered certain advance rate formulas under
the revolving credit facility, (iii) amended financial covenants
with respect to calendar 1997, (iv) deferred all calendar 1997
term loan amortization payments until March 31, 1998, (v)
required the Company to pay First Union an "additional equity
fee" of $3,000,000 in 2002, unless the Company obtains at least
$6,000,000 of net equity proceeds prior to August 31, 1997, (vi)
provided for an amendment fee of $250,000, and (vii) provided
that the Company retain certain business consultants as advisors
and outline certain business strategic plans. Availability under
the revolving credit facility in excess of utilization was
$4,000,000 as of March 29, 1997.
6
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiarie
Notes to Consolidated Condensed Financial Statements
----------------------------------------------------
The Loan and Security Agreement was also amended subsequent to
June 22, 1995 to allow for the Company's change in fiscal year
end, to permit the establishment of a Canadian subsidiary and
related Canadian factoring arrangements for purposes of selling
directly to customers in Canada, to restate certain financial
covenants, to grant approval for the issuance of a subordinated
convertible debenture, the exchange of such debenture for
convertible preferred stock, and payment of the related
dividends, and to increase the annual capital expenditure
limitation to $2,000,000.
The Loan and Security Agreement established covenants requiring
the Company to meet certain interest coverage and profitability
levels, and it contains certain other restrictions, including
limits on the Company's ability to incur debt, make capital
expenditures, merge, pay dividends or repurchase its own stock.
It also provides that the Company would be in default if any
person, with specific exceptions, becomes the owner of or
controls more than 20% of the Company's Common Stock.
Substantially all the Company's assets are collateralized under
these debt facilities.
In connection with the June 1995 restructuring of the Loan and
Security Agreement, the Company issued warrants to First Union
to purchase up to 10% of the Company's then outstanding Common
Stock at an exercise price per share of $.01 per share. The
Warrants provide for a put option by First Union, exercisable
after March 1998, at fair market value, as defined. The Company
also has a call option providing for purchase at fair market
value. For so long as the Company remains in compliance with the
requirements of the Loan and Security Agreement, the Warrants do
not provide anti-dilution protection for First Union for new
issuances of securities.
Also in connection with the 1995 restructuring, interest rates
on all obligations under the Loan and Security Agreement were
set at prime plus 1.5% (9.75% at December 28, 1996 and 10.0% at
March 29, 1997). On each annual adjustment date (as defined),
the interest rate may be reduced based on certain ratios of
interest coverage and debt to earnings before interest, taxes,
depreciation and amortization levels. In July 1995, the Company
purchased an interest rate cap from First Union with a nominal
amount of $20,000,000, which provides for a prime rate limit of
9.25% for the period through October 1998.
3. On August 6, 1996, the Company issued its 10% Convertible
Preferred Stock (the "Preferred Stock") having a liquidation
preference of $5,000,000, in exchange for the convertible
subordinated debenture previously outstanding. The Preferred
Stock is entitled to vote on an as converted basis, and has an
initial conversion price of $2.76, currently representing
1,811,594 shares of Common Stock. Such conversion price may be
reset on the first and second anniversaries of issuance under
certain circumstances and will be adjusted in the event of
dilution. Holders of the Preferred Stock have the right to vote
separately as a class for the election of one Director, and a
representative currently sits on the Board of Directors of the
Company in this capacity. The Holders also have the right to
require the Company to redeem their shares for liquidation value
in the event of a "change of control", as defined. The Company
has the right to make quarterly dividend payments by issuing
additional shares of common stock in lieu of cash and did so in
March 1997 by issuing 56,689 shares at $2.205. The convertible
subordinated debenture had been outstanding since August 17,
1995. This debenture had a face value of $5,000,000, accrued
interest at 8% and would have matured on September 1, 2002. The
initial conversion price was $3.15, representing 1,587,300
shares, subject to adjustment for dilution. The proceeds of this
sale were used to reduce the Company's bank revolving credit
obligations.
7
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
----------------------------------------------------
4. The Company received notification from the Nasdaq Stock Market,
Inc. ("NASDAQ"), on August 6, 1996, that it had approved the
Company's request to have its Common Stock listed on the Nasdaq
SmallCap Market, instead of on the Nasdaq National Market. On
May 9, 1997, the Company received notification from NASDAQ that
is will delist the Company's Common Stock effective at the close
of business on May 16, 1997 because of the Company's
non-compliance with NASDAQ's minimum capital and surplus
requirement. The Company is seeking review of the decision.
Pending completion of such review, the Company's Common Stock
will continue to be listed on the NASDAQ SmallCap Market. If the
Company were no longer listed on the NASDAQ SmallCap Market, it
anticipates that it would trade in the over-the-counter market.
5. Inventories are stated at the lower of cost or market on a
first-in, first-out basis. Inventories consisted of the
following:
December 28, March 29,
1996 1997
---------- -----------
(unaudited)
Finished goods $19,742,000 $20,269,000
Work-in-process 7,663,000 6,785,000
Raw materials 5,767,000 5,050,000
Packaging materials 903,000 812,000
----------- -----------
$34,075,000 $32,916,000
=========== ===========
6. On March 11, 1997, a complaint was filed against the Company in
Christian Dior Couture S.A. and Christian Dior, Inc. vs.
Danskin, Inc., U.S. District Court, Southern District of New
York, 97Civ. 1709 (SAS), an action brought by the Company's
former licensor of the Christian Dior(R) trademark for women's
hosiery, alleging that the Company had marketed certain
unapproved merchandise under Dior's trademark and requesting an
injunction as well as monetary damages. Concurrently with the
filing of the complaint, the plaintiffs also requested an order
directing the Company to show cause as to why a temporary
restraining order should not be entered enjoining the Company
from, among other things, selling any non-conforming merchandise
under Dior's trademark. On March 14, 1997, the parties entered
into a Stipulation and Order resolving the issues relating to
the plaintiffs' request for an injunction, which was so ordered
by the District Court on March 17, 1997. The Company intends to
contest the allegations of the complaint and to assert
affirmative defenses in its answer, which is not yet due, and
management believes that any possible ultimate liability of the
Company in these proceedings will not be material to its
consolidated financial position, results of operations,
liquidity or business of the Company.
The Company is a party to a number of other legal proceedings in
the ordinary course of business. Management believes that the
ultimate resolution of these proceedings will not, in the
aggregate, have a material adverse impact on the financial
condition, results of operations, liquidity or business of the
Company.
8
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
----------------------------------------------------
7. The Company's income tax provision rates differed from federal
statutory rates due to the change in valuation allowance and the
effect of state taxes for the three months ended March 1997 and
1996. The breakdown of income tax expense between current tax
expense and deferred tax expense is not available for the three
months ended March 1997 and 1996. No allocation between current
and deferred income taxes was made during the three months ended
March 1997 and 1996, as such amounts would not be considered
material to the Company's consolidated financial position.
The Company has been selected for audit by certain Federal and
state tax authorities, the resolution of which cannot be
determined at this time. Management believes that any possible
ultimate liability from these audits will not materially affect
the consolidated financial position or results of operations of
the Company.
8. The Company is a judgment creditor of Esmark, Inc. ("Esmark"),
its former parent, and it has fully reserved the amount of
$6,099,000 owed to it through March 1995. On June 6, 1996, the
U.S. Bankruptcy Court for the Southern District of New York
entered an order placing Esmark in Chapter 7 liquidation under
the Bankruptcy Code, granting the relief which had been sought
in an involuntary bankruptcy petition, and it appointed a
Trustee to administer the liquidation. In light of Esmark's
financial condition, the Company no longer accrues interest on
this indebtedness for financial statement purposes.
On June 7, 1996, pursuant to authorization of the Bankruptcy
Court, SunAmerica Life Insurance Company ("SunAmerica")
purchased at a foreclosure sale 2,010,000 shares of the
Company's Common Stock (the "Esmark Shares"), that had been
owned by Esmark, and that Esmark had pledged to SunAmerica to
secure the repayment of certain indebtedness owing to SunAmerica
by a subsidiary of Esmark. SunAmerica subsequently re-registered
these shares in the name of its nominee. These shares represent
approximately 33% of the Company's outstanding Common Stock.
In 1992, Electra granted Esmark an irrevocable 10-year proxy to
vote 990,000 shares of the Company's Common Stock by Electra
Investment Trust P.L.C. ("Electra"), the registered owner of
such shares (the "Electra Shares"). The Company has received an
opinion of Delaware counsel that, by virtue of the foreclosure
sale of the Esmark Shares to SunAmerica, this proxy became
revocable, although to date, the Company has not received notice
of revocation from Electra . Since Esmark is being liquidated
under Chapter 7 of the Bankruptcy Code, the Trustee in
Bankruptcy voted the Electra Shares at the Annual Meeting of
Stockholders held on October 16, 1996, voting to withhold
authority for the election of the two Directors who had been
nominated. Because of the appointment of the Trustee for the
Esmark estate, Byron A. Hero, Jr. is no longer in control of
Esmark, and, accordingly, the agreement between the Company and
Mr. Hero, dated September 16, 1994, obligating him to cause
Esmark to vote the Electra Shares in accordance with the terms
of the agreement, is no longer in effect as to this obligation.
9
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
----------------------------------------------------
The Esmark Shares are the subject of a Registration Rights
Agreement dated July 2, 1992 between the Company and Esmark.
The Company has acknowledged the status of Electra as a Holder
under this agreement with respect to the Electra Shares.
On October 4, 1996 the Company entered into an agreement with
SunAmerica which entitled SunAmerica to (a) designate two
nominees for election to the Company's Board of Directors and to
appoint at least one of these nominees to serve on each
committee of the Board and (b) designate an additional person to
serve as an observer of the Board. At the meeting of the Board
of Directors following the Annual Meeting of Stockholders on
October 16, 1996, the Board of Directors voted to increase the
number of Directors constituting the entire Board, from eight to
10 and elected Donald Schupak and Michel Benasra, SunAmerica's
designees, to fill the vacancies. At the same time, it amended
the Company's By-laws to provide that the size of the Board
cannot be further increased without the affirmative vote of the
SunAmerica designees. It also extended an invitation to Electra
to designate an additional director to become a member of the
Board, but Electra declined this invitation.
9. The Company adopted a shareholder rights plan on June 5, 1996,
for stockholders of record on June 17, 1996, which would become
effective in the event of an accumulation of more than 35% of
its Common Stock by an acquiror. A rights agreement was executed
on June 5, 1996 between the Company and its Rights Agent, a copy
of which was filed as an exhibit to the Company's Report on Form
8-K filed on June 6, 1996.
10. Effective April 15, 1997, the Company curtailed participation
in and froze the accrual of benefits under the Pennaco Hosiery
Division of Danskin, Inc. Hourly Employees' Pension Plan (the
"Pension Plan"). Because of the curtailment, no person who is
not presently a "Participant" (as such term is defined in the
Pension Plan) in the Pension Plan, may become a participant
after April 15, 1997 and no "Credited Service" (as such term is
defined in the Pension Plan) shall be granted to any participant
after such date. Therefore, the Company shall not accrue any
additional liability under the Pension Plan.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The following discussion and analysis should be read in
conjunction with the Consolidated Condensed Financial
Statements, related notes and other information included in this
quarterly report on Form 10-Q (operating data for Danskin
include operating data for the Company's retail activities).
Change in Year End
------------------
As of December 1995, the Company changed its fiscal year end to
the last Saturday in December from the last Saturday in March.
Results of Operations
---------------------
Comparison of the three months ended March 29, 1997 with the
three months ended March 30, 1996.
Net Revenues:
Net revenues amounted to $30.8 million for the three months
ended March 1997, a decrease of $0.6 million, or 1.9%, from the
three months ended March 1996. Wholesale revenues for the
Company decreased $0.7 million for the three month period,
whereas retail volume increased $0.1 million.
Danskin activewear net revenues, which include the Company's
retail operations, amounted to $21.4 million for the three
months ended March 1997, an increase of $1.9 million, or 9.7%,
from $19.5 million in the earlier period. The Company's 48
retail stores generated $4.3 million in net revenues for the
three months ended March 1997, with four additional stores
opened, compared to $4.2 million in net revenues for the prior
period. Comparable retail store sales declined 4.6% for the
three months ended March 1997. The Company continues its efforts
to improve store product offerings, renegotiate existing leases
and streamline store operations. Marketing of activewear
wholesale products continues to address the industry's lifestyle
casual wear trends, and to emphasize fashion and dance product
offerings. In addition, the Company has increased its focus on
outdoor fitness and sport bra products as well as offerings for
kids gymnastics, as promoted by Nadia Comaneci and Kerri Strug.
Pennaco legwear net revenues amounted to $9.4 million for the
three months ended March 1997, a decline of $2.5 million, or
21.0%, from the three months ended March 1996. This decline is
indicative of a continued weak sheer hosiery market in the
department store class of trade. The re-launch of Anne Klein
sheer hosiery and tights has partially offset other declines.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations (continued)
---------------------------------
Gross Profit:
Gross profit increased by $0.4 million, or 4.2%, to $10.8
million in the three months ended March 1997, from the prior
year period. Gross profit as a percentage of net revenues
increased to 35.2% in the three months ended March 1997 from
33.1% for the three months ended March 1996.
Gross profits for activewear were 38.5% of net revenues for the
three months ended March 1997 versus 37.3% for the three months
ended March 1996. This increase was primarily attributable to
improved inventory mix in the Company's retail stores, and
increased selling prices for sales of private label and excess
inventory during the quarter.
Legwear gross profit increased to 27.7% of net revenues in the
three months ended March 1997 from 26.1% in the prior period.
The improvement in gross profit for the quarter versus the prior
year was primarily attributable to price increases and
reductions in certain production costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including retail
store operating costs, decreased by $0.8 million, or 6.8%, to
$10.4 million, or 33.9% of net revenues, in the three months
ended March 1997 from the prior period. Selling, general and
administrative expenses, excluding retail store operating costs,
decreased $0.8 million, or 9.0%, to $7.7 million, or 29.2% of
net revenues, from $8.5 million, or 31.3% of net revenues. The
wholesale decrease in the March 1997 three-month period was
principally a result of a reduction in the provision for
doubtful accounts, lower compensation costs and reduced levels
of sales promotion and advertising expenses.
Operating Income/Loss:
As a result of the foregoing, income from operations (i.e.,
income /loss before interest expense, non-recurring charges and
income taxes) amounted to $0.4 million for the three months
ended March 1997, an improvement of $1.2 million from the three
months ended March 1996. The Danskin wholesale business
accounted for the majority of this improvement.
Interest Expense:
Interest expense amounted to $1.2 million for each of the three
months ended March 1997 and 1996. The Company's effective
interest rate was 10.8% and 10.5% for the three months ended
March 1997 and March 1996, respectively. Effective rates
increased principally due to the issuance of the Preferred Stock
in exchange for the subordinated convertible debenture, which
had an 8% coupon.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations (continued)
--------------------------------
Income Tax Provision:
The Company's income tax provision rates differed from the
Federal statutory rates due to the change in the deferred tax
valuation allowance and the effect of state taxes for the three
months ended March 1997 and March 1996. The Company's deferred
tax balance was $0 at both March 1997 and December 1996.
Net Loss:
As a result of the foregoing, the net loss was $1.0 million for
the three months ended March 1997, an improvement of $1.0
million, from a $2.0 million net loss in the three months ended
March 1996.
Liquidity and Capital Resources
The Company's primary liquidity and capital requirements relate
to the funding of working capital needs, primarily inventory,
accounts receivables, capital investments in operating
facilities, machinery and equipment, principal and interest
payments on indebtedness and funding operating losses in the
legwear division. The Company's primary sources of liquidity
have been from bank financing, issuance of convertible
securities, vendor credit terms and internally generated funds.
Net cash flow used in operations decreased by $0.7 million to
$3.6 million for the three months ended March 1997, because of
an improvement in operating performance as well as a reduction
in accrued expenses and decreases in both legwear and activewear
inventory levels. Cash increased $0.1 million to $1.3 million
during the three months ended March 1997, after $3.9 million in
net financing increases and $0.1 million in capital
expenditures.
Working capital declined $2.7 million to $21.9 million at March
1997 from $24.6 million at December 1996. Accounts receivable
increased by $3.6 million, inventory levels decreased by $1.2
million offset by a $5.0 million increase in the revolving loan
balance, primarily to support the increased activewear business
and to fund operating losses in the legwear division.
On June 22, 1995, the Company entered into an Amended and
Restated Loan and Security Agreement with First Union which
restructured the terms of its financing arrangements and
provided additional availability under the revolving credit
facility. These restructured provisions included total term debt
of $22,000,000 ($21,589,000 balance outstanding as of December
28, 1996 and $21,256,000 as of March 29, 1997) and a revolving
credit facility under which $19,969,000 and $24,220,000 were
outstanding as of December 28, 1996 and March 29, 1997,
respectively. Quarterly amortization payments of the term debt
were scheduled to begin on September 30, 1996 and to
progressively increase from $333,000 to $1,500,000, with a final
maturity of March 2002. The Company classifies $10,000,000 of
its revolving obligations as long term debt. In addition to the
scheduled quarterly principal payments of the term debt, the
Loan and Security Agreement provides for a semi-annual mandatory
retirement of term principal if cash flow, as defined, attains
certain levels, payable when availability under the revolving
credit exceeds $5,000,000 to the extent of such excess.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources (continued)
On March 27, 1997, the Company entered into a Sixth Amendment to
the Loan and Security Agreement with First Union which (i)
increased the revolving credit "cap" from $25,000,000 to
$28,500,000 for the period from March 26, 1997 to March 31,
1998, (ii) altered certain advance rate formulas under the
revolving credit facility, (iii) amended financial covenants
with respect to calendar 1997, (iv) deferred all calendar 1997
term loan amortization payments until March 31, 1998, (v)
required the Company to pay First Union an "additional equity
fee" of $3,000,000 in 2002, unless the Company obtains at least
$6,000,000 of net equity proceeds prior to August 31, 1997, (vi)
provided for an amendment fee of $250,000, and (vii) provided
that the Company retain certain business consultants as advisors
and outline certain business strategic plans. Availability under
the revolving credit facility in excess of utilization was
$4,000,000 as of March 29, 1997.
The Loan and Security Agreement was also amended subsequent to
June 22, 1995 to allow for the Company's change in fiscal year
end, to permit the establishment of a Canadian subsidiary and
related Canadian factoring arrangements for purposes of selling
directly to customers in Canada, to restate certain financial
covenants, to grant approval for the issuance of a subordinated
convertible debenture, the exchange of such debenture for
convertible preferred stock, and payment of the related
dividends, and to increase the annual capital expenditure
limitation to $2,000,000.
The Loan and Security Agreement established covenants requiring
the Company to meet certain interest coverage and profitability
levels, and it contains certain other restrictions, including
limits on the Company's ability to incur debt, make capital
expenditures, merge, pay dividends or repurchase its own stock.
It also provides that the Company would be in default if any
person, with specific exceptions, becomes the owner of or
controls more than 20% of the Company's Common Stock.
Substantially all the Company's assets are collateralized under
these debt facilities.
In connection with the June 1995 restructuring of the Loan and
Security Agreement, the Company issued warrants to First Union
to purchase up to 10% of the Company's then outstanding Common
Stock at an exercise price per share of $.01 per share. The
Warrants provide for a put option by First Union, exercisable
after March 1998, at fair market value, as defined. The Company
also has a call option providing for purchase at fair market
value. For so long as the Company remains in compliance with the
requirements of the Loan and Security Agreement, the Warrants do
not provide anti-dilution protection for First Union for new
issuances of securities.
Also in connection with the 1995 restructuring, interest rates
on all obligations under the Loan and Security Agreement were
set at prime plus 1.5% (9.75% at December 28, 1996 and 10.0% at
March 29, 1997). On each annual adjustment date (as defined),
the interest rate may be reduced based on certain ratios of
interest coverage and debt to earnings before interest, taxes,
depreciation and amortization levels. In July 1995, the Company
purchased an interest rate cap from First Union with a nominal
amount of $20,000,000, which provides for a prime rate limit of
9.25% for the period through October 1998.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources (continued)
On August 6, 1996, the Company issued the Preferred Stock having
a liquidation preference of $5,000,000, in exchange for the
convertible subordinated debenture previously outstanding. The
Preferred Stock is entitled to vote on an as converted basis,
and has an initial conversion price of $2.76, currently
representing 1,811,594 shares of Common Stock. Such conversion
price may be reset on the first and second anniversaries of
issuance under certain circumstances and will be adjusted in the
event of dilution. Holders of the Preferred Stock have the right
to vote separately as a class for the election of one Director,
and a representative currently sits on the Board of Directors of
the Company in this capacity. The Holders also have the right to
require the Company to redeem their shares for liquidation value
in the event of a "change of control", as defined. The Company
has the right to make quarterly dividend payments by issuing
additional shares of common stock in lieu of cash and did so in
March 1997 by issuing 56,689 shares at $2.205. The convertible
subordinated debenture had been outstanding since August 17,
1995. This debenture had a face value of $5,000,000, accrued
interest at 8% and would have matured on September 1, 2002. The
initial conversion price was $3.15, representing 1,587,300
shares, subject to adjustment for dilution. The proceeds of this
sale were used to reduce the Company's bank revolving credit
obligations.
The Company is in advanced discussions with an investor
concerning a financing transaction. If a financing transaction
similar to that presently contemplated were concluded, it is
likely to be highly dilutive of existing common stockholders.
Strategic Outlook
The Company's business strategy over the next two to three years
will be to better capitalize on the consumer recognition of the
Danskin(R) brand and to develop new channels for distribution.
Further, the Company is taking steps to evaluate its long term
business prospects in the contracting sheer hosiery market, amid
increased retailer demands for responsiveness. The Company
intends, to the extent adequate cash flow from operations can be
generated and financing can be obtained on appropriate terms,
expand Danskin(R) and other product lines, pursue growth in
international sales, selectively license the Danskin(R) name for
additional product categories, and open additional full price
Danskin(R) stores. There can be no assurance that the Company
will be able to generate adequate cash flow from operations, and
obtain financing on appropriate terms to implement this
strategy, particularly given the difficulty of predicting
hosiery operations, or, if implemented, that this strategy will
be successful.
The Company anticipates that its short-term funding requirements
will continue to be provided principally by the Company's
banking and vendor arrangements. As a result of the Company's
increased borrowing capacity provided under the Sixth Amendment,
the Company believes that it has adequate liquidity to support
its operations. The Company needs additional financing to avoid
incurring the additional equity fee imposed by the Sixth
Amendment, to meet its short-term funding requirements beyond
December 31, 1997, to acquire or develop any new business, and
to fund the costs related to opening any full price retail
store.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Strategic Outlook (continued)
The Company has engaged Wasserstein Perella & Co., Inc to assist
it in raising financing and with the implementation of its
strategic plan. It has elected Donald Schupak as its Chairman of
the Board of Directors to explore a range of financing
alternatives in an effort to reduce its indebtedness, lower
interest costs, avoid the imposition of any additional equity
fee and expand its business. It believes it will obtain a
commitment for such an infusion prior to August 31, 1997 and
that, if such a commitment is obtained, adequate financing will
be available to meet the above objectives. No assurances can be
given regarding the Company's ability to de-leverage its capital
structure, to raise new equity as required in the Loan and
Security Agreement or to expand its business.
Factors That May Affect Future Results
Statements in this Quarterly Report on Form 10-Q which are not
historical facts, so-called "forward-looking statements", are
made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are
cautioned that all forward-looking statements are based upon
current expectations but involve risks and uncertainties,
including those detailed in the Company's filings with the
Securities and Exchange Commission that could cause the
Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in
the Company's forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Pursuant to the General Instructions to Rule 305 of Regulation
S-K, the quantitative and qualitative disclosures called for by
this Item 3. and by Rule 305 of Regulation S-K are inapplicable
to the Company at this time.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 6 in the Notes to Consolidated Condensed Financial
Statements in Part I - Financial Information of this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit
-------
10.6.4E Amendment Four effective as of November 1,
1996 to Amended Employment Agreement dated as
of August 1, 1994 between the Registrant and
Beverly Eichel
(b) Form 8-K
--------
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANSKIN, INC.
May 13, 1997 By: /s/Edwin W. Dean
------------------------------
Edwin W. Dean
Vice Chairman of the Board,
General Counsel and Secretary
May 13, 1997 By: /s/Beverly Eichel
------------------------------
Beverly Eichel
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
AMENDMENT 4
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT dated as of November 1, 1996 to EMPLOYMENT AGREEMENT dated
as of August 1, 1994 (the "Employment Agreement") between DANSKIN, INC.
("Employer") and Beverly Eichel ("Employee"):
NOW, THEREFORE, in consideration off the premises of such Employment
Agreement and the covenants contained therein, and other good and valuable
consideration, the Employer and Employee hereby agree to amend AMENDMENT 2 of
the Employment Agreement in the following respects:
Effective November 1, 1996, Amendment 2 shall become null and void.
Paragraph 4.02 of the Employment Agreement is hereby amended to include the
following:
vi) a lump sum payment in the amount of $47,917 representing Base
Compensation earned by the employee under the Employment Agreement but
unpaid for the period from January 1, 1995 and October 31, 1996. This
amount shall be paid no later than the last day of the month in which
the Employee is terminated for any reason other than "for cause" or
resigns her employment following a "change in control."
IN WITNESS WHEREOF, the parties have executed this Amendment 4 as of the
date first written above.
For the Employer: DANSKIN, INC.
By: /s/ Mary Ann Domuracki
----------------------
Mary Ann Domuracki
Chief Executive Officer
Attest: /s/ Lynn Golubchik
------------------------
Lynn Golubchik
Assistant Secretary
For the Employee /s/ Beverly Eichel
-----------------------
Beverly Eichel
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<COMMON> 60,463
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