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 27,1997
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 September 27 ,1997, excluding 1,000 shares held by a subsidiary:
9,562,449.
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE FISCAL NINE MONTH PERIODS
ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 27, 1997
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets (Unaudited) 3
as of December 28, 1996 and September 27, 1997
Consolidated Condensed Statements of Operations 4
(Unaudited) for the Fiscal Three
and Nine Month Periods Ended
September 28, 1996 and September
27, 1997
Consolidated Condensed Statements of Cash Flows 5
(Unaudited) for the Fiscal Nine
Month Periods Ended September 28,
1996 and September 27, 1997
Notes to Consolidated Condensed Financial 6
Statements
Item 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About 21
Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Uses of Proceeds 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Danskin, Inc. And Subsidiaries
Consolidated Condensed Balance Sheet
<TABLE>
<CAPTION>
December 28, 1996 September 27, 1997
----------------- ------------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,177,000 $2,057,000
Accounts receivable, less allowance for doubtful
accounts of $938,000 in December 1996
and $1,207,000 in September 1997 16,093,000 19,297,000
Inventories 34,075,000 30,961,000
Prepaid expenses and other current assets 3,397,000 2,469,000
--------------------- ---------------------
Total current assets 54,742,000 54,784,000
--------------------- ---------------------
Property, plant and equipment - net of accumulated depreciation
and amortization of $7,721,000 at December 28, 1996 and
$8,359,000 at September 27, 1997 9,292,000 7,993,000
Other assets 2,906,000 1,721,000
--------------------- ---------------------
Total Assets $66,940,000 $64,498,000
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan payable $9,969,000 $12,712,000
Accounts payable 9,682,000 7,976,000
Accrued expenses 10,532,000 12,583,000
--------------------- ---------------------
Total current liabilities 30,183,000 33,271,000
--------------------- ---------------------
Long-term debt, net of current maturities 31,589,000 10,000,000
Subordinated Debt 0 15,000,000
Accrued retirement costs 4,367,000 2,715,000
--------------------- ---------------------
Total long-term liabilities 35,956,000 27,715,000
--------------------- ---------------------
Total Liabilities 66,139,000 60,986,000
--------------------- ---------------------
Series C Cumulative Convertible Preferred Stock,
Liquidation Value $500,000 244,000
---------------------
Stockholders' Equity
Preferred Stock, $.01 par value, 10,000 shares
authorized; 1,000 shares issued at December 28, 1996 10
Common Stock, $.01 par value, 20,000,000 shares
authorized, 6,047,255 shares issued at December 28, 1996
and 9,563,449 shares issued at September 27, 1997,
less 1,000 shares held by subsidiary 60,463 95,624
Additional paid-in capital 18,901,527 19,959,376
Warrants outstanding 764,000 0
Accumulated deficit (16,345,000) (14,207,000)
Accumulated translation adjustment (15,000) (15,000)
Minimum pension liability adjustment (2,565,000) (2,565,000)
--------------------- ---------------------
Total Stockholders' Equity 801,000 3,268,000
--------------------- ---------------------
Total Liabilities and Stockholders' Equity $66,940,000 $64,498,000
===================== =====================
</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
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Nine Months Ended
--------------------------------------- ----------------------------------------
September 28, 1996 September 27, 1997 September 28, 1996 September 27, 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net revenues $34,818,000 $32,699,000 $95,903,000 $92,953,000
Cost of goods sold 22,453,000 21,068,000 62,526,000 61,184,000
------------------ ------------------- ------------------- -------------------
Gross profit 12,365,000 11,631,000 33,377,000 31,769,000
Selling, general and
administrative expenses 10,540,000 10,200,000 31,513,000 30,236,000
Non-recurring charges 0 300,000 0 300,000
Interest expense 1,182,000 1,251,000 3,558,000 3,686,000
------------------ ------------------- ------------------- -------------------
Total expenses 11,722,000 11,751,000 35,071,000 34,222,000
Income (Loss) before income taxes
and extraordinary items 643,000 (120,000) (1,694,000) (2,453,000)
Provision for income taxes 63,000 194,000 190,000 292,000
------------------ ------------------- ------------------- -------------------
Income (Loss) before extraordinary items 580,000 (314,000) (1,884,000) (2,745,000)
Extraordinary gain from early retirement
of debt 0 5,245,000 0 5,245,000
Net income (loss) 580,000 4,931,000 (1,884,000) 2,500,000
Preferred dividends 77,000 112,000 77,000 362,000
------------------ ------------------- ------------------- -------------------
Net income (loss) applicable
to Common Stockholders 503,000 4,819,000 (1,961,000) 2,138,000
================== =================== =================== ===================
Net income (loss) per share before
extraordinary items $0.07 ($0.04) ($0.30) ($0.40)
Net income (loss) per share for
extraordinary items $0.00 $0.54 $0.00 $0.68
Net income (loss) per share after
extraordinary items $0.07 $0.50 ($0.30) $0.28
Weighted average number of common shares 7,210,000 9,677,000 6,500,000 7,673,000
================== =================== =================== ===================
</TABLE>
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 Nine Months Ended
-------------------------------------------
September 28, 1996 September 27, 1997
(Unaudited) (Unaudited)
-------------------- --------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ($1,884,000) $2,500,000
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,976,000 1,963,000
Extraordinary gain on early retirement of debt --- (5,245,000)
Loss on sale of property, plant and equipment --- 40,000
Provision for doubtful accounts receivable 302,000 361,000
Changes in operating assets and liabilities:
(Increase) in accounts receivable (5,155,000) (3,565,000)
(Increase) decrease in inventories (1,309,000) 3,114,000
(Increase) decrease in prepaid expenses
and other current assets 491,000 (2,260,000)
Increase (decrease) in accounts payable 693,000 (1,706,000)
Increase (decrease) in accrued expenses (1,001,000) 416,000
-------------------- --------------------
Net cash used in operating activities (5,887,000) (4,382,000)
-------------------- --------------------
Cash Flows From Investing Activities:
Capital expenditures (487,000) (161,000)
-------------------- --------------------
Net cash used in investing activities (487,000) (161,000)
-------------------- --------------------
Cash Flows From Financing Activities:
Net (payments) receipts under revolving notes payable 7,223,000 2,743,000
Payments of long-term debt (77,000) (333,000)
Expenses of issuance of preferred stock (250,000) ---
Proceeds from exercise of options to purchase common shares 309,000 ---
Purchase and retirement of common stock (128,000) (20,000)
Net proceeds from sale of common stock to Savings Plan 170,000 59,000
Financing costs incurred (252,000) (1,026,000)
Proceeds from recapitalization --- 4,000,000
-------------------- --------------------
Net cash provided by (used in) financing activities 6,995,000 5,423,000
-------------------- --------------------
Net increase in Cash and Cash Equivalents 621,000 880,000
Cash and Cash Equivalents, Beginning of Period 1,143,000 1,177,000
-------------------- --------------------
Cash and Cash Equivalents, End of Period $1,764,000 $2,057,000
==================== ====================
</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 Financial Statements (continued)
------------------------------------------
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 September 27, 1997, as well as its results of operations for the
fiscal three and nine month periods ended September 27, 1997 and
September 28, 1996 and its cash flows for the nine months ended
September 27, 1997 and September 28, 1996. 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.
2. On May 19, 1997, the Company and Danskin Investors, LLC (the
"Investor"), a company newly formed by an investment group led by
Onyx Partners, Inc., entered into an agreement pursuant to which,
under certain circumstances, the Investor would make an equity
investment in the Company.
On March 27, 1997 the Company entered into a Sixth Amendment to the
Amended and Restated Loan and Security Agreement (the "First Union
Loan and Security Agreement") with First Union National Bank ("First
Union") which, among other matters, required the Company to pay
First Union an additional equity fee of $3,000,000 in 2002 (the
"Additional Equity Fee") unless the Company obtained at least
$6,000,000 of net equity proceeds prior to August 31, 1997. By
letter agreement dated as of June 17, 1997, First Union extended
this August 31, 1997 deadline to December 1, 1997. In addition, by
letter dated July 2, 1997, First Union (i) waived compliance with
the covenant requirements relating to sales of inventory, and (ii)
amended the financial covenants of the First Union Loan and Security
Agreement. Availability under the First Union Loan and Security
Agreement in excess of utilization was $3,398,000 as of September
27, 1997.
On August 28, 1997, First Union, the Company and the Investor
entered into a letter agreement which among other things, provided
for (i) the purchase by the Investor of certain notes executed by
the Company and payable to First Union under the First Union Loan
and Security Agreement in the approximate principal amount of
$21.265 million (the "Term Loan") , (ii) the restructuring of First
Union's revolving credit commitments to the Company (the "Revolving
Credit Facility") pending a contemplated refinancing thereof, and
(iii) the disposition of the warrants ( the "Warrants") issued to
First Union in June 1995 in connection with a prior restructuring of
the Company's obligations to First Union.
On August 28, 1997, the Company also agreed to the terms of a
Memorandum of Understanding with the Investor pursuant to which the
Investor would make a capital investment in the Company. In
accordance with the terms and conditions of the Memorandum of
Understanding, the Investor would (i) contribute the $21.265 million
face amount of the Term Loan to the Company and (ii) invest an
additional $4 million cash in the Company (collectively, the
"Capital Infusion"). In exchange for the Capital Infusion, it was
agreed that the Investor would receive (a) $15 million face amount
of debt (the "Subordinated Debt"), subordinated only to the
Company's obligations to First Union under the Revolving Credit
Facility, and (b) convertible preferred stock of the Company having
a liquidation preference of $500,000 (the "Investor Preferred
Stock"). The Memorandum of Understanding further provided that the
Company would repay all principal and accrued but unpaid interest
under the Revolving Credit Facility with the proceeds from a new
revolving credit facility (the "New Revolving Credit Facility") and
term
6
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
------------------------------------------
loan (the "New Term Loan") to be provided by a new lender.
The conditions to the closing of the purchase of the Term Loan
included, among others, requirements that (i) the Investor shall
have (x) entered into an intercreditor agreement with First Union
providing for the subordination of the Company's obligations to the
Investor under the Term Loan, the collateral securing such
obligations, and any new debt securities issued by the Company to
the Investor, to the Company's obligations under the Revolving
Credit Facility, and (y) made a $4 million cash equity or interim
debt investment in the Company and (ii) the Company shall have (a)
provided a release to First Union, and (b) entered into an amendment
to the First Union Loan and Security Agreement as described below.
All deferred or accrued and unpaid interest, fees (other than the
Additional Equity Fee) and expenses owed by the Company to First
Union in connection with the Term Loan were to be paid at the
closing of the Investor's purchase of the Term Loan (the "Term Loan
Closing"). In addition, the Company was obligated to pay First Union
a fee of $250,000 in connection with the transaction.
Pursuant to certain letter agreements, First Union, subject to the
terms and provisions of the First Union Loan and Security Agreement,
agreed to make overadvances (collectively, the "Overadvance")
available to the Company in varying amounts up to a maximum
aggregate principal amount equal to $1,500,000 at any one time
outstanding for borrowings on or before August 28, 1997. First Union
also agreed to continue to make the Overadvance available to the
Company in varying amounts up to a maximum aggregate principal
amount not to exceed $2.0 million through October 31, 1997.
On September 22, 1997, the Company consented to the assignment to
the Investor of approximately $21.265 million face amount (the "Loan
Amount") of the Term Loan. In addition, at the Term Loan Closing,
the Revolving Credit Facility was amended to, among other things,
(i) adjust the applicable interest rates, (ii) reset the maturity
date for such Facility to March 31, 1998 and (iii) eliminate the
Additional Equity Fee.
In accordance with the terms of a certain Securities Purchase
Agreement, dated September 22, 1997, entered into by the Company and
the Investor (the "Securities Purchase Agreement"), the Investor,
and certain other persons, contributed to the Company in the
aggregate (a) the Loan Amount and (b) $4 million in cash (together,
the "Capital Contribution") in exchange for (i) the Subordinated
Debt and (ii) the Investor Preferred Stock (together the
"Securities") of the Company. The Investor funded the Capital
Contribution through capital contributions made to it by its members
and $544,129 paid by Oppenheimer Bond Fund for Growth to the Company
in exchange for a portion of the Securities.
In connection with the closing of the Capital Contribution, the
Board of Directors of the Company accepted the resignations of
Patricia Patterson, John Burden and Edwin Dean as directors of the
Company and elected Andrew Astrachan, Nina McLemore, Gabriel Brener
and James P. Jalil as directors.
In connection with the closing of the Capital Contribution, the
Board of Directors approved amendments to both the Certificate of
Incorporation and the By-laws of the Company to effectuate
agreements reached between the Company and the Investor, including,
among other things, increasing the number of authorized shares of
its common stock to 100,000,000 and removing the provisions for a
classified Board of Directors (the "Certificate Amendments").
7
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
------------------------------------------
In addition, in connection with the closing of the Capital
Contribution, the Company announced that (a) its Board of Directors
declared a stock dividend on the Common Stock equal to one share of
Common Stock for each 11.99 shares of Common Stock held of record as
of the close of business on September 22, 1997 (these shares were
retroactively applied in the financial statements for the earnings
per share calculation), (b) its Board of Directors redeemed the
Rights issued pursuant to the Rights Agreement, dated as of June 5,
1996, between the Company and First Union, as Rights Agent, for $.01
per right in cash to holders of Common Stock held of record as of
the close of business on September 22, 1997, and (c) it will offer
to its shareholders, including the Investor, the right to purchase,
pro rata, 10 million shares of Common Stock at a per share price of
$0.30 (the "Rights Offering"). The Investor will stand by to
purchase any shares of Common Stock offered in the Rights Offering
and not purchased by other shareholders of the Company.
Also in connection with the closing of the Capital Contribution,
3,291,797 stock options were granted to certain key personnel of the
Company at an exercise price of $0.30 (the "Key Personnel Stock
Opitons"), 1,845,899 of which were exercisable immediately. The
balance of the Key Personnel Stock Options generally vest over a
three year period and are, under certain circumstances, exercisable
through September 22, 2004.
The recognized gain on the transactions described in Note 2 above
(the "Transaction") of $5.2 million represents the difference
between (a) the recorded value of the Term Loan and (b) the fair
value of the Subordinated Debt and the Investor Preferred Stock,
less the write-off of deferred finance charges relating to the First
Union Loan and Security Agreement and the costs incurred in
connection with the Transaction. This gain will be applied against
the Company's net operating loss carryforward which is fully
reserved for. Any remaining net operating loss carryforward
available after offset may be subject to limitation under the change
of control provisions of the Internal Revenue Code.
3. Pursuant to a certain Warrant Purchase Agreement, dated as of
September 22, 1997 (the "Purchase Date"), by and between Donald
Schupak ("Schupak"), Chairman of the Board of Directors, and the
Company, Schupak purchased a warrant (the "Schupak Warrant") to
purchase up to 5,372,315 shares of Common Stock, par value $.01 per
share, subject to adjustment (the "Warrant Shares") for an aggregate
purchase price of $1,611,694.50 (computed on the basis of $.30 a
share), subject to adjustment. In consideration of the sale of the
Schupak Warrant by the Company to Schupak, Schupak paid the Company
$100,000 (the "Warrant Price"). On the Purchase Date, Schupak (x)
paid $20,000 of the Warrant Price to the Company in cash and (y)
delivered to the Company a seven year promissory note of Schupak in
the amount of $80,000 (the "Promissory Note"). The outstanding
principal balance of the Promissory Note bears interest at a rate of
6.55% per annum, to be paid annually on the anniversary of the
Purchase Date. The Schupak Warrant may be exercised, in whole at any
time or in part from time to time, commencing on the date of
effectiveness of an amendment to the Company's Certificate of
Incorporation increasing the number of its authorized shares and
prior to 5:00 p.m., Eastern Standard Time, on September 22, 2004.
The value of the Schupak Warrant in the financials is based upon an
independent appraisal.
4. Effective September 18, 1997, the Executive Committee of the Board
of Directors of the Company amended the Company's Stock Option Plan
to clarify that the Board of Directors retains the discretion to
determine the fair value of the Common Stock with respect to
periods when the Common Stock is not actively traded on NASDAQ or
any other national exchange or under circumstances where significant
transactions in the Common Stock have occurred outside traditional
trading venues.
Effective October 1, 1997, a total of 239,943 options were repriced
with an exercise price of 62.5 cents. All participants granted
options prior to this date, with the exception of certain executives
and outside directors, were given the opportunity to
8
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
------------------------------------------
exchange previous grants, which were all originally granted at
higher exercise prices (ranging from $1.875 to $4).
Under provisions of the Company's Stock Option Plan, as a result of
the change in control of the Company, 33,265 options which were not
vested on or prior to such change of control, have become fully
vested.
5. Effective October 8, 1997 (the "Closing Date"), the Company replaced
its former financing arrangements with First Union with a new loan
and security agreement (the "Loan and Security Agreement") with
Century Business Credit Corporation ("CBCC" or the "Lender") which
matures on October 8, 2002. Proceeds of the Loan and Security
Agreement were used to pay all of the Company's indebtedness to
First Union, and to establish working capital lines of credit.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement provides the Company with a term loan facility in the
aggregate principal amount of $10 million (the "Term Loan Facility")
and a revolving credit facility, including a provision for the
issuance of letters of credit (the "Revolving Credit Facility")
generally in an amount not to exceed the lesser of (a) $45 million
less the aggregate outstanding principal balance under the Term Loan
Facility, or (b) a formula amount based upon the Company's available
inventory and accounts receivable levels, minus certain
discretionary reserves. The Company's obligations to CBCC under the
Loan and Security Agreement are generally secured by a first
priority security interest in all present and future assets of the
Company. The Loan and Security Agreement contains certain
affirmative and negative covenants including, maintenance of
tangible net worth and a limitation on capital expenditures,
respectively. In connection with the closing on the Loan and
Security Agreement, the Company paid CBCC a facility fee equal to
$300,000.
On the Closing Date, two term loans were advanced to the Company in
accordance with the terms of the Term Loan Facility. A term loan in
the original principal amount of $5 million was advanced to the
Company and is, with respect to principal, payable in thirty (30)
consecutive monthly installments commencing on the first day of the
first month following the first anniversary of the Closing Date. A
second term loan in the original principal amount of $5 million was
advanced to the Company and is, with respect to principal, payable
in eighteen (18) consecutive monthly installments commencing on the
first day of the forty-third (43) month following the Closing Date.
At the Closing Date, and after the satisfaction in full of the
Company's obligations to First Union, availability under the
Revolving Credit Facility was approximately $15 million.
Interest on the Company's obligations under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of
the Prime Rate plus one half of one (1/2%) percent and is payable
monthly. Interest may also accrue at a rate per annum equal to the
sum of the Eurodollar Rate, as defined in the Loan and Security
Agreement, plus two and three quarters percent (2- 3/4%) .
6. In accordance with the terms of the Securities Purchase Agreement,
upon the Closing Date, the Investor Preferred Stock and the
Subordinated Debt were, by their terms, automatically exchanged for
(a) $12 million stated value of Series D Redeemable Cumulative
Convertible Preferred Stock (the "Series D Stock") of the Company,
(b) a seven year warrant to purchase 10
9
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
------------------------------------------
million shares of Common Stock at a per share price of $0.30 (the
"Warrants"), and (c) a $3 million aggregate principal amount
subordinated note of the Company (the "Remaining Subordinated
Debt").
The 2,400 shares of Series D Stock are convertible into Common
Stock, at the option of the holder and, in certain circumstances,
mandatorily, at an initial conversion rate of 16,666.66 shares of
Common Stock for each share of the Series D Stock so converted,
subject to adjustment in certain circumstances. The terms of the
Series D Stock also provide that upon the seventh anniversary of the
date of its issuance, the Series D Stock shall be redeemed by the
Company for an amount equal to the sum of (x) $5,000 per share (as
adjusted for any combinations, divisions or similar
recapitalizations affecting the shares of Series D Stock), plus (y)
all accrued and unpaid dividends on such shares of Series D Stock to
the date of such redemption. Holders of the Series D Stock are
entitled to vote, together with the holders of the Common Stock and
any other class of series of stock then entitled to vote, as one
class on all matters submitted to a vote of stockholders of the
Company, in the same manner and with the same effect as the holders
of the Common Stock. In any such vote each share of issued and
outstanding Series D Stock shall entitle the holder thereof to one
vote per share for each share of Common Stock that would be obtained
upon conversion of all of the outstanding shares of Series D Stock
held by such holder, rounded up to the next one-tenth of a share.
Therefore, the exchange of the Series D Stock for the Subordinated
Debt was highly dilutive of existing holders of Common Stock.
Holders of the Series D Stock are also entitled to designate a
majority of the directors to the Board of Directors of the Company.
The Series D Stock has an 8% annual dividend rate, payment of which
is deferred through December 31, 1999, and a seven year maturity.
If, for any fiscal year beginning with the fiscal year ended
December 31, 1999, the Company meets certain agreed upon financial
targets, all accrued dividends for such fiscal year will be forgiven
and the Series D Stock will automatically convert into 40 million
shares of Common Stock. The Remaining Subordinated Debt bears
interest, commencing on December 22, 1997, at the rate of 8% per
annum.
7. On August 6, 1996, the Company issued its 10% Convertible Preferred
Stock (the "10% Cumulative Preferred Stock") having a liquidation
preference of $5,000,000, in exchange for the convertible
subordinated debenture previously outstanding. The 10% Cumulative
Preferred Stock was entitled to vote on an as converted basis, and
was convertible into 4,403,339 shares of Common Stock at a
conversion price of $1.14 per share following the "reset" of such
conversion price that took place on August 6, 1997. Holders of the
10% Cumulative Preferred Stock had the right to vote separately as a
class for the election of one Director. The director previously
elected to the Board of Directors of the Company in this capacity
resigned in May 1997. The Company had 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 per share and in June 1997 by issuing 102,881 shares at $1.21
per share. By agreement of the Company and the holder of the 10%
Cumulative Preferred Stock, the issuance in June 1997 of Common
Stock in lieu of cash was rescinded. The Company did not take action
with respect to the dividend payment which was due on September 1,
1997. In connection with the closing of the Capital Contribution,
the holder of the 10% Cumulative Preferred Stock exchanged such
preferred stock and any accrued but unpaid dividends, for 3,436,214
shares of Common Stock and certain other rights, including the right
to participate in the purchase of the securities issued to the
Investor on the same terms as the Investor. Thereupon, the 10%
Cumulative Preferred Stock was canceled and retired.
10
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
------------------------------------------
8. On May 9, 1997, the Company received notification from the Nasdaq
Stock Market, Inc. ("NASDAQ"), that it would delist the Company's
common stock from the Nasdaq SmallCap Market 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
appealed NASDAQ's decision, and after an oral hearing held on June
19, 1997, the Company was notified that its appeal had been denied.
The Company's common stock was delisted effective June 27, 1997. The
Company's common stock is presently traded in the over-the-counter
market.
9. Inventories are stated at the lower of cost or market on a first-in,
first-out basis. Inventories consisted of the following:
December 28, 1996 September 27, 1997
----------------- ------------------
(unaudited)
Finished goods $19,742,000 $20,119,000
Raw materials 5,767,000 4,334,000
Work-in-process 7,663,000 5,802,000
Packaging materials 903,000 706,000
----------- -----------
$34,075,000 $30,961,000
=========== ===========
10. The Company is party to certain legal proceedings arising in the
ordinary course of its 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.
11. 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 and nine months ended September
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 September 1996 and 1997. No allocation between current
and deferred income taxes was made during the three and nine months
ended September 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
foreign 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.
12. 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 defined) in the Pension Plan, may become a
participant after April 15, 1997 and no "Credited Service" (as
defined) shall be granted to any participant after such date.
Therefore, the Company will not accrue any additional liability
under the Pension Plan.
13. Non-recurring charges of $300,000 consisted of certain executive
employee severance costs.
11
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
------------------------------------------
14. The following Unaudited Pro Forma Consolidated Balance Sheet as of
September 27, 1997 of the Company is based on the Consolidated
Balance Sheet of the Company included elsewhere in this quarterly
report on Form 10-Q, adjusted to give effect to the transactions
described herein as if they had all occurred at September 27, 1997.
12
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
PROFORMA
HISTORICAL ADJUSTMENTS PROFORMA
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
- ------
CASH 2,057 2,057
ACCOUNTS RECEIVABLE 19,297 19,297
INVENTORY 30,961 30,961
OTHER CURRENT ASSETS 2,469 2,469
----- -----
TOTAL CURRENT ASSETS 54,784 54,784
------ ------
NET FIXED ASSETS 7,993 7,993
DEFERRED FEES 1,255 (859)(2) 396
OTHER ASSETS 466 466
--- ---
TOTAL ASSETS 64,498 (859) 63,639
------ ---- ------
LIABILITIES & EQUITY
ACCOUNTS PAYABLE 7,976 7,976
ACCRUED EXPENSES 12,583 12,583
REVOLVING LOAN PAYABLE 12,712 12,712
------ ------
TOTAL CURRENT LIABILITIES 33,271 33,271
------ ------
SUBORDINATED DEBT 15,000 (12,000)(1) 3,000
LONG TERM DEBT 10,000 10,000
ACCRUED PENSION COSTS 2,504 2,504
POST RETIREMENT 211 211
--- ---
TOTAL LONG TERM LIABILITIES 27,715 (12,000)(1) 15,715
------ ------- -- ------
TOTAL LIABILITIES 60,986 (12,000)(1) 48,986
------ ------- -- ------
SERIES C CONVERTIBLE PREFERRED STOCK 244 (244)(1) 0
SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK 11,141 (2) 11,141
------
COMMON STOCK 96 96
ADDITIONAL PAID IN CAPITAL 19,959 19,959
WARRANTS OUTSTANDING 0 244 (1) 244
ACCUMULATED DEFICIT (14,207) (14,207)
ACCUMULATED TRANSLATION ADJUSTMENT (15) (15)
MINIMUM PENSION LIABILITY ADJUSTMENT (2,565) (2,565)
------ ------
TOTAL EQUITY 3,268 244 (1) 3,512
----- --- -- -----
TOTAL LIABILITIES AND EQUITY 64,498 (859) 63,639
------ ---- ------
</TABLE>
Notes to Unaudited Pro Forma
Consolidated Balance Sheet
(1) The Pro Forma adjustments reflect the exchange of the Investor Preferred
Stock and $12 million of the Subordinated Debt for the Warrant and the
Series D Stock.
(2) Pro Forma Series D Stock has been shown net of the deferred equity costs.
13
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Cautionary Statements
---------------------
Certain statements contained in the discussion below, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking"
statements within the meaning of the Private Securities Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: the effects of future events on the
Company's financial performance; the risk that the Company may not be able
to finance its planned growth; risks related to the retail industry in
which the Company competes, including potential adverse impact of external
factors such as inflation, consumer confidence, unemployment rates and
consumer tastes and preferences; and the risk of potential increase in
market interest rates from current rates. Given these uncertainties,
current and prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result
of any revisions to any of the forward-looking statements contained herein
to reflect future events or developments.
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 and Nine months of Year Ended December 1997 with
the Three and Nine months of Year Ended December 1996.
Net Revenues:
Net revenues amounted to $32.7 million for the three months ended
September 1997, a decrease of $2.1 million, or 6.0%, from the prior year
three months ended September 1996. Net revenues for the nine months ended
September 1997 amounted to $93.0 million, a decrease of $2.9 million, or
3.0%, from $95.9 million the same prior year period. Wholesale revenues
for the Company decreased $1.8 million for the three month period and
declined $2.3 million for the nine month period. Retail volume decreased
$0.3 million for the three month period ending September 1997 and $0.6
million for the nine month period ending September 1997.
Danskin activewear net revenues, which includes the Company's retail
operations, amounted to $22.5 million for the three months ended September
1997, an increase of $0.1 million, or 0.4%, from $22.4 million in the
prior three months ended September 1996, and increased $3.2 million, to
$63.8 million, or 5.3%, for the nine month period ended September 1997
over the same prior year period. Comparable retail store sales declined
11.9% for the three months ended September 1997 and declined 9.1% for the
nine month period ending September 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.
14
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Pennaco legwear net revenues amounted to $10.2 million for the three
months ended September 1997, a decline of $2.2 million, or 17.7%, from the
three months ended September 1996, and declined $6.1 million, or 17.3%, to
$29.2 million for the nine month period ending September 1997 from the
same prior year period. This decline is indicative of a continued weak
sheer hosiery market in the department store class of trade.
Gross Profit:
Gross profit decreased by $0.8 million, or 6.5%, to $11.6 million in the
three months ended September 1997 from $12.4 million in the prior year
period, and declined $1.6 million, or 4.8%, to $31.8 million for the nine
month period ended September 1997 from the prior year period. Gross profit
as a percentage of net revenues remained relatively flat in the three
months ended September 1997, but decreased to 31.8% for the nine months
ended September 1997 from 33.4% in the same prior year period.
Gross margins for activewear were 38.7% for the three months ended
September 1997 versus 41.1% for the three months ended September 1996, and
37.8% for the nine month period ended September 1997 versus 39.6% for the
same prior year period. This three and nine month decrease was primarily
attributable to closeout sales, customer markdown allowances from prior
seasons and incremental private label programs.
Legwear gross profit increased to 28.4% in the three months ended
September 1997 from 25.8% in the prior period, but declined to 26.4% for
the nine month period ending September 1997 as compared to 26.6% for the
same prior year period. The September quarter increase is primarily due to
improved margins in the Anne Klein brand. The nine month decrease of 0.2%
is mainly due to closeout sales and the phasing out of a former licensed
brand.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, which include retail store
operating costs, decreased by $0.3 million, or 2.9%, to $10.2 million, or
31.2% of net revenues, in the three months ended September 1997, from
$10.5 million, or 30.2% of net revenues for the three month period ending
September 1996. For the nine month period ending September 1997, selling,
general and administrative expenses decreased $1.3 million, or 4.1%, to
$30.2 million, or 32.5% of net revenues compared to $31.5 million or 32.8%
of net revenues for the nine month period ending September 1996. Selling,
general and administrative expenses, excluding retail store operating
costs, decreased $1.7 million, or 7.4%, to $21.4 million, or 23.0% of net
revenues, in the nine months ended September 1997, from $23.1 million, or
24.1% of net revenues in the same prior year period. The wholesale
decrease in the September 1997 nine month period was principally a result
of a reduction in print advertising costs, lower compensation expenses and
a reduction in distribution costs.
Operating Income/Loss:
As a result of the foregoing, income from operations (i.e., income before
interest expense, non-recurring charges, extraordinary items and income
taxes) amounted to $1.4 million for the three months
15
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
ended September 1997, a decline of $0.5 million from the income of $1.9
million for the three month period ending September 1996. For the nine
month period ending September 1997, the Company generated operating income
of $1.6 million compared to $1.9 million for the same prior year period.
The Danskin wholesale business accounted for the majority of the operating
income for the three and nine month periods.
Interest Expense:
Interest expense amounted to $1.3 million for the three months ended
September 1997 and $1.2 million for the three months ended September 1996,
and $3.7 million for the nine month period ending September 1997 and $3.6
million for the nine month period ending September 1996. The Company's
effective interest rate was 11.0% and 10.4% for the three months ended
September 1997 and September 1996, and 11.0% and 10.5% for the nine months
ended September 1997 and 1996, respectively. Increase of the effective
interest rate over the prior year is principally due to the conversion of
the 8% subordinated convertible debentures to equity.
Non-recurring Charges:
Non-recurring charges were $0.3 million for the three and nine month
period ending September 1997. These charges consisted of certain executive
employee severance costs.
Extraordinary Gain From Early Retirement of Debt:
The Company recognized a gain of $10.0 million, offset by the write-off of
deferred financing fees associated with the First Union Loan and Security
Agreement of $2.6 million and direct costs of the transaction of $2.2
million, for the three and nine month period ending September 1997. The
extraordinary gain is attributable to the discount associated with the
early retirement of the First Union Term Loan of $21.3 million per the
Letter Agreement dated August 28, 1997. This gain will be applied against
the Company's net operating loss carryforward which is fully reserved
for.
Income Tax Provision (Benefit):
The Company's income tax provision (benefit) 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 and nine months
ended September 1997 and September 1996. The Company's deferred tax
balance was $0 at both September 1997 and December 1996.
Net Income (Loss):
As a result of the foregoing, net income was $4.8 million for the three
months ended September 1997, an increase of $4.3 million from a $0.5
million net income in the three months ended September 1996, and $2.1
million for the nine month period ending September 1997, an improvement of
$4.1 million from the nine month period ending September 1996.
Liquidity and Capital Resources
The Company's primary liquidity and capital requirements relate to the
funding of working capital needs, primarily inventory, accounts
receivable, capital investments in operating facilities, machinery and
equipment, and principal and interest payments on indebtedness. The
Company's primary sources
16
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
of liquidity have been from bank financing, issuance of convertible
securities, vendor credit terms and internally generated funds.
Net cash flow used in operations improved by $1.5 million to $4.4 million
for the nine months ended September 1997, from a use of cash from
operations of $5.9 million in the nine months ended September 1996,
principally attributable to decreases in both legwear and activewear
inventory levels offset by an increase in accounts receivables. After $0.2
million used in capital expenditures and the net effect of the capital
infusion of Danskin Investors, LLC (the "Investor"), a company newly
formed by an investment group led by Onyx Partners, Inc., the Company's
cash position increased $0.9 million to $2.1 million for the nine month
period ending September 1997.
Working capital decreased $3.1 million to $21.5 million at September 1997
from $24.6 million at December 1996. Accounts receivable increased by
$3.2 million, inventory levels decreased by $3.1 million and accounts
payable decreased by $1.7 million offset by an increase of $2.7 million in
the revolving loan balance and an increase in accrued expenses related to
the equity deal consummation of the transactions contemplated by the
Securities Purchase Agreement.
On May 19, 1997, the Company and the Investor entered into an agreement
pursuant to which, under certain circumstances, the Investor would make an
equity investment in the Company.
On March 27, 1997, the Company entered into a Sixth Amendment to the
Amended and Restated Loan and Security Agreement (the "First Union Loan
and Security Agreement") with First Union National Bank ("First Union")
which , among other matters, required the Company to pay First Union an
additional equity fee of $3,000,000 in 2002 (the "Additional Equity Fee"),
unless the Company obtained at least $6,000,000 of net equity proceeds
prior to August 31, 1997. By Letter Agreement, dated as of June 17, 1997,
First Union extended this August 31, 1997 deadline to December 1, 1997. In
addition, by letter dated July 2, 1997, First Union (i) waived compliance
with the covenant requirements relating to sales of inventory, and (ii)
amended the financial covenants of the First Union Loan and Security
Agreement. Availability under the First Union Loan and Security Agreement
in excess of utilization was $3,398,000 as of September 27, 1997.
On August 28, 1997, First Union, the Company and the Investor entered into
a letter agreement which among other things, provided for (i) the purchase
by the Investor of certain notes executed by the Company and payable to
First Union under the First Union Loan and Security Agreement in the
approximate principal amount of $21.265 million (the "Term Loan") , (ii)
the restructuring of First Union's revolving credit commitments to the
Company (the "Revolving Credit Facility") pending a contemplated
refinancing thereof, and (iii) the disposition of the warrants ( the
"Warrants") issued to First Union in June 1995 in connection with a prior
restructuring of the Company's obligations to First Union.
On August 28, 1997, the Company also agreed to the terms of a Memorandum
of Understanding with the Investor pursuant to which the Investor would
make a capital investment in the Company. In accordance with the terms and
conditions of the Memorandum of Understanding, the Investor would (i)
contribute the $21.265 million face amount of the Term Loan to the Company
and (ii) invest an additional $4 million cash in the Company
(collectively, the "Capital Infusion"). In exchange for the Capital
Infusion, it was agreed that the Investor would receive (a) $15 million
face amount of debt (the "Subordinated Debt"), subordinated only to the
Company's obligations to First Union under the Revolving Credit Facility,
and (b) convertible preferred stock of the Company having a liquidation
preference of $500,000 (the "Investor Preferred Stock"). The Memorandum of
Understanding further provided that the Company would repay all principal
and accrued but unpaid interest under the Revolving Credit Facility with
the proceeds from a new revolving credit facility (the "New Revolving
Credit Facility") and term loan (the "New Term Loan") to be provided by a
new lender.
17
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The conditions to the closing of the purchase of the Term Loan included,
among others, requirements that (i) the Investor shall have (x) entered
into an intercreditor agreement with First Union providing for the
subordination of the Company's obligations to the Investor under the Term
Loan, the collateral securing such obligations, and any new debt
securities issued by the Company to the Investor, to the Company's
obligations under the Revolving Credit Facility, and (y) made a $4 million
cash equity or interim debt investment in the Company and (ii) the Company
shall have (a) provided a release to First Union, and (b) entered into an
amendment to the First Union Loan and Security Agreement as described
below. All deferred or accrued and unpaid interest, fees (other than the
Additional Equity Fee) and expenses owed by the Company to First Union in
connection with the Term Loan were to be paid at the closing of the
Investor's purchase of the Term Loan (the "Term Loan Closing"). In
addition, the Company was obligated to pay First Union a fee of $250,000
in connection with the transaction.
Pursuant to certain letter agreements, First Union, subject to the terms
and provisions of the First Union Loan and Security Agreement, agreed to
make overadvances (collectively, the "Overadvance") available to the
Company in varying amounts up to a maximum aggregate principal amount
equal to $1,500,000 at any one time outstanding for borrowings on or
before August 28, 1997. First Union also agreed to continue to make the
Overadvance available to the Company in varying amounts up to a maximum
aggregate principal amount not to exceed $2.0 million through October 31,
1997.
On September 22, 1997, the Company consented to the assignment to the
Investor of approximately $21.265 million face amount (the "Loan Amount")
of the Company's term loan obligations owing to First Union. In addition,
at the Term Loan Closing, the Revolving Credit Facility was amended to,
among other things, (i) adjust the applicable interest rates, (ii) reset
the maturity date for such Facility to March 31, 1998 and (iii) eliminate
the Additional Equity Fee.
In accordance with the terms of a certain Securities Purchase Agreement,
dated September 22, 1997, entered into by the Company and the Investor
(the "Securities Purchase Agreement"), the Investor, and certain other
persons, contributed to the Company in the aggregate (a) the Loan Amount
and (b) $4 million (together, the "Capital Contribution") in exchange for
(i) the Subordinated Debt and (ii) the Investor Preferred Stock (together
with the Subordinated Debt, the "Securities") of the Company. The Investor
funded the Capital Contribution through capital contributions made to it
by its members and $544,129 paid by Oppenheimer Bond Fund for Growth to
the Company in exchange for a portion of the Securities.
In connection with the closing of the Capital Contribution, the Board of
Directors of the Company accepted the resignations of Patricia Patterson,
John Burden and Edwin Dean as directors of the Company and elected Andrew
Astrachan, Nina McLemore, Gabriel Brener and James P. Jalil as directors.
In connection with the closing of the Capital Contribution, the Board of
Directors approved amendments to both the Certificate of Incorporation and
the By-laws of the Company to effectuate agreements reached between the
Company and the Investor, including, among other things, increasing the
number of authorized shares of its common stock to 100,000,000 and
removing the provisions for a classified Board of Directors (the
"Certificate Amendments").
In addition, in connection with the closing of the Capital Contribution,
the Company announced that (a) its Board of Directors declared a stock
dividend on the common stock of the Company equal to one share of common
stock for each 11.99 shares of common stock held of record as of the close
of business on September 22, 1997 (these shares were retroactively applied
in the accompanying financial statements for the earnings per share
calculation),(b) its Board of Directors redeemed the Rights issued
pursuant to the Rights Agreement, dated as of June 5, 1996, between the
Company and First Union Bank, as Rights Agent, for $.01 per right in cash
to holders of common stock held of record as of the close of business on
18
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
September 22, 1997, and (c) it will offer to its shareholders, including
the Investor, the right to purchase, pro rata, 10 million shares of Common
Stock at a per share price of $0.30 (the "Rights Offering"). The Investor
will standby to purchase any shares of common stock offered in the Rights
Offering and not purchased by other shareholders of the Company.
Also in connection with the closing of the Capital Contribution, 3,291,797
stock options were granted to certain key personnel of the Company at an
exercise price of $0.30 (the "Key Personnel Stock Options"), 1,845,899 of
which were exercisable immediately. The balance of the Key Personnel Stock
Options generally vest over a three year period and are, under certain
circumstances, exercisable through September 22, 2004.
The recognized gain on the transactions described above (the
"Transaction") of $5.2 million represents the difference between (a) the
recorded value of the Term Loan and (b) the fair value of the Subordinated
Debt and the Investor Preferred Stock, less the write-off of deferred
finance charges relating to the First Union Loan and Security Agreement
and the costs incurred in connection with the Transaction. This gain will
be applied against the Company's net operating loss carryforward which is
still fully reserved for. Any remaining operating loss carryforward
available after offset may be subject to limitation under the change of
control provisions of the Internal Revenue Code.
Pursuant to a certain Warrant Purchase Agreement, dated as of September
22, 1997 (the "Purchase Date"), by and between Donald Schupak ("Schupak"),
Chairman of the Board of Directors, and the Company, Schupak purchased a
warrant (the "Warrant") to purchase up to 5,372,315 shares of Common
Stock, par value $.01 per share, subject to adjustment (the "Warrant
Shares") for an aggregate purchase price of $1,611,694.50 (computed on the
basis of $.30 a share), subject to adjustment. In consideration of the
sale of the Warrant by the Company to Schupak, Schupak paid the Company
$100,000 (the "Warrant Price"). On the Purchase Date, Schupak (x) paid
$20,000 of the Warrant Price to the Company in cash and (y) delivered to
the Company a seven year promissory note of Schupak in the amount of
$80,000 (the "Promissory Note"). The outstanding principal balance of the
Promissory Note bears interest at a rate of 6.55% per annum, to be paid
annually on the anniversary of the Purchase Date. The Warrant may be
exercised, in whole at any time or in part from time to time, commencing
on the date of effectiveness of an amendment to the Company's Certificate
of Incorporation increasing the number of its authorized shares and prior
to 5:00 p.m., Eastern Standard Time, on September 22, 2004. The value of
the Schupak Warrant in the financials is based upon an independent
appraisal.
Effective September 18, 1997, the Executive Committee of the Board of
Directors of the Company amended the Company's Stock Option Plan to
clarify that the Board of Directors retains the discretion to determine
the fair value of the Common Stock with respect to periods when the Common
Stock is not actively traded on NASDAQ or any other national exchange or
under circumstances where significant transactions in the Common Stock
have occurred outside of traditional trading venues.
Effective October 1, 1997, a total of 239,943 options were repriced with
an exercise price of 62.5 cents (the fair market value on such date). All
participants granted options prior to this date, with the exception of
certain executives and outside directors, were given the opportunity to
exchange previous grants, which were all originally granted at higher
exercise prices (ranging from $1.875 to $4).
Under provisions of the Company's Stock Option Plan, as a result of the
change in control of the Company, 33,265 options which were not vested on
or prior to such change of control, have become fully vested.
Effective October 8, 1997 (the "Closing Date"), the Company replaced its
former financing arrangements with First Union with a new loan and
security agreement (the "Loan and Security Agreement") with Century
Business Credit Corporation ("CBCC" or the "Lender") which matures on
October 8, 2002. Proceeds of the Loan and Security Agreement were used to
pay all of the Company's indebtedness to First Union and to establish
working capital lines of credit.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement provides the Company with a term loan facility in the aggregate
principal amount of $10 million (the "Term Loan Facility") and a revolving
credit facility, including a provision for the issuance of letters of
credit (the "Revolving
19
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Credit Facility") generally in an amount not to exceed the lesser of (a)
$45 million less the aggregate outstanding principal balance under the
Term Loan Facility, or (b) a formula amount based upon the Company's
available inventory and accounts receivable levels, minus certain
discretionary reserves. The Company's obligations to CBCC under the Loan
and Security Agreement are generally secured by a first priority security
interest in all present and future assets of the Company. The Loan and
Security Agreement contains certain affirmative and negative covenants
including, maintenance of tangible net worth and a limitation on capital
expenditures, respectively. In connection with the closing on the Loan and
Security Agreement, the Company paid CBCC a facility fee equal to
$300,000.
On the Closing Date, two term loans were advanced to the Company in
accordance with the terms of the Term Loan Facility. A term loan in the
original principal amount of $5 million was advanced to the Company and
is, with respect to principal, payable in thirty (30) consecutive monthly
installments commencing on the first day of the first month following the
first anniversary of the Closing Date. A second term loan in the original
principal amount of $5 million was advanced to the Company and is, with
respect to principal, payable in eighteen (18) consecutive monthly
installments commencing on the first day of the forty-third (43) month
following the Closing Date. At the Closing Date, and after the
satisfaction in full of the Company's obligations to First Union,
availability under the Revolving Credit Facility was approximately $15
million.
Interest on the Company's obligations under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of the
Prime Rate plus one half of one (1/2%) percent and is payable monthly.
Interest may also accrue at a rate per annum equal to the sum of the
Eurodollar Rate, as defined in the Loan and Security Agreement, plus two
and three quarters percent (2-3/4%).
In accordance with the terms of the Securities Purchase Agreement, upon
the Closing Date, the Investor Preferred Stock and the Subordinated Debt
were, by their terms, automatically exchanged for (a) $12 million stated
value of Series D Redeemable Cumulative Convertible Preferred Stock (the
"Series D Stock") of the Company, (b) a seven year warrant to purchase 10
million shares of Common Stock of the Company at a per share price of
$0.30 (the "Warrants"), and (c) a $3 million aggregate principal amount
subordinated note of the Company (the "Remaining Subordinated Debt").
The 2,400 shares of Series D Stock are convertible into Common Stock, at
the option of the holder and, in certain circumstances, mandatorily, at an
initial conversion rate of 16,666.66 shares of Common Stock for each share
of the Series D Stock so converted, subject to adjustment in certain
circumstances. The terms of the Series D Stock also provide that upon the
seventh anniversary of the date of its issuance, the Series D Stock shall
be redeemed by the Company for an amount equal to the sum of (x) $5,000
per share (as adjusted for any combinations, divisions or similar
recapitalizations affecting the shares of Series D Stock), plus (y) all
accrued and unpaid dividends on such shares of Series D Stock to the date
of such redemption. Holders of the Series D Stock are entitled to vote,
together with the holders of the Common Stock and any other class of
series of stock then entitled to vote, as one class on all matters
submitted to a vote of stockholders of the Company, in the same manner and
with the same effect as the holders of the Common Stock. In any such vote
each share of issued and outstanding Series D Stock shall entitle the
holder thereof to one vote per share for each share of Common Stock that
would be obtained upon conversion of all of the outstanding shares of
Series D Stock held by such holder, rounded up to the next one-tenth of a
share. Therefore, the exchange of the Series D Stock for the Subordinated
Debt was highly dilutive of existing holders of Common Stock. Holders of
the Series D Stock are also entitled to designate a majority of the
directors to the Board of Directors of the Company. The Series D Stock has
an 8% annual dividend rate, payment of which is deferred through December
31,1999, and a seven year maturity. If, for any fiscal year beginning with
the fiscal year ended December 31, 1999, the Company meets certain agreed
upon financial targets, all accrued dividends for
20
<PAGE>
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
such fiscal year will be forgiven and the Series D Stock will
automatically convert into 40 million shares of Common Stock. The
Remaining Subordinated Debt bears interest, commencing on December 22,
1997, at the rate of 8% per annum.
On August 6, 1996, the Company issued its 10% Convertible Preferred Stock
(the "10% Cumulative Preferred Stock") having a liquidation preference of
$5,000,000, in exchange for the convertible subordinated debenture
previously outstanding. The 10% Cumulative Preferred Stock was entitled to
vote on an as converted basis, and was convertible into 4,403,339 shares
of Common Stock at a conversion price of $1.14 per share following the
"reset" of such conversion price that took place on August 6, 1997.
Holders of the 10% Cumulative Preferred Stock had the right to vote
separately as a class for the election of one Director. The director
previously elected to the Board of Directors of the Company in this
capacity resigned in May 1997. The Company had 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 per share
and in June 1997 by issuing 102,881 shares at $1.21 per share. The Company
did not take action with respect to the dividend payment which was due on
September 1, 1997. By agreement of the Company and the holder of the 10%
Cumulative Preferred Stock, the issuance in June 1997 of Common Stock in
lieu of cash was rescinded. In connection with the closing of the Capital
Contribution, the holders of the 10% Cumulative Preferred Stock exchanged
such preferred stock and any accrued by unpaid dividends for 3,436,214
shares of Common Stock certain other rights, including the right to
participate in the purchase of the securities issued to the Investor on
the same terms as the Investor. Thereupon, the 10% Cumulative Preferred
Stock was canceled and retired.
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 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 implement this
strategy, particularly given the difficulty of predicting hosiery
operations or, if implemented, that this strategy will be successful.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 10 in the Notes to Consolidated Condensed Financial Statements in
Part I - Financial Information of this quarterly report on Form 10-Q.
21
<PAGE>
Item 2. Changes in Securities and Uses of Proceeds
------------------------------------------
The following is a description of all sales of equity securities by the
Company during the quarterly period ended September 27, 1997 that were not
registered under the Securities Act of 1933, as amended (the "Securities
Act"). All of such sales were private placements made in reliance upon the
exemption provided by Section 4(2) of the Securities Act, and no
underwriters were involved in such placements.
On September 22, 1997, pursuant to the terms of the Securities Purchase
Agreement between the Company and the Investor, the Investor, and certain
other persons, contributed to the Company the Capital Contribution in
exchange for the Subordinated Debt and the Investor Preferred Stock. The
Investor funded the Capital Contribution through capital contributions
made to it by its members and $544,129 paid by Oppenheimer Bond Fund for
Growth ("BFG") to the Company in exchange for a portion of the
Subordinated Debt and the Investor Preferred Stock. In connection with the
closing of the Capital Contributions, BFG exchanged the 10% Cumulative
Preferred Stock of the Company held by it for 3,436,214 shares of Common
Stock and certain other rights, including the right to participate in
purchase of the Subordinated Debt and the Investor Preferred Stock on the
same terms as the Investor.
The terms of the Investor Preferred Stock provided that holders thereof
had, among other rights, the right to elect four of nine directors to the
Board of Directors of the Company.
In accordance with the terms of the Securities Purchase Agreement, on the
Closing Date, the Investor Preferred Stock and the Subordinated Debt were,
by their terms, automatically exchanged for (a) 2,400 shares of the
Series D Stock, (b) a seven year warrant to purchase 10 million shares of
Common Stock at a per share price of $.30 (the "Warrants") and (c) a $3
million aggregate principal amount subordinated note of the Company. The
Series D Stock is convertible, at the option of the holder, and in certain
circumstances, mandatorily, at an initial conversation rate of 16,666.66
shares of Common Stock for each share of the Series D Stock so converted,
and a per share conversion price of $.30, each of which is subject to
adjustment in certain circumstances. The terms of the Series D Stock also
provide that, upon the seventh anniversary of the date of its issuance,
such stock shall be redeemed by the Company for an amount equal to the sum
of (x) $5,000 per share (as adjusted for any combinations, divisions or
similar recapitalizations affecting the shares of the Series D Stock),
plus (y) all accrued and unpaid dividends on shares of such stock to the
date of such redemption. Holders of the Series D Stock are entitled to
vote, together with the holders of the Common Stock and any other class of
series of stock then entitled to vote, as one class on all matters
submitted to a vote of stockholders of the Company, in the same manner and
with the same effect as the holders of the Common Stock. In any such vote
each share of issued and outstanding Series D Stock shall entitle the
holder thereof to one vote per share for each share of Common Stock that
would be obtained upon conversion of all of the outstanding shares of
Series D Stock held by such holder, rounded up to the next one-tenth of a
share. Holders of the Series D Stock are also entitled to designate a
majority of the directors to the Board of Directors of the Company. The
Series D Stock has an 8% annual dividend rate, payment of which is
deferred through December 31, 1999, and a seven year maturity. If, for any
fiscal year beginning with the fiscal year ended December 31, 1999, the
Company meets certain agreed upon financial targets, all accrued dividends
for such fiscal year will be forgiven and the Series D Stock will
automatically convert into 40 million shares of Common Stock at a
conversion price of $.30 per share.
The terms of the Warrants provide that they may be exercised, in whole at
any time or in part from time to time, commencing on the Closing Date and
prior to the close of business on the seventh anniversary thereof. The
initial aggregate warrant price of $3,000,000 and the initial per share
warrant price is $.30 per share, each of which is subject to certain
anti-dilution adjustments. The aggregate warrant price and the per share
warrant price may be paid (a) in cash, (b) by surrender to the Company of
shares of Common Stock with a fair value on the date of exercise that is
equal to the aggregate warrant price or per share warrant price, as the
case may be, in respect of the number of Warrants exercised, (c) by
22
<PAGE>
surrender to the Company of warrants or (d) by a combination of (a), (b)
and (c). The holder of the Warrants also has the right (the "Conversion
Right") to convert the Warrant or any portion thereof into shares of
Common Stock, but only if, at the time of such conversion, the per share
warrant price shall be less than the current market price per share of
Common Stock and the Warrants shall otherwise be exercisable.
As described above, the Capital Contribution in exchange for which the
Investor Preferred Stock and the Subordinated Debt were issued was used to
reduce the amount of the Company's obligations to First Union pursuant to
the term loan portion of the First Union Loan and Security Agreement.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None.
(b) Form 8-K
--------
Form 8-K dated October 8, 1997
Form 8-K dated September 22, 1997.
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.
November 11, 1997 By: /s/Mary Ann Domuracki
----------------------------
Mary Ann Domuracki
Chief Executive Officer
November 11, 1997 By: /s/Beverly Eichel
----------------------------
Beverly Eichel
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
23
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