SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
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 Identification No.)
incorporation or organization)
111 West 40th Street, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 764-4630
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share, and associated rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this Form 10-K [ ].
As of March 1, 1998, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was $15,762,694. Such aggregate market value
was computed by reference to the closing price of the Common Stock as quoted by
the National Quotation Bureau on such date.
As of March 1, 1998, there were 10,088,124 shares of the registrant's
Common Stock outstanding, excluding 1,083 shares held by a subsidiary.
Unless the context indicates otherwise, the term "Company" refers to
Danskin, Inc. and, where appropriate, one or more of its subsidiaries.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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DANSKIN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on 26
Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of
the Registrant 27
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management 36
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 38
SIGNATURES 44
CONSOLIDATED FINANCIAL STATEMENTS F4-F7
FINANCIAL STATEMENT SCHEDULES F8-F27
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PART I
ITEM 1. BUSINESS
The Company designs, manufactures and markets several leading brands of
women's activewear, dancewear 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 legwear 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 currently operates as two divisions: Danskin Division for activewear and
Pennaco for legwear.
Danskin(R) is a leading brand of women's activewear, legwear, and
dancewear in the United States, enjoying a brand awareness factor of over 82%
among American women. The Company manufactures and sells activewear, dancewear
and legwear to girls and women under the Danskin(R) label and to large-size
women under the Danskin Plus(R) label. Although known for its design of seasonal
fashion offerings and its wide range of colors, currently approximately 65% of
the Danskin Division's net revenues are attributable to basic styles, with black
being the most popular color. The Company currently licenses the Danskin(R)
brand to manufacturers of women's underwear, children's socks and cycling wear.
The Danskin Division produces over 80% of its activewear products at its plant
in York, Pennsylvania and is one of the only major suppliers of branded women's
activewear with substantial domestic manufacturing capacity. Manufacturing
domestically allows the Company to respond to customer orders quickly and also
allows its designers to respond quickly to market trends.
Pennaco hosiery is widely recognized for its quality, fit and innovation.
Pennaco is one of the oldest manufacturers of hosiery in the United States and
the second largest supplier of sheer hosiery to domestic, full line department
stores and apparel specialty stores, as well as being the leading supplier of
private label hosiery to these stores. The Company markets Round-the-Clock(R),
which has been in the market since 1919, as well as two licensed brands of
hosiery: Givenchy(R) and Anne Klein(R).
The Company operates three full-priced stores and 45 outlet stores in 22
different states. The Company's outlet stores, in addition to offering in-line
merchandise, provide a distribution channel for irregular and excess inventory.
The Company presently anticipates closing certain unprofitable outlet stores and
selectively opening full price stores during the next two years.
Strategy
The Company's market includes products intended for women's activewear,
dancewear and legwear. The Company has developed a diversified portfolio of
quality branded and private label products (1) that can be offered to consumers
at varying price points through its channels of distribution. The Company's
objectives are (i) to expand its portfolio of products in order to become a
complete activewear and legwear resource by capitalizing on the strong name
recognition of its proprietary and licensed brands and (ii) to expand its
distribution channels for activewear through department stores and through
international channels of distribution. Key elements of the Company's strategy
include the following:
- - --------
(1)/ Danskin(R), Danskin Plus(R), Dance France(R) and Round-the-Clock(R) are
registered trademarks of Danskin, Inc.
Givenchy(R) is a registered trademark of Givenchy S.A.
Anne Klein(R) is a registered trademark of Anne Klein & Company.
Christian Dior(R) is a registered trademark of Christian Dior S.A.
Lycra(R) is a registered trademark of E.I. DuPont de Nemours & Co., Inc.
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Expansion of Danskin(R) Product Lines
The Company introduced a variety of new activewear products in 1997. This
expansion has included sports bras and outerwear designed for outdoor activities
such as walking and hiking. This expansion of product lines exemplifies the
Company's strategy to take the Danskin(R) brand beyond the gym and dance studio
and into a woman's total active lifestyle. Due to the strength of the Danskin(R)
name, the Company has expanded its product offerings in categories such as
fleece and outerwear, which complement its traditional strength in stretch
bodywear and legwear. The Company believes that this strategy will facilitate
the Company's ability to sell a full line of clothing products to retail
customers and to have Danskin(R) brand products offered for sale in many more
departments in department stores.
International Sales Expansion
The Company believes that the Danskin(R) brand enjoys strong recognition
in many foreign markets, including Canada, Germany, England, Australia and
Holland. Accordingly, the Company has targeted international markets as a
potential significant source of growth. It generally approaches this market
through distributors, although it distributes directly in Canada and is
considering direct distribution in other foreign countries as well. Export net
sales over the past three full fiscal years were $6.2 million for Fiscal 1995,
$6.7 million for Fiscal 1996 and $6.3 million for Fiscal 1997.
Licensing of Danskin(R) Name
The Company currently licenses the Danskin(R) brand to manufacturers of
women's and girls underwear, children's socks and cycling wear. The Company
believes that there is an opportunity to license the Danskin(R) name for
additional product categories, such as children's sportswear, swimwear,
sunglasses, watches, personal care products and outerwear. The Company believes
that selective licensing enhances the value of its brands, by expanding the
opportunities for retail purchases of its brands, affording cross-marketing and
merchandising opportunities and providing additional product categories for sale
in Company-owned stores.
Store Strategy
Outlet Stores. The Company is evaluating the performance of selected
locations and is attempting to renegotiate the leases on certain underperforming
outlet stores and is limiting the number of new outlet stores it opens each
year. In addition, in order to improve the operating performance of its outlet
stores, the Company has changed the stores' merchandise mix and ordering
practices and now provides for the automatic replenishment of product as
determined by model stock levels.
Full Price Retail Stores. In November 1995, the Company opened a full
price retail store under the Danskin(R) name on Columbus Avenue in New York
City, followed in February 1996 by a second store in Miami's South Beach. Since
1991, the Company has operated a full price retail store in Santa Monica,
California, under the Dance France(R) name. The Company believes that the
Danskin(R) name recognition of over 82% among American women and the brand's
reputation for fit, comfort and durability provide the Company with an
opportunity to open additional full price Danskin(R) stores in freestanding
metropolitan and upscale mall locations. These stores offer the Company's
consumers a wider assortment of Danskin(R) merchandise by carrying an inventory
of approximately 1,500 SKU's (stock keeping units), contrasted with only
approximately 150 SKU's maintained at any one time by even the largest retailer
of Danskin(R) products. In addition to opening a new channel of distribution for
the Company's products, the Company believes these stores are an effective form
of consumer advertising and help "showcase" the full assortment of its
activewear merchandise. The Company believes there are ample opportunities for
selective national expansion of its full price retail strategy. The Company
presently intends to selectively open full price retail stores over the next two
years.
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Establishment of the Company as a Complete Legwear Resource
Pennaco is the number two hosiery resource (behind Sara Lee Corporation)
in most domestic, full line department stores, and enjoys a reputation for the
fit and quality of its products, private label offerings, reliable shipping
performance and brand diversity. The Company is also the major supplier of
private label sheer hosiery sold by these department stores. The Company has
developed initiatives for each of its legwear brands to penetrate new market
niches. These include the further expansion of Anne Klein(R) trouser socks to
take advantage of the Anne Klein(R) presence on the main floor of department
stores. Recognizing the trend towards more casual dressing, the Company intends
to increase its casual business, including socks and tights, which currently
account for approximately 10% of shipments, to 30%. It has launched a Danskin(R)
sock and tights line and an Anne Klein(R) sock and tights line.
Market Segmentation
Activewear
The Company sells its activewear products to approximately 6,000 accounts,
representing over 12,000 stores. These products are targeted towards different
segments of the wholesale market. Danskin(R) and Danskin Plus(R) (activewear for
the large sized woman) products are marketed to major sporting goods stores,
such as The Sports Authority, Jumbo Sports and Oshman's Sporting Goods, full
line department stores, including Dillard's, Nordstrom, Lord & Taylor, Federated
Department Stores (including Burdine's and Macy's) and Belk Stores, and many
smaller sporting goods and specialty stores. The Company intends to enhance its
product offerings to gain additional penetration in the activewear market in
department stores.
Legwear
The Company sells its legwear products to approximately 1,870 accounts,
representing over 2,500 stores. The customer base for its legwear consists
primarily of full line department stores and apparel specialty stores, including
Federated Department Stores (including Macy's and Bloomingdale's), May Co.
stores (including Kaufmans, Filenes, Hecht, Famous Barr, Robinson May, Foleys,
Meier and Frank and Lord & Taylor), Mercantile Stores, Dillards, Dayton Hudson -
Marshall Field's, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Carson Pirie
Scott and Talbot's (including its catalog). The Company provides a diversity of
legwear products to its customer base at each price/quality level, and seeks
market niches for product expansion. Within the legwear market, the market is
divided principally by retail price points, with designer brands, such as Anne
Klein(R) and Givenchy(R), occupying the upper price point positions with
generally higher gross margins, non-designer brands, such as Round-the-Clock(R),
occupying the middle price point positions and private label products at varied
price points, depending upon the retailer's brand image.
Products
Activewear
The Company designs, manufactures and markets several leading brands of
women's and girl's activewear (including bodywear, cover-ups and outerwear) and
dancewear under the Danskin(R) and Dance France(R) labels. Dance France(R) is
the Company's line of high fashion bodywear offering finer fabrics, textures and
prints, and is primarily directed to specialty stores at higher price points.
Danskin realizes approximately 65% of activewear revenues from basic
styles, with black being the single most popular color. Activewear products are
generally designed in four seasonal fashion groupings, with a monthly
introduction of new styles or colors. In an effort to improve margins and
minimize operating complexity, the Company continually reviews and eliminates
low-volume SKU's from its product offerings. The total number of SKU's for
activewear is approximately 5,000.
Danskin(R) activewear products sell at retail prices ranging from $4.50 to
$64.
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Legwear
Pennaco is one of the oldest manufacturers of hosiery in the United States
and is the second largest supplier of women's sheer hosiery and legwear to
domestic, full line department stores and apparel specialty stores and the major
supplier of private label hosiery to these stores. Approximately 40% of the
Company's annual legwear revenues consist of sales of its private label
merchandise. Pennaco hosiery is widely recognized for its quality, fit and
innovation. Through its proprietary brand, Round-the-Clock(R), the Company was
the first manufacturer to introduce multiple sizes and colors in pantyhose, and
was a pioneer in the application of spandex (Lycra(R)) yarns to hosiery.
Recognizing the trend towards more casual dressing, the Company launched a
Danskin(R) sock and tight line, as well as an Anne Klein(R) sock and tight line,
and its own line of Round-the-Clock(R) trouser socks.
The Company also manufactures and sells two licensed brands of hosiery:
Givenchy(R) and Anne Klein(R), which represented approximately 22% and 8% of
legwear revenues, respectively for the fiscal year ended December 27, 1997.
Givenchy(R) has been a leading brand since its introduction by Pennaco in 1979.
The license agreement with Givenchy Corporation covers the United States, Canada
and Mexico and expires on December 31, 1998. Anne Klein(R) legwear was initially
launched during 1991. The license with Anne Klein & Company expires on December
31, 1998, and covers the United States, certain other countries and duty-free
shops throughout most of the world. The Company also formerly licensed the
Christian Dior(R) brand under a license agreement, which it allowed to expire at
the end of 1996. See "--Litigation."
Anne Klein(R) sheer hosiery retails in a price range of $11.00 to $16.00,
Givenchy(R) in a price range of $4.50 to $19.00 and Round-the-Clock(R) in a
price range of $3.75 to $12.50.
Although the Company is required to maintain a high number of legwear
SKU's because of the complex packaging requirements of its private label
customers, it knits only 160 styles. Product is held in an undyed state and is
dyed, finished and packaged in accordance with forecasted demand. Over the past
year, the Company has aggressively reduced both the number of legwear styles and
SKU's it produces, which has contributed to improved gross margins.
Store Operations
Full Price Retail
In November 1995, the Company opened a full price retail store under the
Danskin(R) name on Columbus Avenue in New York City, followed in February 1996
by a second store in Miami's South Beach. Since 1991, the Company has also
operated a full price retail store in Santa Monica, California, originally under
the Dance France(R) name and presently under the Danskin(R) name. These stores
are designed exclusively for women and offer a wide assortment of Danskin(R)
products. By adding new, higher priced Danskin(R) products, such as sweaters and
outerwear, the Company has raised the average amount of a retail transaction in
its stores. It also believes that the full price store concept will be
applicable in other major metropolitan areas and in selected upscale mall
locations in the United States, and it presently intends to further test that
concept by selectively opening new full price retail locations in the next two
years.
The Company's New York City and South Beach stores cover 2,500 square feet
each and the Santa Monica store covers approximately 1,100 square feet. The
Company presently anticipates that any full price stores opened in the future
would range in size from approximately 1,500 to 2,000 square feet each. The
Company estimates that capital expenditures for each store of this size range
will average approximately $400,000, and that each such store will require
approximately $150,000 of inventory.
Outlets
The Company currently operates 45 outlet stores located in 22 different
states, situated in areas where the Company believes they generally do not
compete with the Company's principal channels of distribution. They range in
size from approximately 1,100 to 12,000 square feet, with the average being
approximately 5,400 square feet. These stores traditionally have provided a
channel of distribution for closeout merchandise. The Company has taken steps,
which have improved inventory turns and margins for its outlet stores. See
"--Strategy -- Store Strategy -- Outlet Stores."
6
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Operations
Activewear
The Company manufactures over 80% of its activewear products at its
275,000 square foot plant in York, Pennsylvania and is one of the only major
suppliers of branded women's activewear with substantial domestic manufacturing
capacity. Manufacturing domestically allows the Company to respond to customer
orders quickly and also allows its designers to respond quickly to market
trends, thus enabling the Company to defer authorization of fabric cutting until
product samples have been seen by buyers. In order to complement the York plant,
the Company has acquired a sewing facility in Mexico, operating under NAFTA,
that currently produces activewear products with lower costs on a contract
basis. This facility provides the activewear plant with expansion opportunities,
while retaining the quick response and flexibility afforded by being a domestic
manufacturer. In addition, as the Company progresses in its strategy of
diversification of its activewear product offerings, it expects to source an
increasing proportion of total production through offshore contractors.
Specifically, the Company recently entered into an agreement with Li & Fung
(Trading) Limited ("Li & Fung"), pursuant to which Li & Fung has agreed to act
as a non-exclusive buying agent of the Company, to assist the Company in
purchasing merchandise in certain foreign countries.
The York plant has a dyeing facility, which enables the Company to hold
basic garments in an undyed state and then to dye them when customer orders are
received, thereby minimizing inventory risk and inventory levels. The Company is
also able to do its own screen printing at this facility. Distribution of
activewear is made from the Company's distribution center in York, Pennsylvania.
Legwear
The Company manufactures its hosiery in its 281,000 square foot facility
in Grenada, Mississippi. The facility's current capacity is approximately 50,000
dozen pairs per week, and the Company is currently producing approximately
25,000 dozen pairs per week. Actual production varies according to seasonal
requirements. The plant operates over 500 high-speed knitting machines and has a
state-of-the-art dyeing facility that has helped make Pennaco a recognized
leader in the industry for its fashion and color offerings. Legwear distribution
facilities are also located in Grenada, Mississippi.
The Company continues to process a substantial and increasing portion of
its customer orders through EDI programs, which permit the electronic receipt of
purchase orders and, in some cases, the electronic transmission of invoices. In
addition, the Company has established a "New Quick Response Program" for certain
high volume styles, which has enhanced its EDI replenishment capabilities and
has enabled it to ship products within five days of receiving an order.
Sales and Marketing
The Company's domestic sales force presently consists of approximately 35
sales people; 20 of whom are responsible for marketing the Company's activewear
product lines and 15 of whom are responsible for marketing the Company's legwear
product lines to department stores, apparel specialty stores, sporting goods
retailers and smaller specialty stores. The Company periodically reviews the
structure of its sales force and makes adjustments based on the Company's needs.
Export sales are generally made to international distributors, with the
exception of Canada, where the Company utilizes independent sales
representatives to market Danskin(R) activewear directly.
The Company emphasizes its commitment to customer service through a staff
of approximately 150 area representatives, located throughout the country, whose
principal responsibility is field merchandising of legwear products in
department stores. These representatives are present in the stores during peak
consumer traffic periods; they merchandise the selling fixtures, instruct store
personnel about effective selling, conduct seminars, interact directly with
consumers and are available to support in-store events and promotions, all with
the goal of maximizing sales of the Company's products. To a lesser extent, they
also merchandise the Company's activewear products in department stores and
certain sporting goods stores.
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One of the Company's principal promotional vehicles for activewear is its
title sponsorship and ownership of the Danskin(R) Womens Triathlon Series, an
annual series of triathlon competitions for women. The Company uses the Series
as a promotional event for both retailers and consumers, offering seminars at
retail stores for participants prior to the race event in each location. The
Company further evidences its support of women's programs by donating all of the
triathlon entry fees to the Susan G. Komen Breast Cancer Foundation.
The Company sponsors "Team Danskin," a group of world class women athletes
from a variety of sports. The rising level of participation by women in all
sports has prompted Danskin to expand its fitness apparel offerings in recent
years and to direct more of its marketing efforts toward these consumers. The
Team Danskin members help the Company's designers create products suitable for
each of their sports. They are selected not only for their accomplishments but
also for their communications skills. All are expected to appear at in-store
promotions and trade shows. The current active Team Danskin members include, in
addition to Nadia Comaneci and Kerri Strug (gymnastics), Candace Cable
(physically challenged downhill skier) and Nicole Bobek (figure skating). The
Company focuses its marketing efforts on sports with a high level of
participation by girls and high media awareness, such as figure skating and
gymnastics.
Legwear marketing programs consist primarily of in-store promotions,
co-operative advertising and in-store legwear seminars, which are designed to
teach the stores' sales personnel how to sell the Company's products.
Seasonality
The Company's business achieves seasonally higher financial performance in
its September fiscal quarter, principally as a result of "back-to-school"
purchases. See "Management's Discussion and Analysis of Financial Conditions and
Result of Operations--Seasonality."
Suppliers
The Company's raw materials consist principally of piece goods and yarn
that are purchased by the Company from a number of domestic and foreign textile
mills and converters. The Company obtains Lycra(R) from DuPont. Although from
time to time there have been shortages of Lycra(R), such shortages have not
adversely affected the Company. The Company does not have long-term formal
arrangements with any of its suppliers. However, the Company, to date, has been
able to satisfy its raw material requirements and considers its sources of
supply adequate.
Trademarks
The Company owns and utilizes a variety of trademarks, the principal ones
being Danskin(R), Dance France(R) and Round-the-Clock(R). The Danskin(R)
trademark is owned by the Company worldwide, except in Japan, and is registered
with the United States Patent and Trademark Office and in most other major
jurisdictions of the world. In Japan, the trademark is owned by the Company's
former licensee, Goldwin, Inc., with whom the Company has a long-term
cooperation agreement.
Certain of the Company's other trademarks are registered with the United
States Patent and Trademark Office and in some foreign jurisdictions as well.
The Company regards its trademarks and other proprietary rights as valuable
assets and believes that they have significant value in the marketing of its
products. The Company actively protects its trademarks against infringement.
Regulation
The Company is subject to various federal, state and local environmental
laws and regulations limiting the discharge, storage, handling and disposal of a
variety of substances, particularly the federal Water Pollution Control Act, the
Clean Air Act of 1970 (as amended in 1990), the Resource Conservation and
Recovery Act (including amendments relating to underground tanks) and the
federal "Superfund" program. The Company cannot with certainty assess at this
time the impact upon its operations or capital expenditure requirements of
future emission standards and enforcement practices under the 1990 amendments to
the Clean Air Act.
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In connection with the refinancing of its bank loan agreement, in the
fourth quarter of fiscal year ended December 27, 1997, the Company engaged an
independent environmental consulting firm to conduct assessments of
environmental conditions at the Company's manufacturing and distribution
facilities in York, Pennsylvania and Grenada, Mississippi. No material
environmental problems were discovered in these assessments.
The Company also is subject to federal, state and local laws and
regulations relating to workplace safety and worker health, including those
promulgated under the Occupational Safety and Health Act ("OSHA"). As part of
its OSHA compliance efforts, the Company requires all personnel working in high
noise areas and those working in certain areas with high concentrations of dust
to wear protective equipment.
The Company believes that it currently is in compliance in all material
respects with existing OSHA standards and environmental laws and regulations.
The Company does not believe that there is a substantial likelihood that further
OSHA or environmental compliance will require substantial expenditures or
materially affect its operations or competitive position.
Employees
As of March 1, 1997, the Company employed approximately 1,551 persons, of
whom 904 were employed at Danskin, 605 were employed at Pennaco and the
remainder were employed at the Company's executive offices. At such date, 1,241
of the Company's employees were paid on an hourly basis, and the remainder were
salaried employees. Although there have been attempts to organize certain of its
employees in the past, none are currently represented by a union, and employee
relations are generally considered to be good.
Competition
The apparel industry is highly competitive. Many of the Company's
competitors are larger and have greater financial, distribution, marketing and
other resources, and better established brand names, than the Company. The
Danskin(R) and Dance France(R) brands compete with products sold by an array of
smaller and larger companies, including Nike, Reebok, Adidas, Fila, Champion,
Authentic Fitness and Weekend Exercise Company. Legwear products compete with
products sold by a number of other established manufacturers and marketers, the
largest of which is the Hanes division of Sara Lee Corporation, while other
significant competitors include Jockey International, Inc., Kayser-Roth Corp.
and Ithaca Industries, Inc. The Company does not market its legwear either in
the mass market channel of distribution or in food or drug stores.
ITEM 2. PROPERTIES
The Company leases its principal executive offices and showroom located at
111 West 40th Street in New York City. Such lease provides for annual rent of
$748,000 and expires in December 2001.
The Danskin plant is located in York, Pennsylvania and contains office
space, inventory storage space and a shop area where substantially all of the
Company's activewear products are manufactured. This facility is owned by the
Company. Danskin also leases a distribution facility in York, Pennsylvania. Such
lease provides for annual rent of $424,000 and expires in September 1999.
The Pennaco mill is located in Grenada, Mississippi and contains office
space and inventory storage space where substantially all the hosiery products
manufactured by the Company are produced. The Company leases this facility from
the city of Grenada for a nominal rent through the year 2065. The distribution
center is also leased from the City of Grenada for annual rent of $333,000,
under a lease that expires in December 2008.
The Company also has committed to lease space for 48 retail stores at
annual rents ranging from $17,000 to $300,000 under leases expiring during the
fiscal year ending December 26, 1998 through fiscal 2006. One outlet store is
owned by the Company. Four outlet store leases expire in 1998 and will not be
renewed because of a lack of profitability. The Company may also attempt to
negotiate additional lease terminations.
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The Company's facilities provide adequate levels of capacity for current
levels of production as well as for reasonable levels of additional growth. None
of the Company's properties is leased from any affiliated entity.
Substantially all of the Company's properties and other assets are pledged
to Century Business Credit Corporation (CBCC) to secure the Company's
obligations under the Loan and Security Agreement with CBCC. In addition,
certain subordinated notes of the Company are also secured by a second lien on
substantially all of the Company's property and other assets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and Note 11 in the Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
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.
On July 2, 1997, the parties entered into a Settlement Agreement and Mutual
Release (the "Settlement/Release Agreement"). The Company has satisfied its
obligations under the Settlement/Release Agreement, and management does not
believe that the liability of the Company under the Settlement/Release Agreement
was material to the consolidated financial position, results of operations,
liquidity or business of the Company.
The Company is a party to a number of other legal proceedings arising 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded over-the-counter on the Nasdaq
National Market under the symbol "DANS" until August 8, 1996, at which time it
was moved to The Nasdaq SmallCap(TM) Market under the same symbol. Effective
June 27, 1997, the Company's Common Stock was delisted due to the Company's
non-compliance with Nasdaq's minimum capital and surplus requirement. Bid
quotations for the Company's Common Stock may be obtained from the "pink sheets"
published by the National Quotation Bureau, and the Common Stock is traded in
the over-the-counter market. The following table presents the quarterly high and
low bid quotations during the last two fiscal years, including for each of the
three months ended March 29, 1997 and June 27, 1997, during which time the
Common Stock was listed on the Nasdaq SmallCap Market(TM) and for each of the
three months ended September 27, 1997 and December 27, 1997, during which time
the Common Stock was no longer traded on the Nasdaq Small Cap Market(TM). These
quotations reflect the inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Although as a result of the Capital Contribution, the Company would be in
compliance with Nasdaq's minimum capital and surplus requirement, the Company
does not presently intend to apply for listing of the Common Stock on the Nasdaq
National Market or the Nasdaq Small Cap Market(TM) in the immediate future.
High Low
---- ---
Fiscal Year Ended December 28, 1996
Three-month period ended March $4.875 $3.375
Three-month period ended June 4.000 2.500
Three-month period ended September 4.000 1.875
Three-month period ended December 3.125 2.125
Fiscal Year ended December 27, 1997
Three-month period ended March $2.750 $2.000
Three-month period ended June 2.375 0.500
Three-month period ended September(1) 1.500 0.563
Three-month period ended December(1) 1.188 0.500
As of December 27, 1997, the number of stockholders of record of the
Company's Common Stock was approximately 157.
(1) Since June 27, 1997, the Common Stock has traded solely in the
over-the-counter market. Accordingly, bid quotations for the Common Stock
were available only from the "pink sheets" published by the National
Quotation Bureau. Such bid quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
The Company has not declared any cash dividends with respect to the Common
Stock subsequent to the effective date of its initial public offering, August
19, 1992. The Company's Loan and Security Agreement with CBCC prohibits the
payment of dividends without the lender's consent.
11
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Commencing with the nine months ended December 30, 1995, the Company changed
its fiscal year end to the last Saturday in December. The following selected
consolidated operating data for each of the three years in the period ended
March 25, 1995, the two nine month periods ended December 24, 1994 and December
30, 1995, and the three twelve month periods ended December 30, 1995, December
28, 1996 and December 27, 1997, and the financial position for each of the
periods then ended, have been derived from the consolidated financial statements
of the Company. The twelve month period ended December 30, 1995 is herein
referred to as the "Twelve Months 1995"; the nine-month period ended December
30, 1995 is referred to as "Nine Months 1995"; and the nine-month period ended
December 24, 1994 is referred to as the "Nine Months 1994." The data presented
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements, including the Notes thereto, of the Company, appearing elsewhere in
this Annual Report on Form 10-K.
12
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
Twelve
Fiscal Years Fiscal Nine Months Months Fiscal Years
Ended March Ended December Ended Ended December
--------------------- ------------------- --------- ---------------------
(in thousands, except per share amounts)
1993 1994 1995 1994 1995 1995 1996 1997
-------- --------- --------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues
Danskin $ 68,342 $ 71,814 $ 74,608 $ 55,003 $ 56,732 $ 76,337 $ 80,608 $ 81,158
Pennaco(1) 66,148 59,683 53,510 40,964 37,055 49,601 47,537 40,828
-------- --------- --------- -------- -------- --------- --------- ---------
Total 134,490 131,497 128,118 95,967 93,787 125,938 128,145 121,986
Cost of goods sold
Danskin 42,068 42,797 45,979 33,769 35,028 47,244 49,056 52,314
Pennaco(1) 45,432 43,207 41,367 31,640 27,153 36,874 34,554 29,508
-------- --------- --------- -------- -------- --------- --------- ---------
Total 87,500 86,004 87,346 65,409 62,181 84,118 83,610 81,822
Gross profit
Danskin 26,274 29,017 28,629 21,234 21,704 29,093 31,552 28,844
Pennaco(1) 20,716 16,476 12,143 9,324 9,902 12,727 12,983 11,320
-------- --------- --------- -------- -------- --------- --------- ---------
46,990 45,493 40,772 30,558 31,606 41,820 44,535 40,164
Selling, general and
administrative expenses 42,934 43,847 44,077 32,038 29,851 41,895 42,026 40,174
Non-recurring charges (2) -- 6,244 4,143 1,645 1,100 3,598 -- 300
Interest expense 2,353 2,343 3,928 2,684 3,699 4,943 4,721 4,278
-------- --------- --------- -------- -------- --------- --------- ---------
(Loss) income before (benefit
from) provision for income
taxes, cumulative effect of
a change in accounting method
and extraordinary item 1,703 (6,941) (11,376) (5,809) (3,044) (8,616) (2,212) (4,588)
(Benefit from) provision for
income taxes (3) 195 370 (1,719) (1,524) 178 (20) 2,777 245
-------- --------- --------- -------- -------- --------- --------- ---------
(Loss) income before cumulative
effect of a change in accounting
method and extraordinary item 1,508 (7,311) (9,657) (4,285) (3,222) (8,596) (4,989) (4,833)
Cumulative effect of a change in
accounting method -- 250 -- -- -- -- -- --
Extraordinary item (4) -- -- -- -- -- -- -- 5,245
-------- --------- --------- -------- -------- --------- --------- ---------
Net (loss) income 1,508 (7,061) (9,657) (4,285) (3,222) (8,596) (4,989) 412
Preferred Stock dividend 240 -- -- -- -- -- 202 425
-------- --------- --------- -------- -------- --------- --------- ---------
(Loss) income applicable
to Common Stock $ 1,268 ($ 7,061) ($ 9,657) ($ 4,285) ($ 3,222) ($ 8,596) ($ 5,191) ($ 13)
======== ========= ========= ======== ======== ========= ========= =========
Common Stock dividend-cash $ 15,000 -- -- -- -- -- -- --
======== ========= ========= ======== ======== ========= ========= =========
Basic net income (loss) per share
Net income (loss) per share before
extraordinary items (5,6) $ 0.24 ($ 1.14) ($ 1.51) ($ 0.67) ($ 0.50) ($ 1.34) ($ 0.80) ($ 0.66)
Net income per share for
extraordinary items (4) -- -- -- -- -- -- -- 0.66
Cumulative effect of a change
in accounting method -- 0.04 -- -- -- -- -- --
-------- --------- --------- -------- -------- --------- --------- ---------
Net income (loss) per share
after extraordinary items $ 0.24 ($ 1.10) ($ 1.51) ($ 0.67) ($ 0.50) ($ 1.34) ($ 0.80) ($ 0.00)
======== ========= ========= ======== ======== ========= ========= =========
Weighted average number of
common shares outstanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942
======== ========= ========= ======== ======== ========= ========= =========
Diluted net income (loss) per share
Net income (loss) per share before
extraordinary items (5,6) $ 0.24 ($ 1.14) ($ 1.51) ($ 0.67) ($ 0.50) ($ 1.34) ($ 0.80) ($ 0.66)
Net income per share for
extraordinary items (4) -- -- -- -- -- -- -- 0.66
Cumulative effect of a change
in accounting method -- 0.04 -- -- -- -- -- --
-------- --------- --------- -------- -------- --------- --------- ---------
Net income (loss) per share
after extraordinary items $ 0.24 ($ 1.10) ($ 1.51) ($ 0.67) ($ 0.50) ($ 1.34) ($ 0.80) ($ 0.00)
======== ========= ========= ======== ======== ========= ========= =========
Weighted average number of
common shares and share
equivalents outstanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942
======== ========= ========= ======== ======== ========= ========= =========
Working Capital $ 28,927 $ 17,066 $ 17,618 $ 19,585 $ 25,656 $ 25,656 $ 24,559 $ 18,854
Total assets 68,892 74,481 77,741 81,601 67,742 67,742 66,940 55,002
Long-term debt (excludes
current obligations) 15,293 13,850 24,399 22,743 36,666 36,666 31,589 9,667
Total debt(7) 26,435 38,371 45,725 44,083 41,101 41,101 41,558 21,539
Total stockholders' equity 22,416 13,408 5,195 9,233 1,519 1,519 801 1,681
</TABLE>
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (continued)
(1) Pennaco recorded a $1.0 million pre-tax charge against income for the
fiscal year ended March 27, 1993, related to production problems caused by
an unauthorized change in product specifications by a yarn vendor. Net
revenues and cost of goods sold were each adversely affected by $0.5
million for the fiscal year ended March 27, 1993.
(2) Non-recurring charges of $300,000 for the fiscal year ended December 27,
1997, consisted of certain executive employee severance costs.
Non-recurring charges were $1.1 million for the nine months ended December
30, 1995 and consisted of losses on certain license arrangements and
certain executive employee severance costs. Non-recurring charges were
$4.1 million (net of $0.7 million in related party interest income) for
the fiscal year ended March 25, 1995. The non-recurring charges included
costs associated with the potential acquisition of affiliated entities, a
reserve for additional amounts due from Esmark, Inc. ("Esmark"), the
Company's former parent, an accrual for certain executive compensation
costs and costs associated with certain litigation, and the write-off of
certain non-operating long-term assets. Non-recurring charges were $6.2
million for the fiscal year ended March 26, 1994. Fiscal nine months ended
December 24, 1994 included $2.1 million (net of $0.5 million in related
party interest income) related to the costs associated with the potential
acquisition of affiliated entities, additional amounts due from
affiliates, an accrual for certain executive compensation costs and
certain costs associated with ongoing litigation. Such reserve was
considered necessary principally due to the diminution in the market value
of one of Esmark's principal assets, its 2,010,000 shares of Common Stock
of the Company. See Note 13 in the Notes to Consolidated Financial
Statements.
(3) Fiscal year ended December 28, 1996, included a $4.5 million increase in
the deferred tax valuation allowance, which reduced the net deferred tax
asset to zero.
(4) The recognized gain of $5.2 million represents the difference between (a)
the recorded value of the Term Loan and (b) the fair value of the
Subordinated Notes and the Series C Preferred Stock, less the write-off of
deferred finance charges relating to the First Union Loan Agreement and the
costs incurred in connection with the Capital Contribution and the
Refinancing. This gain will be applied against the Company's net operating
loss carryforward, which is fully reserved. 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. See "Risk
Factors -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Notes 11 and 15 in the Notes Consolidated
Financial Statements.
(5) On August 19, 1992, the Company consummated the Initial Public Offering of
3,000,000 shares of Common Stock at $13.00 per share, which provided
proceeds of $34.6 million, net of underwriting discounts and related costs.
The net proceeds of the Initial Public Offering received by the Company
were used to: (i) redeem all outstanding shares of a certain preferred
stock outstanding for $5.2 million (including accrued dividends of
approximately $0.2 million to the date of redemption); (ii) repay $13.9
million in debt obligations; (iii) pay $0.5 million to the Company's former
lender, representing the balance of the purchase price of $2.0 million due
for the Company's purchase of a warrant issued to such lender that provided
for the purchase of 10% of the Common Stock of the Company by such lender;
and (iv) pay to Esmark a dividend of $15.0 million that was declared prior
to the date of the Initial Public Offering.
Pursuant to a certain Warrant Purchase Agreement, dated as of the
Contribution Closing Date, by and between Donald Schupak, Chairman of the
Board of Directors, and the Company, Mr. Schupak purchased the Schupak
Warrant to purchase the Warrant Shares for an aggregate purchase price of
$1,611,694.50 (computed on the basis of $.30 a share), subject to
adjustment. On the Contribution Closing Date, in consideration of the sale
of the Schupak Warrant by the Company to Mr. Schupak, Mr. Schupak paid the
Company the Warrant Price comprised of (x) $20,000 in cash and (y) the
Schupak Promissory Note. Pursuant to a certain Warrant Purchase Agreement,
dated as of the Contribution Closing Date, by and between David Chu, a
director of the Company, and the Company, Mr. Chu purchased a warrant (the
"Chu Warrant") to purchase 795,900 shares of Common Stock, subject to
adjustment for an aggregate purchase price of $238,770 (computed on the
basis of $.30 a share) subject to adjustment. In consideration of the sale
of the Chu Warrant by the Company to Mr. Chu, Mr. Chu paid the Company the
purchase price of $14,815 in the form of a promissory note. The value of
the Schupak Warrant and the Chu Warrant in the financial statements are
based upon an independent appraisal. See Note 16 to the Notes to
Consolidated Financial Statements.
Effective October 1, 1997, a total of 239,943 options, previously granted
to certain current employees, were repriced with an exercise price of
$.625. Specifically, options granted prior to that date which were
originally granted at higher exercise prices (ranging from $1.875 to $4),
were repriced with the exception of certain options held by executives and
outside directors. Under provisions of the 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.
14
<PAGE>
(6) In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share", which
requires presentation of basic earnings per share (EPS) and diluted
earnings per share and requires the restatement of EPS for all prior
periods reported. The Company has adopted this statement as of December 27,
1997.
In connection with the closing of the Capital Contribution, (i) the 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 accompanying financial statements for the
earnings per share calculation) and (ii) the 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. Also in connection with the closing of the
Capital Contributions, 3,291,797 Stock Options were granted to certain key
personnel, 1,845,899 of which were exercisable immediately. See Note 15 in
the Notes to Consolidated Financial Statements.
(7) Effective the Refinancing Closing Date, the Company entered into the Loan
and Security Agreement with CBCC, which provides for loans to the Company
maturing on October 8, 2002, thereby refinancing all amounts owing First
Union. 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. In connection with the closing of the Loan and Security
Agreement, the Company paid CBCC a facility fee equal to $300,000. On the
Refinancing Closing Date, two term loans were advanced to the Company in
accordance with the terms of the Term Loan Facility in the aggregate
principal amount of $10 million. See Note 11 to the Notes to Consolidated
Financial Statements.
In connection with an amendment to the First Union Loan Agreement in
November 1994, $6.1 million in term loan refinancing was obtained, directly
reducing revolving credit obligations. Bank debt obligations totaled $45.7
million as of March 25, 1995, with revolving credit obligations totaling
$31.3 million and term obligations totaling $14.4 million. Effective June
22, 1995, the Company amended the First Union Loan Agreement, pursuant to
which an additional $8.0 million in term loan refinancing was obtained,
reducing revolving credit obligations to a balance of $22.0 million and
increasing term loan obligations to $22.0 million. In addition, the
maturity date of all obligations to First Union was extended from August
1996 to March 2002. Total First Union debt obligations as of December 28,
1996 and December 30, 1995 amounted to $41.6 million and $36.1 million,
respectively, including revolving credit balances of $20.0 million and
$14.1 million, respectively, and term loan obligations of $21.6 million and
$22.0 million, respectively. Total debt obligations as of December 28, 1996
included $5 million of convertible subordinated debentures. Total revolving
credit availability in excess of utilization under the terms of the First
Union Loan Agreement amounted to $3.5 million and $8.5 million as of
December 28, 1996 and December 30, 1995, respectively, and $2.0 million at
March 25, 1995. See Note 11 in the Notes to Consolidated Financial
Statements.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Selected Consolidated Financial Data and the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
Background
In 1986, the Company was acquired by Esmark, Inc. ("Esmark") from Beatrice
Companies, Inc. (the corporate parent of Playtex International) in a leveraged
buyout transaction. From 1986 to 1992, the Company generated positive earnings
and cash flow, which were used to grow the legwear and activewear businesses. In
August 1992, the Company completed the Initial Public Offering, resulting in net
proceeds of approximately $39.0 million. The Company received approximately
$14.0 million of the net proceeds from the initial public offering, which were
used to reduce indebtedness.
During the fiscal year ended March 26, 1994, the Company began to
experience decreased sheer hosiery sales as overall market demand declined due
to a trend toward casual clothing. As a result of sheer hosiery sales declines,
a $6.2 million non-recurring charge, principally for a write-off of an advance
to Esmark, and continued legal costs associated with certain litigation, the
Company incurred a $7.1 million net loss in the fiscal year ended March 26,
1994. During the fiscal year ended March 25, 1995, the Company suffered a $9.7
million net loss principally due to a $4.1 non-recurring charge associated with
continued decreases in sheer hosiery sales, the loss of a large private label
hosiery customer and continued legal costs associated with lawsuits. These
losses constrained the Company's cash flow, resulting in increased bank
borrowings. Reduced cash flow caused the Company's legwear operations in certain
instances to operate with insufficient inventory and to ship incomplete orders.
The cash flow shortfall also hampered the Company in pursuing certain strategic
opportunities in the Danskin Division, including opening full price retail
stores, expanding the Company's international operations and broadening the
Company's product line to capitalize on Danskin's strong consumer brand
recognition. The Company has undertaken a number of steps to improve its
operating results. These steps have included: (i) the appointment of a new chief
executive officer; (ii) the appointment of new members to the Board of
Directors; (iii) the Capital Contribution; (iv) the Refinancing; (v) significant
reductions in selling, general and administrative costs; (vi) improved
efficiencies at both of the Company's manufacturing facilities; and (vii) the
development of new channels of distribution for the Company's activewear
products.
Change in Fiscal Year End
As of December 1995, the Company changed its fiscal year to the last
Saturday in December from the last Saturday in March.
16
<PAGE>
RESULTS OF OPERATIONS
Comparison of the fiscal year ended December 27, 1997 with the fiscal year ended
December 28, 1996
Net Revenues
Net revenues for the fiscal year ending 1997 amounted to $122.0 million, a
decrease of $6.1 million, or 4.8%, from $128.1 million for the fiscal year
ending 1996. Wholesale revenues for the Company declined $5.3 million and retail
volume decreased $0.8 million for fiscal 1997.
Danskin activewear net revenues, which includes the Company's retail
operations, increased $0.6 million, to $81.2 million, or 0.7%, in fiscal 1997
from $80.6 million in fiscal 1996. The Company's wholesale business increased
$1.4 million or 2.3% over fiscal 1996, while comparable retail store sales
declined 7.7% during fiscal 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
trends towards casual wear, and to emphasize fashion and dancewear product
offerings.
Pennaco legwear net revenues declined $6.7 million, or 14.1%, to $40.8
million for fiscal 1997 from $47.5 million for fiscal 1996. This decline is
indicative of a continued weak sheer hosiery market in the department store
class of trade.
Gross Profit
Gross profit declined $4.3 million, or 9.7%, to $40.2 million for the
twelve months ended December 27, 1997 from the same prior year period. Gross
profit as a percentage of net revenues decreased to 33.0% for the twelve months
ended December 27, 1997 from 34.7% for the same prior year period.
Gross margins for activewear were 35.6% for fiscal 1997 as compared to
39.1% for the same prior year period. This decrease was primarily attributable
to closeout sales, customer markdown allowance from prior seasons, incremental
private label programs and additional inventory markdowns taken to improve turns
in the outlet stores.
Legwear gross profit improved to 27.7% for fiscal 1997 as compared to 27.3%
for the same prior year period. This increase of 0.4% was mainly due to
realization of selected price increases and reduction of costs in the
manufacturing facility.
Selling, General and Administrative Expenses
For fiscal 1997, selling, general and administrative expenses, which
include retail store operating costs, decreased $1.8 million, or 4.3%, to $40.2
million, or 33.0% of net revenues, compared to $42.0 million, or 32.8% of net
revenues for fiscal 1996. Selling, general and administrative expenses,
excluding retail store operating costs, decreased $2.4 million, or 7.8%, to
$28.3 million, or 23.2% of net revenues, for fiscal 1997, from $30.7 million, or
28.6% of net revenues, for the same prior year period. The decrease for fiscal
1997 was principally a result of a reduction in print advertising costs, lower
compensation expenses and a reduction in distribution costs.
Interest Expense
Interest expense amounted to $4.3 million for fiscal 1997 and $4.7 million
for fiscal 1996. The Company's effective interest rate was 11.1% and 10.5% for
1997 and fiscal 1996, respectively. The increase of the effective interest rate
over the same prior year period was principally due to the conversion of the
Company's 8% subordinated convertible debentures to 10% Cumulative Preferred
Stock.
Non-recurring Charges
Non-recurring charges were $0.3 million for fiscal 1997. These charges
consisted of certain executive employee severance costs.
17
<PAGE>
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 Agreement of $2.6
million and direct costs of the transaction of $2.2 million, for fiscal 1997.
The extraordinary gain is attributable to the difference between (a) the
recorded value of the Term Loan and (b) the fair value of the Subordinated Notes
and Series C Preferred Stock, less the write-off of deferred finance charges
relating to the First Union Loan Agreement and the costs incurred in connection
with such transactions. This gain will be applied against the Company's net
operating loss carryforward, which is fully reserved. (See Note 11 to the Notes
to Consolidated Financial Statements).
At March 29, 1997 (the end of the Company's last full taxable year), based
on its tax returns as filed, the Company had approximately $12.3 million of net
operating loss carryforwards for federal income tax purposes. The Company
believes that, after taking into account (i) the use of net operating losses to
shelter income arising in respect of certain of the transactions described in
"The Capital Contribution and the Refinancing" and (ii) the operating loss of
the Company for the 1997 taxable year, the Company will retain approximately
$7.0 million to $9.9 million in net operating loss carryforwards. However, as
discussed immediately below, the use of these carryforwards by the Company will
be limited by the "ownership change" rules of Section 382.
Under Section 382, if a corporation with losses undergoes an "ownership
change," then the amount of pre-ownership-change net operating loss
carryforwards that such corporation may use to offset income in any
post-ownership-change taxable year is limited to an amount (the "annual Section
382 limitation") that is determined, in general, by multiplying the fair market
value of such corporation's outstanding capital stock immediately prior to the
ownership change by the "long-term tax-exempt rate" which is published monthly
by the Internal Revenue Service. The Company had an ownership change in 1997 as
a result of the Capital Contribution. (See Note 11 to the Notes to Consolidate
Financial Statements). The Company believes that its annual Section 382
limitation resulting from that ownership change limits its ability to use its
pre-ownership-change net operating loss carryforwards to shelter future income.
Income Tax Provision (Benefit)
The Company's income tax provision (benefit) rates differed from the
Federal statutory rates due to the utilization of net operating losses, the
effect of the Alternative Minimum Tax and the effect of state taxes for fiscal
1997 and fiscal 1996, respectively. The Company's net deferred tax balance was
$0 at both December 27, 1997 and December 28, 1996.
Net Income (Loss)
As a result of the foregoing, the net income was $0.4 million for fiscal
1997, an improvement of $5.4 million from the $5.0 million loss for fiscal 1996.
Comparison of the fiscal year ended December 28, 1996 with the twelve months
ended December 30, 1995
Net Revenues
Net revenues for the fiscal year ended December 28, 1996 amounted to $128.1
million, an increase of $2.2 million, or 1.8%, from the twelve months ended
December 30, 1995 (the "Twelve Months 1995").
Danskin activewear net revenues, which includes the Company's retail
operations, increased $4.3 million, or 5.6%, to $80.6 million for the fiscal
year ended December 28, 1996, over the Twelve Months 1995. During the fiscal
year ended December 28, 1996, the Company operated 49 retail stores, generating
$20.7 million for such period, with four additional stores opened and one store
closed compared with the prior year. Same store sales at 36 comparable retail
stores declined 6.4% for the fiscal year ended December 28, 1996. The Company
was focused on improving store product offerings, renegotiating existing leases
and streamlining store operations. Marketing of activewear wholesale products
continued to address the trends towards casual wear, and to emphasize fashion
and dance product offerings. In addition, the Company increased its focus on
outdoor fitness and sport bra products as well as offerings for childrens
gymnastics, as promoted by Nadia Comaneci and Kerri Strug.
18
<PAGE>
Pennaco legwear net revenues declined $2.1 million, or 4.2%, to $47.5
million for the fiscal year ended December 28, 1996, from the Twelve Months
1995. This decline was indicative of a continued weak sheer hosiery market in
the department store class of trade. The re-launch of Anne Klein(R) sheer
hosiery and tights was successfully introduced in July 1996, partially
offsetting other branded declines. The Company's Round-the-Clock Lycra(R) 3D
"Leg-solutions" hosiery (incorporating new knitting technology which allows the
use of Lycra(R) throughout entire product) was launched in the Fall of 1995, was
well received and partially offset significant declines in the Company's
traditional Lycra(R) business.
Gross Profit
Gross profit increased by $2.7 million, or 6.5%, to $44.5 million for the
fiscal year ended December 28, 1996, over the same prior year period. Gross
profit as a percentage of net revenues increased to 34.8% for the fiscal year
ended December 28, 1996 from 33.2% for the Twelve Months 1995.
Gross margins for activewear were 39.1% and 38.1% for the fiscal year ended
December 28, 1996 and the Twelve Months 1995, respectively. The increase was
primarily attributable to improvements in retail inventory mix and prior year
liquidation of certain excess wholesale inventories, partially offset by higher
wholesale sales levels of lower margin fashion products.
Legwear gross profit margins increased to 27.3% for the fiscal year ended
December 28, 1996 from 25.7% for the Twelve Months 1995. The increase was
principally due to price increases and reductions in certain production costs,
partially offset by the continued competitive market in traditional Lycra(R)
products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, which include retail store
operating costs, increased by $0.1 million, or 0.3%, to $42.0 million, or 32.8%
of net revenues, for the fiscal year ended December 28, 1996 compared to $41.9
million, or 33.3% of net revenues, for the Twelve Months 1995. Wholesale
selling, general and administrative expenses, excluding retail store operating
costs, decreased $1.2 million, or 3.7%, to $30.7 million, or 28.6% of net
revenues, despite a $0.5 million Twelve Months 1995 insurance refund of certain
legal costs. The wholesale decrease for the fiscal year ended December 28, 1996
was principally a result of a reduction in the provision for doubtful accounts
and lower compensation costs, partially offset by increased advertising costs.
Operating Income (Loss) Before non-recurring charges, interest and taxes
As a result of the foregoing, income from operations (i.e., income/loss
before interest expense, non-recurring charges and income taxes) amounted to
$2.5 million for the fiscal year ended December 28, 1996, an improvement of $2.6
million over the Twelve Months 1995.
Interest Expense
Interest expense amounted to $4.7 million and $4.9 million for the fiscal
year ended December 28, 1996 and the Twelve Months 1995, respectively. The
Company's effective interest rate was 10.5% and 11.2% for the fiscal year ended
December 28, 1996 and the Twelve Months 1995, respectively. Effective interest
rates declined principally due to more favorable market rates and lower rates
that became effective under the First Union Loan Agreement.
Income Tax Provision (Benefit)
The Company's effective federal and state income tax rate was 125% and 6%
for the fiscal year ended December 28, 1996 and the Twelve Months 1995,
respectively. The tax provision for the fiscal year ended December 28, 1996
includes increases in valuation allowances which reduced deferred tax assets,
state taxes and unrealized benefit from net operating losses. The tax provision
rate for the Twelve Months 1995 was principally the result of unrealized benefit
from net operating losses net of state taxes. The Company's deferred tax
balances of $0 as of December 28, 1996 and $3.9 million as of December 30, 1995
were net of a valuation allowance amounting to $10.6 million and $6.1 million,
respectively.
19
<PAGE>
Net Loss
As a result of the foregoing, the net loss for the fiscal year ended
December 28, 1996 was $5.0 million, an improvement of $3.6 million over the $8.6
million net loss for the prior year.
Comparison of the nine months ended December 30, 1995 with the nine months ended
December 24, 1994
Net Revenues
Net revenues decreased by $2.2 million, or 2.3%, to $93.8 million for the
nine months ended December 30, 1995 from $96.0 million for the nine months ended
December 24, 1994, reflecting a decrease in Pennaco operations of $3.9 million,
which more than offset an increase in Danskin operations of $1.7 million.
Net revenues of Danskin increased by $1.7 million, or 3.1%, to $56.7
million for the nine months ended December 30, 1995 from $55.0 million for the
nine months ended December 24, 1994, due to increases in sales of the Company's
retail operations. Overall retail store sales increased by $2.4 million to $14.6
million for the nine months ended December 30, 1995 from $12.2 million for the
nine months ended December 24, 1994, principally due to the opening of eight
additional stores over the prior year, including the Company's first full price
store, which opened in November 1995 in New York City. Comparable retail store
sales declined 4.2% for the nine months ended December 30, 1995, primarily due
to a weak retail environment and the Company's inability to provide its stores
with appropriate inventory levels and product mix earlier in the year. Danskin
wholesale operations experienced a decline of $0.6 million, or 1.4%, in sales
for the nine months ended December 30, 1995, principally due to a divestiture of
certain unprofitable childrens and performance lines. In addition, sales of
performance tights declined because of a continuing difficult hosiery market.
Danskin's efforts towards addressing the industry's trends of lifestyle casual
wear partially offset these declines.
Net revenues of Pennaco decreased by $3.9 million, or 9.5%, to $37.1
million for the nine months ended December 30, 1995 from $41.0 million for the
same prior period. The results principally reflect a continuing weak retail
climate for the sheer hosiery market, as evidenced by Pennaco's loss of certain
customer doors due to bankruptcies and consolidations. Pennaco's decline for
sales for the nine months ended December 30, 1995 occurred primarily in its
branded business, with reductions in private label sales as well, partially
offset by certain customer price increases. The Company introduced certain new
marketing initiatives in its branded business, principally for Givenchy(R) and
Round-the-Clock(R) "Leg Solutions."
Gross Profit
Gross profit increased by $1.1 million, or 3.6%, to $31.6 million for the
nine months ended December 30, 1995 from $30.5 million for the same prior
period. Gross profit as a percentage of net revenues increased to 33.7% for the
nine months ended December 30, 1995 from 31.8% for the nine months ended
December 24, 1994.
Gross margins for Danskin were 38.3% and 38.5% for the nine months ended
December 30, 1995 and December 24, 1994, respectively. This reduction was
primarily attributable to an increasingly promotional retail environment and
planned retail store inventory reductions by the Company to improve inventory
turnover.
Gross margins of Pennaco increased to 26.7% for the nine months ended
December 30, 1995 from 22.7% for the same prior period. The improvement in gross
margins was primarily attributable to private label price increases, the
elimination of certain low margin customers and reductions in certain production
costs.
20
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses, which include retail store
operating costs, decreased by $2.2 million to $29.8 million, or 31.8% of net
revenues, for the nine months ended December 30, 1995, from $32.0 million, or
33.3% of net revenues, for the nine months ended December 24, 1994. The decrease
for the same 1995 period was principally a result of reduced compensation, lower
legal costs and reimbursement to the Company of a portion of legal defense costs
related to securities transactions. Excluding increases associated with retail
expansion, expenses declined by $3.9 million, or 14.9% for the nine months ended
December 30, 1995.
Operating Income (Loss) Before Non-recurring Charges, Interest and Taxes
As a result of the foregoing, income from operations (i.e., income before
non-recurring charges, interest expense and income taxes) increased by $3.3
million to earnings of $1.8 million for the nine months ended December 30, 1995.
The legwear business contributed most significantly to this improvement.
Non-recurring Charges
Non-recurring charges were $1.1 million for the nine months ended December
30, 1995 and consisted of losses on certain license arrangements and certain
executive employee severance costs.
Interest Expense
Interest expense increased by $1.0 million, or 37.0%, to $3.7 million for
the nine months ended December 30, 1995 from $2.7 million for the nine months
ended December 24, 1994. This increase was mostly attributable to higher market
interest rates, higher interest factors provided under restructured debt terms
and increased borrowing levels. The Company's effective interest rate reflected
these factors and was 10.9% and 8.6% for the nine month periods ended December
30, 1995 and December 24, 1994, respectively. In addition, amortization of
financing costs included in interest expense amounted to $0.4 million and $0.3
million for the nine months ended December 30, 1995 and December 24, 1994,
respectively.
Income Tax Provision (Benefit)
The Company's income tax provision/benefit rates differed from the Federal
statutory rates due to the effect of state taxes and the change in valuation
allowance for the nine months ended December 30, 1995, and the nine months ended
December 24, 1994. The Company's deferred tax balance of $3.9 million as of
March 1995 and December 1995 was net of a valuation allowance amounting to $4.9
million and $6.1 million, respectively.
Net Loss
As a result of the foregoing, the Company's net loss was $3.2 million for
the nine months ended December 30, 1995 and $4.3 million for the nine months
ended December 24, 1994, an improvement of $1.1 million, or 25.0%.
SEASONALITY
In the years ended December 1997 and 1996, the Fall season continued to
represent the best volume period for activewear and legwear, while the
performance of women's apparel at retail deteriorated in the first quarter of
1996, negatively impacting results.
The following table summarizes the net revenues, operating (loss) income
before non-recurring charges, interest and taxes and net (loss) income of the
Company before preferred stock dividends, for each of the fiscal March, June,
September and December quarters in the last two fiscal years:
21
<PAGE>
For the fiscal quarters ended
(millions)
March June September December
----- ---- --------- --------
1997
Net Revenues $30.8 $29.5 $32.7 $29.0
Operating (loss) income before non-
recurring charges, interest and taxes 0.4 (0.3) 1.4 (1.5)
Net (loss) income (0.8) (1.6) 4.9 (2.1)
1996
Net Revenues 31.4 29.7 34.8 32.2
Operating (loss) income before non-
recurring charges, interest and taxes (0.8) 0.8 1.8 0.6
Net (loss) income (2.0) (0.4) 0.5 (3.0)
INFLATION
The Company does not believe that the relatively moderate levels of
inflation which have been experienced in the United States, Canada and Western
Europe in recent years have had a significant effect on its net revenues or its
profitability.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not yet fully assessed the impact of the Year 2000 issue
on its computer systems and its operations, including the development of cost
estimates and the extent of computer programming changes required to address
this issue. Any disruption of its operations, whether caused by the Company's
computer systems or those of any of its customers or vendors, could have a
material adverse effect on the Company's financial position or results of
operations. Although final cost estimates have yet to be determined, it is
anticipated that these Year 2000 costs will result in an increase in the
Company's expenses during 1998 and 1999. In addition, there can be no assurance
that the Company will not experience significant cost overruns or delays in
connection with upgrading software or the programming of changes required to
address this issue.
The Company's primary liquidity and capital requirements relate to the
funding of working capital needs, primarily inventory and accounts receivables,
capital investments in operating facilities, machinery and equipment, and
principal and interest payments on indebtedness. The Company's primary sources
of liquidity have been bank financing, convertible securities, vendor credit
terms and internally generated funds.
Net cash flow used in operations improved by $3.1 million to $1.1 million
for the fiscal year ended December 27, 1997, from a use of cash from operations
of $4.2 million for the year ended December 28, 1996, principally attributable
to decreases in both legwear and activewear inventory levels partially offset by
decreases in accounts payable and accrued expenses. After $0.2 million used in
capital expenditures, payments to the revolver loan and the net effect of the
Capital Contribution, the Company's cash position decreased by $0.4 million to
$0.8 million for the year ended December 27, 1997.
Working capital decreased $5.7 million to $18.9 million at December 27,
1997 from $24.6 million at December 28, 1996. Accounts receivable decreased by
$1.2 million, inventory levels decreased by $5.4 million, prepaid expenses
decreased by $1.5 million and accounts payable and revolver decreased by $1.6
million and $1.4 million, respectively, offset partially by an increase of $0.4
million in the current portion of long term debt and accrued expenses.
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.
22
<PAGE>
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.
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 "Revolver Credit
Facility")pending a contemplated refinancing thereof, and (iii) the disposition
of the warrants (the "First Union 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.
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.
23
<PAGE>
Effective October 8, 1997, (the "Refinancing Closing Date"), the Company
replaced its former finance 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 repay 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, (the "CBCC Revolving Credit Facility"), including a provision
for the issuance of letters of credit, 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 customary affirmative and negative covenants, including
maintenance of tangible net worth and a limitation on capital expenditures,
respectively. In connection with the closing under the Loan and Security
Agreement, the Company paid CBCC a facility fee equal to $300,000.
On the Refinancing 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 Refinancing 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
Refinancing Closing Date. At the Refinancing 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, as defined in the Loan and Security Agreement, 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 Refinancing Closing Date, the Investor Preferred Stock, having a liquidation
preference of $500,000, and $15 million aggregate principal amount of 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) $3 million of subordinated debt
(the "Remaining Subordinated Debt") and (c) warrants to purchase 10,000,000
shares of Common Stock for $.30 per share. The 2,400 shares of Series D Stock
are convertible into Common Stock, at the option of the holder and, in certain
circumstances, mandatory, 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 am 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, 199, 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.
24
<PAGE>
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 of distribution for the Company's products. Further, the
Company is taking steps to evaluate its long-term business prospects in the
contracting sheer hosiery market, amid increased retailer demands for increased
responsiveness. In this regard, the Company will, 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 selectively 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 has incurred losses for each of the periods presented.
Management believes that with its current financing in place (which was
completed in October 1997 with CBCC) the Company will have sufficient working
capital to sustain its operations. Management's plans include to expand
Danskin(R) and other product lines, pursue growth in international sales and
selectively license the Danskin(R) name for additional product categories and
open additional full price Danskin(R) stores. In addition, the Company plans to
continue its stabilization of its hosiery business.
The Company expects that 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 under the Loan and Security
Agreement, the Company believes that it has adequate liquidity to pursue its
business strategies. The Company may need additional financing, however, for the
acquisition or development of any new business.
Change of Accountants
On November 3, 1997, the Company dismissed the firm of Deloitte & Touche
LLP ("Deloitte"), its independent auditors. The decision to dismiss Deloitte was
approved by the Board of Directors. No report of Deloitte relating to the
financial statements of the Company for the last two fiscal years contained an
adverse opinion or a disclaimer of opinion, nor was any such report qualified or
modified as to uncertainty, scope of audit or accounting principles. During the
last two fiscal years and all subsequent interim periods preceding the
dismissal, there was no disagreement with Deloitte on any matter relating to
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Deloitte, would have caused it to make reference to the subject matter of the
disagreement in connection with its report. Deloitte did not advise the Company
during its two most recent fiscal years or during any subsequent period
preceding the dismissal: (i) that the internal controls necessary for the
Company to develop reliable financial statements did not exist; (ii) that
information had come to its attention that had led it to no longer be able to
rely on management's representations, or that had made it unwilling to be
associated with the financial statements prepared by management; (iii) of the
need to expand significantly the scope of its audit, or that information had
come to its attention during the two most recent fiscal years or any subsequent
interim period that if further investigated might (a) materially have impacted
the fairness or reliability of either (A) previously issued audit reports or the
underlying financial statements or (B) the financial statements issued or to be
issued covering the fiscal periods subsequent to the date of the most recent
financial statements covered by an audit report or (b) have caused it to be
unwilling to rely on management's representations or be associated with the
Company's financial statements; or (iv) that information had come to its
attention that it had concluded materially impacts the fairness or reliability
of either (1) previously issued audit reports or the underlying financial
statements or (2) the financial statements issued or to be issued covering the
fiscal periods subsequent to the date of the most recent financial statements
covered by the audit report.
On November 3, 1997, Arthur Andersen LLP ("Arthur Andersen") was engaged
by the Company to act as its new independent auditors. During the two most
recent fiscal years and any subsequent interim periods prior to engaging Arthur
Andersen, neither the Company nor anyone on its behalf consulted Arthur Andersen
regarding either: (i) the application of accounting principles to a specified
transaction, either completed or proposed; or (ii) the type of audit opinion
that might be rendered on the Company's financial statements. The Company was
neither provided with a written report nor oral advice that Arthur Andersen
concluded was an important consideration by the Company in reaching a decision
as to the acceptance of its engagement as the independent auditors of the
Company, relating to accounting, auditing or financial reporting matters, or any
matter that was the subject of either a disagreement or an event described in
the paragraph above.
25
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required pursuant to this Item
8 begin on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The following table sets forth certain information regarding the Company's
directors and executive officers:
Year Term
as Director
Name Age Position Expires
- - ----------------------------- --- ------------------------------- -----------
Donald Schupak (1)(3)(4)..... 54 Chairman of the Board 1998
Nina McLemore(1)(4).......... 52 Vice Chairperson of the Board 1999
M. Catherine Volker (1)...... 43 President, Chief Executive 1999
Officer and Director
Beverly Eichel............... 40 Executive Vice President and
Chief Financial Officer
Margaret B. Pritchard........ 35 Secretary, General Counsel and
Vice President, Business
Development
Andrew J. Astrachan(1)(4).... 38 Director 1997
Gabriel Brener(3)............ 38 Director 1997
David Chu.................... 43 Director 1999
Michael Hsieh(2)(3).......... 39 Director 1998
James P. Jalil(2)............ 49 Director 1997
Henry T. Mortimer, Jr.(2).... 55 Director 1997
Larry B. Shelton(2).......... 63 Director 1998
- - --------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Member of the Nominating Committee.
The business experience, principal occupations and employment, as well as
the periods of service, of each of the directors and executive officers of the
Company during at least the last five years, are set forth below.
27
<PAGE>
Directors
Class II (Terms to Expire in 1997)
Directors in Class II will continue to serve as directors until they are
proposed for reelection at the next annual meeting of stockholders.
Andrew J. Astrachan, age 38, has been a director of the Company since
September 1997. He is the President and founder of Onyx Partners, Inc., an
investment bank. From 1985 to 1990, Mr. Astrachan was employed at Drexel,
Burnham & Lambert. Prior to that, he was a Vice President at Salomon Brothers
Inc. from 1981 to 1985.
Gabriel Brener, age 38, has been a director of the Company since September
1997. He is President and CEO of Galco, Inc., an investment and management firm
headquartered in Los Angeles, California. Mr. Brener serves as an advisory board
member of each of New Colt Holding Company and First National Bank. He has
previously served as Chairman of the Board for Valassis de Mexico, S.A. de C.V.
and has held board positions for several other companies.
James P. Jalil, age 49, has been a director of the Company since September
1997. He has been a senior corporate partner with the law firm of Shustak Jalil
& Heller since 1992. Prior to that, Mr. Jalil was a corporate partner at Lane &
Mittendorf from 1982 to 1992.
Henry T. Mortimer, Jr., age 55, has been a director of the Company since
August 1992. He has been the Managing Director, Europe, of Financial Security
Assurance, Inc., a bond insurance company, and the President of American
International Advisory Group, Inc., a financial advisory firm, since 1985. Prior
to 1985, he was a Senior Vice President of E.F. Hutton & Co., Inc. in its
investment banking department. In addition, he is currently a director of
Tipiak, S.A., a French food manufacturing company.
Class III (Terms to Expire in 1998)
Donald Schupak, age 54, has been a director of the Company since October
16, 1996 and became the Chairman of the Board of Directors on March 27, 1997. He
is the Chairman of the Board of Directors of 7th Level, Inc., a technology
company that develops interactive tools and solutions primarily for on-line and
other network applications. He is also the Chief Executive Officer of the
Schupak Group, an organization that provides strategic planning, management
consulting and corporate finance services to a variety of clients, including
several Fortune 100 companies. Mr. Schupak founded the Schupak Group in 1990 and
has served as a director of Horn & Hardart Company. From September 1988 through
September 1990, he served as Chairman, Chief Executive Officer and President of
Horn & Hardart Company. From 1971 through 1980, Mr. Schupak was actively engaged
in the practice of law with Schupak, Rosenfeld & Fischbein, a New York City law
firm founded by Mr. Schupak.
Larry B. Shelton, age 63, has been a director of the Company since October
1994. He is the President of Shelton & Associates, a management consulting firm
specializing in the apparel industry. In 1991, he retired as President and Chief
Operating Officer of Genesco, Inc., an apparel manufacturing company, having
served in that organization for over 35 years in various management capacities.
He has long been active in the apparel industry, having served as Chairman of
the Board of The American Apparel Manufacturing Association and as a board
member of The Clothing Manufacturers Association.
Michael Hsieh, age 39, has been the President of LF International, Inc., a
venture capital company, since 1986 and a director of Li & Fung (BVI) Ltd. since
1992. He was previously with R.H. Chapell Co., a San Francisco venture capital
firm, and with Merrill Lynch Capital Markets Group.
28
<PAGE>
Class I (Terms to Expire in 1999)
M. Catherine Volker, age 43, became the Chief Executive Officer of the
Company on March 2, 1998. Prior to joining the Company, Ms. Volker served as
President of Hanes Hosiery since 1993 and served as Vice President of Hanes'
parent, the Sara Lee Corporation since 1996. Ms. Volker joined Hanes Hosiery as
Vice President of Merchandising in 1986 and was appointed Vice President and
General Manager of Hanes Hosiery in 1992.
David Chu, age 43, is the President, Chief Executive Officer and chief
designer of Nautica International, Inc., an apparel licensed product company he
founded in 1983. He is a member of the Counsel of Fashion Designers of America
(CFDA) and a director of the Educational Foundation for the Fashion Industries
(an advisory body to the Fashion Institute of Technology). In addition, Mr. Chu
is a trustee of The Asia Society and The China Institute.
Nina McLemore, age 52, has been a director of the Company since September
1997 and became the Vice Chairperson of the Board on December 10, 1997. She is a
Senior Managing Partner of Regent Capital Partners, L.P., a private investment
firm. She previously served as a member of the Executive Committee of Liz
Claiborne, Inc. from 1989 to 1993 and was responsible for acquisitions,
start-ups and new business opportunities in 1993. Prior to that, Ms. McLemore
was President of Liz Claiborne Accessories from 1980 to 1992. She serves as a
Director for Santa Monica Amusements, Inc., Super Graphics, Inc. and Talton
Holdings, Inc.
Officers
Beverly Eichel has been the Executive Vice President of the Company since
April 1996, with responsibility for retail store operations. Additionally, she
has been the Chief Financial Officer of the Company since July 1992, having
previously been its Controller since October 1987. Prior to that, she was the
Director of Accounting for MGM/UA Home Video from 1984 to 1987 and a senior
accountant with Ernst & Whinney (now known as Ernst & Young LLP), a public
accounting firm, from 1980 to 1984. She is a member of American Institute of
Certified Public Accountants in New York.
Margaret B. Pritchard has been the Vice President, Business Development of
the Company since June 1, 1997. Ms. Pritchard has also been the General Counsel
of the Company since October 1, 1997, having previously served as the Company's
Assistant General Counsel since June 1, 1997. She was appointed Secretary of the
Company by the Board of Directors on December 10, 1997. Prior to joining the
Company, Ms. Pritchard was an associate with the law firm of Fried, Frank,
Harris, Shriver & Jacobson in New York.
Under Section 16(a) of the Securities and Exchange Act of 1934, the
Company's directors, executive officers and holders of more than 10% of the
Common Stock are required to report their initial ownership of the Company's
equity securities and any subsequent changes in that ownership to the Securities
and Exchange Commission. Specific due dates for these reports have been
established, and the Company is required to disclose any failure to file by
these dates with respect to Fiscal 1997. Based on written representations of its
directors and executive officers and copies of reports they have filed with the
Securities and Exchange Commission, the only late reports filed for Fiscal 1997
were Form 4's for each of Andrew Astrachan, Gabriel Brener, Nina McLemore,
Michael Hsieh, James P. Jalil and David Chu relating to formula stock option
grants under the Company's 1992 Stock Option Plan.
Board of Directors and Board Committees
The Board of Directors met eleven times in 1997.
The Board of Directors has an Executive Committee, an Audit Committee, a
Compensation Committee and a Nominating Committee.
The Executive Committee is generally empowered to act on behalf of the
Board of Directors when the Board is not convened in meeting. The members of the
Executive Committee consist of Donald Schupak, Cathy Volker, Nina McLemore and
Andrew J. Astrachan. The Executive Committee held one meeting during 1997.
29
<PAGE>
The Audit Committee is generally responsible for recommending the
appointment of the Company's independent auditors and overseeing the accounting
and internal audit functions of the Company, including reviewing, with the
Company's independent auditors, (i) the general scope of their audit services
and the annual results of their audit, (ii) the reports and recommendations made
to the Audit Committee by the independent auditors, and (iii) the Company's
internal control structure. The members of the Audit Committee consist of Larry
B. Shelton, Henry T. Mortimer, Michael Hsieh and James P. Jalil. The Audit
Committee held one meeting during 1997.
The Compensation Committee is generally responsible for reviewing and
making recommendations to the Board of Directors concerning remuneration of the
Company's key employees, including executive officers. The Compensation
Committee also grants stock options pursuant to the Stock Option Plan. The
members of the Compensation Committee consist of Gabriel Brener, Donald Schupak
and Michael Hsieh. The Compensation Committee did not meet during 1997.
The Nominating Committee is generally responsible for recommending
appropriate individuals to serve as members of the Board of Directors. The
members of the Nominating Committee consist of Donald Schupak, Andrew J.
Astrachan and Nina McLemore. The Nominating Committee did not meet during 1997.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation
earned during the last three fiscal years by the Company's Chief Executive
Officer and each other executive officer of the Company (each, a "named
executive officer"). The Company had only four executive officers during the
fiscal year ended December 27, 1997 ("fiscal 1997"). On March 2, 1998, Mrs.
Domuracki was replaced as Chief Executive Officer. Mr. Dean resigned his
position effective October 1, 1997. (See "Employment Agreement -Edwin Dean"). In
1995, the Company's Board of Directors approved a change in the fiscal year end
to the last Saturday in December from the last Saturday in March, effective
December 30, 1995. As a result, the information set forth in the table below as
"NM 1995" is for the nine-month transition period ended December 30, 1995, and
the information for 1995 is for the fiscal year ended March 25, 1995.
================================================================================
Name and Fiscal Salary Bonus Other Stock All Other
Principal Year ($) ($) Annual Options Compensation($)
Position Compen- (#) (7)
sation
- - --------------------------------------------------------------------------------
Mary Ann 1997 350,000 37,500 0 1,020,00 4,436
Domuracki(1) 1996 353,865 60,000 0 0 5,072
Chief Executive NM1995 202,500 0 0 15,000 1,298
Officer and 1995 292,500 0 0 79,384(2) 5,075
President
- - --------------------------------------------------------------------------------
Edwin W. Dean(3) 1997 150,000 0 0 0 591
Vice Chairman, 1996 205,000 25,000 0 0 1,407
General Counsel NM1995 195,600 0 0 49,384(4) 8,545
And Secretary 1995 286,666 0 0 0 11,580
- - --------------------------------------------------------------------------------
Beverly Eichel(5) 1997 250,000 37,500 0 680,000 4,026
Executive Vice 1996 228,942 40,000 0 0 4,767
President and NM1995 168,750 0 0 10,000 2,381
Chief Financial 1995 243,750 0 0 71,359(6) 4,444
Officer
- - --------------------------------------------------------------------------------
Margaret B. 1997 127,692 0 0 100,000 0
Pritchard(8)
Vice President,
Secretary and
General Counsel
================================================================================
30
<PAGE>
(1) Ms. Domuracki became Chief Executive Officer of the Company on April 1,
1996. Salary for fiscal 1995 reflects voluntary salary reductions from $300,000
to $270,000 that took effect January 1, 1995, and from $350,000 to $270,000 that
were in effect during the Nine Months 1995 and fiscal 1996. Effective November
1, 1996, the full contracted salary rate of $350,000 was reinstated. In
addition, on November 29, 1996 Ms. Domuracki received a lump sum payment in the
amount of $71,250 representing payment of the contractual amount of salary due
her for the period April 1, 1995 through October 31, 1996, less the voluntary
10% salary reduction which was in effect during that period. Ms. Domuracki was
replaced as Chief Executive Officer of the Company on March 2, 1998.
(2) Amounts shown include options for an aggregate of 39,384 shares that were
repriced effective July 1994 at $4.00 per share, replacing options for 14,384
shares granted in fiscal 1993 with an exercise price of $13.00 per share and
options for 25,000 shares granted in fiscal 1994 with an exercise price of
$6.275 per share.
(3) Salary for fiscal 1995, the Nine Months 1995 and fiscal 1996 reflects a
voluntary salary reduction from $300,000 to $260,000 that was in effect from
January 1, 1995 to March 31, 1996.
(4) Amounts shown include options for an aggregate of 39,384 shares that were
repriced effective June 26, 1995 at $4.00 per share replacing options for 4,384
shares granted in fiscal 1992 with an exercise price of $13.00 per share, and
options for 25,000 shares granted in fiscal 1993 with an exercise price of
$6.375 per share
(5) Ms. Eichel became Executive Vice President of the Company in April 1996.
Salary for fiscal 1995, the Nine Months 1995 and fiscal 1996 reflects a
voluntary salary reduction from $250,000 to $225,000 that was in effect from
January 1, 1995 to November 1, 1996, at which time the full contracted salary
rate of $250,000 was reinstated.
(6) Amounts shown include options for an aggregate of 31,359 shares that were
repriced effective July 1, 1994 at $4.00 per share, replacing options for 6,359
shares granted in fiscal 1993 with an exercise price of $13.00 per share, and
options for 25,000 shares granted in fiscal 1994 with an exercise price of
$6.275 per share.
(7) Amounts shown under "All Other Compensation" for 1997 for Ms. Domuracki and
Ms. Eichel represent premiums paid by the Company in respect of life insurance
policies for the benefit of Ms. Domuracki and Ms. Eichel in the amount of $1,470
and $1,060 respectively and $2,375 for each contributed by the Company in 1997
as the 25% matching contribution for the first 6% of earnings contributed by
such individuals to the Company's Savings Plan, a tax qualified defined
contribution plan covering full-time salaried employees over the age of 21 (the
"Savings Plan"). The Savings Plan allows participants to elect to make
contributions, on a pre-tax basis, from 1% to 15% of their compensation, subject
to applicable Internal Revenue Code limitations, and the Company is required to
make a matching contribution equal to 25% of the participant's contributions up
to 6% of such compensation. A participant becomes 33-1/3% vested in the matching
contributions after three years of service, 66-2/3% after four years of service
and 100% after five years of service. In addition, included for Ms. Domuracki,
Ms. Eichel and Mr. Dean is a discretionary profit sharing contribution of $591
on behalf of each made by the Company in 1997 in shares of Common Stock (314
shares each). The Savings Plan provides for a discretionary profit sharing
contribution. A participant becomes fully vested in a profit sharing
contribution after five years of service.
(8) Amounts shown under "Salary" for Ms. Pritchard represent amounts earned for
the period May 1, 1997 through December 27, 1997, based on a base salary rate of
$180,000.
31
<PAGE>
Stock Option Grants in Last Fiscal Year
The following table shows information for Fiscal Year 1997 respecting stock
option grants to each named executive officer.
================================================================================
Individual Grants Grant Date Value
- - --------------------------------------------------------------------------------
Number of Percent of
Securities Total Options Present
Underlying Granted to Expira- Value
Options Employees in Exercise tion Grant
Name Granted Fiscal Year Price Date Date(4)
- - --------------------------------------------------------------------------------
Mary Ann 1,020,000(1) 24% $.30 2004 122,400
Domuracki
- - --------------------------------------------------------------------------------
Edwin W. Dean -- -- -- -- --
- - --------------------------------------------------------------------------------
Beverly Eichel 680,000 (2) 16% $.30 2004 81,600
- - --------------------------------------------------------------------------------
Margaret B. 100,000 (3) 2% $.625 2004 4,000
Pritchard
================================================================================
(1) Pursuant to the terms of a Stock Option Agreement between the Company and
Mrs. Domuracki, dated September 22, 1997, Mrs. Domuracki was granted 1,020,000
options to purchase Common Stock at a per share exercise price of $.30, 630,000
of which were exercisable immediately. The balance of the options were to vest
over a three year period provided Mrs. Domuracki were an employee of the Company
at such time. Mrs. Domuracki was replaced as Chief Executive Officer in March
1998. Of the 630,000 options which are presently exercisable, 120,000 are
exercisable through September 2004 and 510,000 are generally exercisable through
March 1999.
(2) Pursuant to the terms of a Stock Option Agreement between the Company and
Ms. Eichel, dated September 22, 1997, Ms. Eichel was granted 680,000 options to
purchase Common Stock at a per share price of $.30, 420,000 of which were
exercisable immediately. The balance of the options vest over a three year
period, provided Ms. Eichel is an employee of the Company at such time. The
options are, under certain circumstances, exercisable through September 2004.
(3) Pursuant to the terms of a Stock Options Agreement between the Company and
Ms. Pritchard, dated October 1, 1997, Ms. Pritchard was granted 100,000 options
to purchase Common Stock at a per share price of $.625. The options vest over a
three year period and are, under certain circumstances, exercisable through
October 1, 2004.
(4) The present values on the grant date are calculated under the Black-Scholes
valuation model. The Black-Scholes valuation model is a mathematical formula
used to value options, and considers historical stock price volatility, the
exercise period of the option and interest rates. Historical stock price
volatility has been measured from January 1, 1995 to March 3, 1997. The
Black-Scholes valuation model was chosen in accordance with Securities and
Exchange Commission rules; however, this model should not be construed as an
endorsement of its accuracy at valuing options. The real value of the options in
this table depends upon the actual performance of the Common Stock during the
applicable period.
32
<PAGE>
Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
The following table shows information for fiscal 1997 respecting stock
options for each named executive officer.
================================================================================
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Shares Options at Options at
Acquired on Value Fiscal Year Fiscal Year
Name Exercise Realized End (1) End (2)($)
- - --------------------------------------------------------------------------------
Mary Ann Domuracki -- $0 1,114,384 $390,034
- - --------------------------------------------------------------------------------
Edwin W. Dean -- $0 49,384(3) $0
- - --------------------------------------------------------------------------------
Beverly Eichel -- $0 761,359 $266,476
- - --------------------------------------------------------------------------------
Margaret B. Pritchard -- $0 100,000 $2,500
================================================================================
(1) 1,275,127 options are presently exercisable.
(2) The value of an unexercised option at December 27, 1997 is determined by
subtracting the exercise price of such option from the market value of a share
of Common Stock on December 27, 1997, as published by the National Quotation
Bureau.
(3) Mr. Dean's options are exercisable through September 2000.
33
<PAGE>
Employment Agreements
Donald Schupak
--------------
On March 27, 1997, Donald Schupak was elected Chairman of the Board of the
Company and the Company entered into a "Heads of Agreement" letter with him.
This agreement engaged him as Chairman of the Board, reporting to the Board of
Directors, until the earlier of (i) the consummation of an equity transaction,
(ii) consummation of a refinancing transaction, or (iii) December 31, 1997. His
duties under such agreement included taking a leadership role with respect to
the raising of equity capital and the development of a long-term business plan.
As part of his compensation for such services he was granted an option to
acquire 4% of the Common Stock outstanding, on a fully diluted basis,
immediately following the completion of an equity transaction. Upon the
consummation of the Capital Contribution and the Refinancing, the Heads of
Agreement letter was terminated, the option previously granted was cancelled,
and Mr. Schupak purchased the Schupak Warrant.
M. Catherine Volker
-------------------
On February 2, 1998, the Company entered into an employment agreement with
Catherine Volker, employing her as Chief Executive Officer of the Company from
March 2, 1998 until February 28, 2003, subject to earlier termination for death,
resignation or removal. Ms. Volker's annual base salary is $375,000. She is
entitled to receive an annual performance bonus of up to 100% of her base salary
as determined by the Board of Directors, in its sole discretion, based on such
quantitative and qualitative initiatives as indentified by the Board upon
consultation with Ms. Volker and upon approval of the budget for the respective
fiscal year. The performance bonus for fiscal year ended December 26, 1998 shall
be no less that $187,500. Under Ms. Volker's agreement, if she resigns her
employment for `good reason' (as defined), if the Company terminates her
employment without `cause' (as defined), or she resigns by reason of a `change
of control' (as defined), the Company will be obligated to continue her base
salary payments for a period of one year, and she will be entitled to a
performance bonus in an amount equal to, depending upon the circumstance of her
resignation or termination, fifty percent (50%) to one-hundred percent (100%) of
the previous year's performance bonus.
Mary Ann Domuracki
------------------
On August 1, 1994, the Company entered into an employment agreement with
Mary Ann Domuracki employing her as President and Chief Operating Officer until
she resigns or is terminated. This agreement was amended as of April 4, 1996 to
provide for her employment as Chief Executive Officer and was further amended,
most recently, on September 22, 1997, in connection with the Capital
Contribution. Her base salary compensation is presently $350,000.
On March 2, 1998, Ms. Domuracki was replaced as Chief Executive Officer of
the Company. Pursuant to the terms of her employment agreement, Ms. Domuracki
will continue to receive compensation and benefits under such agreement for the
two year period following her replacement (offset by compensation received from
any new employer after one year).
Edwin W. Dean
-------------
On April 1, 1996, the Company entered into an employment agreement with
Edwin W. Dean which employed him as Vice Chairman of the Board, General Counsel
and Secretary until he resigned or was terminated. His annual base salary
compensation was $260,000 through June 30, 1996, and thereafter was $150,000. In
connection with the closing of the Capital Contribution, Edwin W. Dean resigned
his position as Vice Chairman of the Board of Directors, General Counsel and
Secretary on September 30, 1997. Pursuant to the terms of the employment
agreement dated as of April 1, 1996, between Mr. Dean and the Company, Mr. Dean
will continue to receive compensation and benefits under such agreement for the
two-year period to follow his resignation (offset by compensation received from
any new employer after one year).
34
<PAGE>
Beverly Eichel
--------------
On August 1, 1994, the Company entered into an employment agreement with
Beverly Eichel employing her as Vice President and Chief Financial Officer until
she resigns or is terminated. This agreement was amended as of April 4, 1996 to
provide for her employment as Executive Vice President and Chief Financial
Officer. This Agreement was further amended several times, most recently on
September 22, 1997 in connection with the Capital Contribution. Her base salary
compensation is $250,000, with the amount subject to annual adjustment by the
Chief Executive Officer with the approval of the Compensation Committee of the
Board of Directors, but not to be less than $250,000. The Board of Directors
shall consider an annual bonus for Ms. Eichel during each fiscal year that she
continues in the employment of the Company, and shall grant such bonus in its
discretion, taking into consideration the recommendation of the Chairman of the
Board and performance criteria. Under the employment agreement, if the Company
terminates her employment without "cause," (as defined), or if she resigns by
reason of a "change of control," (as defined) (i) the Company will be obligated
to continue her base salary payments for two years thereafter, at the annual
rate of $250,000 (offset by compensation received from any new employer after
one year), (ii) the Company will make a prorated bonus payment for the fiscal
year then in progress and (iii) any granted, but unvested, stock options that
she holds (excluding the options granted in connection with the amendment of her
employment agreement described above in "--Stock Option Plan") shall vest
immediately.
In connection with the Capital Contribution, Ms. Eichel's employment
agreement was amended in certain respects. Under the terms of the amendment (i)
Ms. Eichel agreed to defer her right to resign after the "change in control"
which occurred as a result of the Capital Contribution and receive additional
compensation until the period commencing September 22, 1998 and ending 30 days
thereafter, (ii) the definition of "change in control" under the employment
agreement was changed, generally, to be deemed to occur only when (x) any person
acquires greater than 50% of the Company's securities or all or substantially
all of the Company's assets, or (y) a majority of the Company's directors
elected at any subsequent meeting of the Company's stockholders are not
nominated by the then current Board of the Company, (iii) the period of
noncompetition after a termination of employment was reduced from twelve months
to nine months, (iv) Ms. Eichel was granted options to purchase 680,000 shares
of Common Stock, at an exercise price of $.30 per share, of which options to
purchase 420,000 were immediately vested, and options to purchase 86,666 will
become vested on each of the first three anniversaries of the closing of the
Refinancing, and (v) for each fiscal year after the fiscal year ending December,
1997, the Chairman of the Board in consultation with Ms. Eichel will recommend
the establishment of an annual bonus plan, including benchmarks and hurdles as
shall be approved by the Board, for Ms. Eichel.
Compensation Committee Interlocks and Insider Participation
All of the members of the Compensation Committee are non-employee directors
of the Company and are not former officers of the Company or its subsidiaries.
No executive officer of the Company serves as a member of the Board of Directors
or on the compensation committee of a corporation for which any of the Company's
directors serving on the Compensation Committee or on the Board of Directors of
the Company is an executive officer.
Compensation of Directors
Directors who are employees of the Company are not compensated for serving
as directors. Directors who are not employees of the Company receive an annual
retainer fee of $12,000 plus fees of $1,000 per day for attendance at meetings
of the Board of Directors and $500 per day for attendance at meetings of its
committees. Each of the directors appointed by Danskin Investors has agreed to
waive receipt of such amount through December 31, 1998. All non-employee
directors of the Company are reimbursed for out-of-pocket expenses. In addition,
each non-employee director receives, upon such person's initial election as a
director, a grant of an option to purchase 20,000 shares of the Common Stock
under the Stock Option Plan at fair market value, exercisable in three equal
installments on the first, second and third anniversaries of the grant date. Mr.
Schupak has agreed to defer the grant of his options until an amendment to the
Stock Option Plan has been approved by the stockholders, increasing the total
number of shares reserved for issuance thereunder.
35
<PAGE>
Although neither Mr. Schupak nor Ms. McLemore receives a salary from the
Company, the Company provides for a payment of $10,000 per month to each of Mr.
Schupak and Ms. McLemore to defray their respective office overhead, and each is
entitled to reimbursement of reasonable travel and other expenses incidental to
the performance of their duties.
CERTAIN TRANSACTIONS
On September 22, 1997, in connection with the Capital Contribution, Donald
Schupak (the Chairman of the Board of the Company) purchased from the Company,
the Schupak Warrant for the purchase of 5,372,315 shares of Common Stock,
subject to adjustment, at an exercise price of $.30 a share, subject to
adjustment. On the Contribution Closing Date, in consideration of the sale of
the Schupak Warrant, Mr. Schupak paid the Company the Warrant Price comprised of
(x) $20,000 in cash and (y) the Schupak Promissory Note in the amount of
$80,000. The outstanding principal balance of the Schupak Promissory Note bears
interest at a rate of 6.55% per annum, to be paid annually on the anniversary of
the Contribution Closing 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 Amended and Restated Certificate of
Incorporation increasing the number of its authorized shares to 100,000,000 and
prior to 5:00 p.m., Eastern Standard Time, on September 22, 2004. In addition,
David Chu, a director of the Company, purchased from the Company, for $14,815, a
warrant for the purchase of 795,900 shares of Common Stock at an exercise price
of $.30 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 1, 1998,
regarding the beneficial ownership of the Common Stock by (i) each person known
to the Company to beneficially own more than 5% of the Common Stock; (ii) each
director and each named executive officer; and (iii) all executive officers and
directors of the Company as a group. A person is a beneficial owner if he or she
has or shares voting power or investment power. On March 1, 1998, there were
outstanding 10,089,207 shares of Common Stock (including 1,083 shares held by a
subsidiary of the Company) and 2,400 shares of Series D Preferred Stock.
36
<PAGE>
Beneficial Ownership
---------------------------------------
Percent of
Outstanding
Name and Address Amount and Nature of Voting
of Beneficial Owner Beneficial Ownership Securities*
- - --------------------------------------------------------------------------------
Danskin Investors, L.L.C.(1) 48,160,980 Common Stock 80.6%
9595 Wilshire Boulevard 2,311.7 Series D 96.3%
Beverly Hills, CA 90212 Preferred Stock
The Oppenheimer Bond Fund For Growth(2) 5,318,636 Common Stock 10.5%
350 Linden Oaks 88.3 Series D 3.7%
Rochester, NY 14625 Preferred Stock
Donald Schupak (3) 5,392,315 Common Stock 9.7%
0 Series D 0%
Preferred Stock
Nina McLemore (4) 795,899 Common Stock 1.6%
0 Series D 0%
Preferred Stock
David Chu (5) 795,900 Common Stock 1.6%
0 Series D 0%
Preferred Stock
M. Catherine Volker 750,000 Common Stock 1.5%
0 Series D 0%
Preferred Stock
Mary Ann Domuracki (6) 736,803 Common Stock 1.5%
0 Series D 0%
Preferred Stock
Beverly Eichel (7) 501,576 Common Stock 1.0%
0 Series D 0%
Preferred Stock
Margaret B. Pritchard 0 Common Stock 0%
0 Series D 0%
Preferred Stock
Henry T. Mortimer, Jr. (8) 20,000 Common Stock .04%
0 Series D 0%
Preferred Stock
Larry B. Shelton (8) 20,000 Common Stock .04%
0 Series D 0%
Preferred Stock
Andrew J. Astrachan 0 Common Stock 0%
0 Series D 0%
Preferred Stock
Gabriel Brener 0 Common Stock 0%
0 Series D 0%
Preferred Stock
Michael Hsieh 0 Common Stock 0%
0 Series D 0%
Preferred Stock
James P. Jalil 0 Common Stock 0%
0 Series D 0%
Preferred Stock
All directors and executive 9,012,493 Common Stock 15.2%
officers as a group (13 0 Series D 0%
persons)(9) Preferred Stock
- - ----------
* For the purpose of this calculation, the outstanding voting securities of the
Company include 10,089,207 shares of Common Stock presently issued and
40,000,000 shares of Common Stock, issuable upon the conversion of the Series
D Preferred Stock that the holders of the Series D Preferred Stock are
currently entitled to vote.
(1) The amount shown as Common Stock includes those shares of Common Stock
issuable upon conversion of the shares of Series D Preferred Stock held by the
beneficial owner and a presently exercisable warrant. Each share of Series D
Preferred Stock entitles the holder thereof to one vote per share for each share
of Common Stock that would be issued upon conversion of a share of Series D
Preferred Stock (16,666.66 votes per share).
(2) The amount shown as Common Stock includes those shares of Common Stock
issuable upon conversion of the shares of Series D Preferred Stock held by the
beneficial owner and a presently exercisable warrant. Each share of Series D
Preferred Stock entitles the holder thereof to one vote per share for each share
of Common Stock that would be issued upon conversion of a share of Series D
Preferred Stock (16,666.66 votes per share).
37
<PAGE>
(3) Includes 5,372,315 shares of Common Stock underlying a presently exercisable
warrant and 20,000 shares of Common Stock underlying presently exercisable
options which, if granted, would have vested upon the change of control
resulting from the Capital Contribution. Mr. Schupak was entitled to the
automatic grant of an option to purchase 20,000 shares of Common Stock upon his
appointment as a Director of the Company, but agreed to defer such grant until
an amendment to the Stock Option Plan has been approved by the stockholders,
increasing the total number of shares reserved for issuance upon exercise of
options granted thereunder.
(4) Includes 795,899 shares of Common Stock underlying presently exercisable
options.
(5) Includes 795,900 shares of Common Stock underlying a presently exercisable
warrant.
(6) Includes 3,800 shares held by Ms. Domuracki as custodian for her children,
as to which shares Mr. Domuracki has sole voting and investment power; 2,000
shares held by her spouse, as to which shares Ms. Domuracki disclaims beneficial
ownership; 6,619 shares beneficially owned by Ms. Domuracki through the
Company's Savings Plan, as to which shares Ms. Domuracki has sole voting and
investment power; and 724,384 shares underlying presently exercisable options.
(7) Includes 217 shares of Common Stock owned of record by Ms. Eichel, as to
which shares Ms. Eichel has sole voting and investment power; and 501,359 shares
of Common Stock underlying presently exercisable options.
(8) Includes, 20,000 shares of Common Stock underlying presently exercisable
options.
(9) Includes 2,081,642 shares of Common Stock issuable upon the exercise of
presently exercisable stock options (including options to purchase 20,000 shares
of Common Stock to which Mr. Schupak became entitled upon his appointment as a
director described in Note 5 above), 6,168,215 shares of Common Stock issuable
upon the purchase of shares of Common Stock pursuant to presently exercisable
warrants and 762,636 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
1. Financial Statements
2. Financial Statement Schedules
The financial statements and financial statement schedules included in
this Annual Report on Form 10-K are listed in the accompanying Index to the
Financial Statements on Page F-1 of this Form 10-K.
All other schedules have been omitted because the required information is
shown in the Consolidated Financial Statements or Notes thereto or they are not
applicable.
3. Exhibits
The Exhibits designated by an asterisk are management contracts and
compensatory plans and arrangements required to be filed as Exhibits to this
Form 10-K.
Exhibit
Number Description
- - ------ -----------
3.1.1 Amended and Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1.1 to the Registration
Statement of the Registrant on Form S-1 (Reg. No. 33-49274)(the
"Registration Statement").)
3.1.2 Certificate of Correction, dated July 9, 1992, of the Amended and
Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1.2 to Amendment No. 1 to
the Registration Statement ("Amendment No. 1").)
38
<PAGE>
3.1.3## Certificate of Amendment, dated the 27th day of January 1998 to the
Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Certificate of Incorporation of the Registrant
dated as of January 27, 1998.
4.1 Form of Certificate for Common Stock of the Registrant.
(Incorporated by reference to Exhibit 4.1 to Amendment No. 1.)
4.2 Securities Purchase Agreement, dated as of September 22, 1997,
between the Registrant and Danskin Investors, LLC. (Incorporated by
refence to Registrant's Form 8-K dated September 22, 1997.
4.2.1 Form of Warrant Issued to Danskin Investors, LLC. (Incorporated by
reference to Registrant's Form 8-K dated September 22, 1997.
4.2.2 Certificate of Designations of Series C Cumulative Convertible
Preferred Stock (Incorporated by reference to the Registrant's Form
8-K dated September 22, 1997.
4.2.3 Certificate of Designations of Series D Cumulative Convertible
Preferred Stock. (Incorporated by reference to the Registrant's Form
8-K dated September 22, 1997.)
4.2.4 Promissory Notes of the Registrant's in favor of Danskin Investors,
LLC. (Incorporated by reference to the Registrant's Form 8-K dated
September 22, 1997.)
10.1.1 Tax Refund Agreement, dated July 22, 1986, by and among Danpen,
Inc., Beatrice Companies, Inc. and Esmark, Inc. (Incorporated by
reference to Exhibit 10.1.1 to the Registration Statement.)
10.1.2 Supplemental Tax Refund Agreement, dated March 15, 1990, among
Beatrice Companies, Inc., Esmark, Inc., Danpen, Inc. and the
Registrant. (Incorporated by reference to Exhibit 10.1.2 to the
Registration Statement.)
10.5.1 Lease Agreement, dated October 16, 1986, between the Registrant and
Robert H. Arnow, relating to leasehold interest at 111 West 40th
Street, New York, New York, as amended, and related agreement.
(Incorporated by reference to Exhibit 10.5.1 to the Registration
Statement.)
10.5.4 Lease Agreement, dated March 22, 1996, between the City of Grenada,
Mississippi and the Registrant. (Incorporated by reference to
Exhibit 10.5.4 to the Registrant's Form 10-Q for the fiscal quarter
ended September 28, 1996.)
10.5.5 Agreements in connection with Industrial Revenue Bond for property
located at 1261 South Commerce Street, Grenada, Mississippi, between
the City of Grenada, Mississippi and the Registrant (as assignee of
International Playtex, Inc.). (Incorporated by reference to Exhibit
10.5.5 to Amendment No. 1.)
10.5.7 Agreement between the Pennaco division and the City of Grenada,
Mississippi, relating to the issuance by the City of Grenada of
$1,500,000 principal amount of bonds to finance the construction of
a distribution center to be owned by the City of Grenada and leased
to the Pennaco division. (Incorporated by reference to Exhibit
10.5.7 to Amendment No. 2 to the Registration Statement ("Amendment
No. 2").)
10.5.11 Lease Agreement between Paul Klinge A/S and the Registrant.
(Incorporated by reference to Exhibit 10.5.11 to Amendment No. 2.)
10.5.12 Addendum to Lease between Henrik Klinge and the Registrant dated
August 23, 1996. (Incorporated by reference to Exhibit 10.5.12 to
the Registrant's Form 10-Q for the fiscal quarter ended September
28, 1996.)
*10.6.2B Employment Agreement dated April 1, 1996 between the Registrant and
Edwin W. Dean. (Incorporated by reference to Exhibit 10.6.2B to the
Registrant's Form 10-Q for the fiscal quarter ended March 30, 1996.)
39
<PAGE>
*10.6.3A Amended Employment Agreement, dated April 1, 1994, between the
Registrant and Mary Ann Domuracki. (Incorporated by reference to
Exhibit 10.6.3A to the Registrant's Form 10-Q for the fiscal quarter
ended June 25, 1994.)
*10.6.3B Amendment One, effective November 1, 1994, to the amended Employment
Agreement, dated April 1, 1994, between the Registrant and Mary Ann
Domuracki. (Incorporated by reference to Exhibit 10.6.3B to the
Registrant's Form 10-Q for the fiscal quarter ended September 24,
1994.)
*10.6.3C Amendment Two, effective January 1, 1995, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and Mary Ann
Domuracki. (Incorporated by reference to Exhibit 10.6.3C to the
Registrant's Form 10-Q for the fiscal quarter ended December 24,
1994.)
*10.6.3D Amendment Three, effective April 1, 1996, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and Mary Ann
Domuracki. (Incorporated by reference to Exhibit 10.6.3D to the
Registrant's Form 10-Q for the fiscal quarter ended September 28,
1996.)
*10.6.3E## Amendment Four, effective as of November 1, 1996, to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Mary Ann Domuracki.
*10.6.3F## Amendment Five, effective as of September 22, 1997, to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Mary Ann Domuracki.
*10.6.4A.1 Employment Agreement, dated August 1, 1994, between the Registrant
and Beverly Eichel. (Incorporated by reference to Exhibit 10.6.4A.1
to the Registrant's Form 10-K for the fiscal year ended March 25,
1995.)
*10.6.4B Amendment One, effective November 1, 1994, to the Employment
Agreement, dated August 1, 1994, between the Registrant and Beverly
Eichel. (Incorporated by reference to Exhibit 10.6.4B to the
Registrant's Form 10-Q for the fiscal quarter ended September 24,
1994.)
*10.6.4C Amendment Two, effective January 1, 1995, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and Beverly
Eichel. (Incorporated by reference to Exhibit 10.6.4C to the
Registrant's Form 10-Q for the fiscal quarter ended December 24,
1994.)
*10.6.4D Amendment Three, effective April 1, 1996, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and Beverly
Eichel. (Incorporated by reference to Exhibit 10.6.4D to the
Registrant's Form 10-Q for the fiscal quarter ended September 28,
1996.)
*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. (Incorporated by reference to Exhibit
10.6.4E to the Registrant's Form 10Q for the fiscal quarter ended
March 29, 1997.)
*10.6.4F## Amendment Five effective as of September 22, 1997 to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Beverly Eichel.
*10.6.5## Employment Agreement, dated February 2, 1998, between the Registrant
and Catherine Volker.
*10.6.6## Stock Option Plan and Agreement, dated February 2, 1998, between the
Registrant and Catherine Volker.
*10.7.2 Life Insurance Policy dated February 20, 1992, issued by Prudential
Select on the life of Mary Ann Domuracki, in the amount of
$2,000,000, with the Registrant named as beneficiary, including
assignment, dated March 16, 1995, to First Union National Bank of
North Carolina. (Incorporated by reference to Exhibit 10.7.2 to the
Registrant's Form 10-K for the fiscal year ended March 25, 1995.)
40
<PAGE>
*10.7.3 Life Insurance Policy dated November 2, 1992, issued by Metropolitan
Life Insurance Co. on the life of Beverly Eichel in the amount of
$1,000,000, with the Registrant named as beneficiary, including
assignment, dated March 16, 1995, to First Union National Bank of
North Carolina. (Incorporated by reference to Exhibit 10.7.3 to the
Registrant's Form 10-K for the fiscal year ended March 25, 1995.)
*10.8.1 1992 Stock Option Plan of the Registrant, together with form of
Non-Qualified Stock Option Agreement. (Incorporated by reference to
Exhibit 10.8.1 to the Registration Statement.)
*10.8.1A Amendment No. 1 to the 1992 Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 10.8.1A to the Registrant's
Form 10-K for the fiscal year ended March 27, 1993.)
*10.8.2 Savings Plan of the Registrant, as amended. (Incorporated by
reference to Exhibit 4.1 to the Registration Statement of the
Registrant on Form S-8 (Reg. No. 33-53852).)
10.10.1A Renewal license agreement dated December 29, 1993 between Givenchy
and the Registrant. (Incorporated by reference to Exhibit 10.10.1A
to the Registrant's Form 10-Q for the fiscal quarter ended December
25, 1994.)
10.10.2B Renewal license agreement dated January 26, 1996 between Anne Klein
& Company and the Pennaco Division of Danskin, Inc. (Incorporated by
reference to Exhibit 10.10.2A to the Registrant's Form 10-Q for the
fiscal quarter ended March 30, 1996.)
10.10.3 License agreement, dated as of October 1, 1994, between SsangYong
(U.S.A.), Inc. and the Registrant. (Incorporated by reference to
Exhibit 10.10.3 to the Registrant's Form 10-Q for the fiscal quarter
ended September 24, 1994.)
10.10.5 License agreement, dated June 1, 1995, between Canari Cycle Wear, a
Division of Kassach Marketing and the Registrant. (Incorporated by
reference to Exhibit 10.10.5 to the Registrant's Form 10-K for the
fiscal year ended March 25, 1995.)
10.10.6 License Agreement dated November 1, 1996 between Wundies, Inc. and
the Registrant. (Incorporated by reference to Exhibit 10.10.6 to the
Registrant's Form 10-Q for the fiscal quarter ended June 28, 1997.)
10.16.25 Amended and restated Loan and Security Agreement, dated as of June
22, 1995, between the Registrant and First Union, with attachments
and exhibits. (Incorporated by reference to Exhibit 10.16.25 to the
Registrant's Form 10-K for the fiscal year ended March 25, 1995.)
10.16.25A First Amendment, dated August 17, 1995, to the Amended and Restated
Loan Agreement between the Registrant and First Union National Bank
of North Carolina, as Agent. (Incorporated by reference to Exhibit
99.1 to the Registrant's Form 8-K dated August 17, 1995.)
10.16.25B Second Amendment dated February 29, 1996 to the Amended and Restated
Loan Agreement between the Registrant and First Union National Bank
of North Carolina, as Agent. (Incorporated by reference to Exhibit
10.16.25B to the Registrant's Form 10-K for the nine-month
transition period ended December 30, 1995.)
10.16.25C Third Amendment dated March 18, 1996 to the Amended and Restated
Loan Agreement between the Registrant and First Union National Bank
of North Carolina, as Agent. (Incorporated by reference to Exhibit
10.16.25C to the Registrant's Form 10-K for the nine-month
transition period ended December 30, 1995.)
10.16.25D Fourth Amendment dated July 31, 1996 to the Amended and Restated
Loan Agreement between the Registrant and First Union National Bank
of North Carolina, as Agent. (Incorporated by reference to Exhibit
10.16.25D to the Registrant's Form 10-Q for the fiscal quarter ended
December 25, 1993)
41
<PAGE>
10.16.25E Fifth Amendment dated December 31, 1996 to the Amended and Restated
Loan Agreement between the Registrant and First Union National Bank
of North Carolina, as Agent (Incorporated by reference to Exhibit
10.16.25E to the Registrant's Form 10-K for the fiscal year ended
December 28, 1996).
10.16.25F Sixth Amendment dated March 27, 1997 to the Amended and Restated
Loan Agreement between the Registrant and First Union National Bank
of North Carolina, as Agent (Incorporated by reference to Exhibit
10.16.25E to the Registrant's Form 10-K for the fiscal year ended
December 28, 1996).
10.26 Notice of Exercise of Rights Under Guaranty and Pledge dated
September 29, 1994 from SunAmerica, Inc., as Agent, under a certain
Notes Purchase Agreement dated as of September 3, 1993, by and among
Nautech Incorporated, SunAmerica Insurance Company of America,
SunAmerica, Inc. as Agent, and the guarantors named therein.
(Incorporated by reference to Exhibit 1 to the Registrant's Form 8-K
dated September 29, 1994.)
10.27 Rights Agreement, dated as of June 5, 1996, between the Registrant
and First Union National Bank of North Carolina, N.A. (Incorporated
by reference to Exhibit 4.1 to the Registrant's current report on
Form 8-K filed on June 6, 1996.)
10.28 Letter Agreement, dated as of October 4, 1996, between the
Registrant and SunAmerica Life Insurance Company. (Incorporated by
reference to Exhibit 99.1 to the Registrant's current report on Form
8-K filed on October 8, 1996.)
10.29 Certificate of Designations of the Registrant dated August 5, 1996.
(Incorporated by reference to Exhibit 4.1 to the Registrant's
current report on Form 8-K filed on August 6, 1996.)
10.29.1 Exchange Agreement dated as of August 6, 1996 between the Registrant
and the Oppenheimer Bond Fund For Growth. (Incorporated by reference
to Exhibit 4.2 to the Registrant's current report on Form 8-K filed
on August 6, 1996.)
10.29.2 Registration Rights Agreement dated as of August 6, 1996 between the
Registrant and the Oppenheimer Bond Fund For Growth. (Incorporated
by reference to Exhibit 4.3 to the Registrant's current report on
Form 8-K filed on August 6, 1996.)
10.30 Heads of Agreement dated March 27, 1997 between the Registrant and
Donald Schupak (Incorporated by reference to Exhibit 10.30 to the
Registrant's Form 10-K for the fiscal year ended December 28, 1996).
10.31## Financial Data Schedule.
21.1## Subsidiaries of the Registrant.
23.1## Consent of Arthur Andersen LLP.
23.2## Consent of Deloitte & Touche, LLP
99.1 Press release dated May 20, 1997. (Incorporated by reference to
Exhibit 99.1 to the Registrant's Form 8K dated May 19, 1997.)
99.2 Press release dated September 23, 1997. (Incorporated by reference
to the Registrant's Form 8-K dated September 22, 1997.)
- - ---------------
## Filed herewith
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York and State
of New York on the 27th day of March, 1998.
DANSKIN, INC.
By /s/ M. Catherine Volker
--------------------------------
Chief Executive Officer
Date: March 27, 1998
43
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1933,
as amended, this Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity in Which Signed Date
- - --------- ------------------------ ----
/s/ M. Catherine Volker
- - ---------------------------- Chief Executive Officer March 27, 1998
M. Catherine Volker
/s/ Donald Schupak
- - ---------------------------- Chairman of the Board March 27, 1998
Donald Schupak
/s/ Nina McLemore
- - ---------------------------- Vice Chairperson of the Board March 27, 1998
Nina McLemore
/s/ Beverly Eichel Executive Vice President March 27, 1998
- - ---------------------------- and Chief Financial Officer
Beverly Eichel
/s/ Andrew J. Astrachan Director March 27, 1998
- - ----------------------------
Andrew J. Astrachan
/s/ Gabriel Brener
- - ---------------------------- Director March 27, 1998
Gabriel Brener
/s/ David Chu
- - ---------------------------- Director March 27, 1998
David Chu
/s/ Michael Hsieh
- - ---------------------------- Director March 27, 1998
Michael Hsieh
/s/ James P. Jalil
- - ---------------------------- Director March 27, 1998
James P. Jalil
/s/ Larry Shelton
- - ---------------------------- Director March 27, 1998
Larry Shelton
/s/ H. Timothy Mortimer
- - ---------------------------- Director March 27, 1998
H. Timothy Mortimer
44
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-2
Report of Previous Independent Public Accountants F-3
Consolidated Financial Statements as of December 30, 1995
and December 28, 1996 and for the nine months ended
December 30, 1995, for the year ended December 28,
1996 and the year ended December 27, 1997:
Consolidated Balance Sheets as of December 28, 1996
and December 27, 1997 F-4
Consolidated Statements of Operations for the nine
months ended December 30, 1995, for the fiscal year
ended December 28, 1996 and for the fiscal year ended
December 27, 1997 F-5
Consolidated Statements of Stockholders' Equity
for the nine months ended December 30, 1995, for
the fiscal year ended December 28, 1996 and for
the fiscal year ended December 27, 1997 F-6
Consolidated Statements of Cash Flows for the
nine months ended December 30, 1995, for the fiscal
year ended December 28, 1996 and for the fiscal year
ended December 27, 1997 F-7
Notes to Consolidated Financial Statements F-8 to F-25
Supplemental Financial Information:
Unaudited Selected Quarterly Financial Information S-1
Financial Statement Schedule:
Schedule II Schedule of Valuation and Qualifying
Accounts S-2
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Danskin, Inc.:
We have audited the accompanying consolidated balance sheet of Danskin, Inc. (a
Delaware Corporation) and Subsidiaries (the "Company") as of December 27, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Danskin, Inc. and Subsidiaries
as of December 27, 1997, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. The amounts in this schedule for the year ended December
27, 1997, have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 6, 1998
F-2
<PAGE>
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of DANSKIN, INC.:
We have audited the accompanying consolidated balance sheet of Danskin, Inc. and
Subsidiaries (the "Company") as of December 28, 1996 and related consolidated
statements of operations, stockholders' equity and cash flows for the fiscal
nine months ended December 30, 1995 and for the fiscal year ended December 28,
1996. Our audits also included the financial statement schedule listed in the
Index on page F-1. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Danskin, Inc. and Subsidiaries as
of December 28, 1996, and the results of their operations and their cash flows
for the fiscal nine months ended December 30, 1995 and for the year ended
December 28, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated statements taken as whole, presents fairly,
in all material respects, the information set forth therein.
Deloitte & Touche LLP
New York, New York
March 14, 1997, [Except for Note 11 for which the date is March 27, 1997]
F-3
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, 1996 December 27, 1997
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,177,000 $ 808,000
Accounts receivable, less
allowance for doubtful
accounts of $938,000 at
December 28, 1996 and
$848,000 at December 27, 1997 16,093,000 14,935,000
Inventories 34,075,000 28,714,000
Prepaid expenses and other
current assets 3,397,000 1,926,000
------------ ------------
Total current assets 54,742,000 46,383,000
Property, plant and equipment - net
of accumulated depreciation
and amortization of $7,721,000
at December 28, 1996 and
$8,671,000 at December 27, 1997 9,292,000 7,591,000
Other assets 2,906,000 1,028,000
------------ ------------
Total Assets $ 66,940,000 $ 55,002,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan payable $ 9,969,000 $ 8,539,000
Current portion of long-term debt -- 333,000
Accounts payable 9,682,000 8,043,000
Accrued expenses 10,532,000 10,614,000
------------ ------------
Total current liabilities 30,183,000 27,529,000
------------ ------------
Long-term debt, net of current maturities 31,589,000 9,667,000
Subordinated Debt -- 3,000,000
Accrued retirement costs 4,367,000 1,985,000
------------ ------------
Total long-term liabilities 35,956,000 14,652,000
------------ ------------
Total Liabilities 66,139,000 42,181,000
------------ ------------
Commitments and contingencies
Series D Cumulative Convertible Preferred
Stock, Liquidation Value
$12,000,000 and 2,400 shares -- 11,140,000
Stockholders' Equity
Preferred Stock, $.01 par value,
10,000 shares authorized;
1000 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
10,074,290 shares issued at
December 27, 1997, less
1,000 shares held by subsidiary
at December 28, 1996
and 1,083 at December 27, 1997 60,463 100,732
Additional paid-in capital 19,650,527 20,366,268
Accumulated deficit (16,345,000) (16,511,000)
Minimum pension liability adjustment (2,565,000) (2,275,000)
------------ ------------
Total Stockholders' Equity 801,000 1,681,000
============ ============
Total Liabilities and Stockholders' Equity $ 66,940,000 $ 55,002,000
============ ============
See Notes to Consolidated Financial Statements
F-4
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal
Nine Months Fiscal Year Fiscal Year
Ended Ended Ended
December 30, December 28, December 27,
1995 1996 1997
------------- ------------- -------------
Net revenues $ 93,787,000 $ 128,145,000 $ 121,986,000
Cost of goods sold 62,181,000 83,610,000 81,822,000
------------- ------------- -------------
Gross profit 31,606,000 44,535,000 40,164,000
Selling, general and
administrative expenses 29,468,000 42,069,000 40,125,000
Non-recurring charges 1,100,000 -- 300,000
Provision for doubtful
accounts receivable 383,000 (43,000) 49,000
Interest expense 3,699,000 4,721,000 4,278,000
------------- ------------- -------------
34,650,000 46,747,000 44,752,000
Loss before income tax
(benefit) provision and
extraordinary items (3,044,000) (2,212,000) (4,588,000)
(Benefit) provision for
income taxes 178,000 2,777,000 245,000
------------- ------------- -------------
Net loss before
extraordinary items (3,222,000) (4,989,000) (4,833,000)
Extraordinary gain from
early retirement of debt -- -- 5,245,000
------------- ------------- -------------
Net (loss) income (3,222,000) (4,989,000) 412,000
Preferred dividends -- 202,000 425,000
------------- ------------- -------------
Net loss applicable
to Common Stock ($3,222,000) ($5,191,000) ($13,000)
============= ============= =============
Basic net income (loss)
per share:
Net income (loss) per share
before extraordinary items ($0.50) ($0.80) ($0.66)
Net income (loss) per share
for extraordinary items -- -- 0.66
Net income (loss) per share ------------- ------------- -------------
after extraordinary items ($0.50) ($0.80) ($0.00)
============= ============= =============
Weighted average number
of common shares 6,415,000 6,513,000 7,942,000
============= ============= =============
Diluted net income (loss)
per share:
Net (loss) per share before
extraordinary items ($0.50) ($0.80) ($0.66)
Net income per share for
extraordinary items -- -- 0.66
Net income (loss) per share ------------- ------------- -------------
after extraordinary items ($0.50) ($0.80) ($0.00)
============= ============= =============
Weighted average number of
common shares and share
equivalents (Note 1) 6,415,000 6,513,000 7,942,000
============= ============= =============
See Notes to Consolidated Financial Statements
F-5
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Minimum
Additional Pension
Preferred Stock Common Stock Paid-in Accumulated Liability
Shares Amount Shares Amount Capital Deficit Adjustment Total
--------- ------ ------------ ------- ----------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 25, 1995 5,921,207 $59,212 $14,450,788 ($7,932,000) ($1,383,000) 5,195,000
Net loss (3,222,000) (3,222,000)
Purchase and retirement of
Common Stock (12,103) (121) (31,002) (31,123)
Sale of Common Stock to
Employee Savings Plan 12,271 123 30,000 30,123
Warrants granted to lender 164,000 164,000
Minimum pension liability
adjustment (617,000) (617,000)
Balance, December 30, 1995 5,921,375 $59,214 $14,613,786 ($11,154,000) ($2,000,000) $1,519,000
Net loss (4,989,000) (4,989,000)
Preferred Stock dividend (202,000) (202,000)
Purchase and retirement of
Common Stock (41,013) (410) (139,162) (139,572)
Sales and contribution of
Common Stock to Employee
Savings Plan 55,893 559 178,263 178,822
Common Stock option exercises 110,000 1,100 317,650 318,750
Issuance of Preferred Stock 1,000 10 4,694,990 4,695,000
Accumulated translation
adjustment (15,000) (15,000)
Minimum pension liability
adjustment (565,000) (565,000)
Balance, December 28, 1996 1,000 $10 6,046,255 $60,463 $19,650,527 ($16,345,000) ($2,565,000) $801,000
Net income 412,000 412,000
Preferred Stock dividend 56,689 567 124,433 (125,000)
Reversal of accrued preferred
stock dividend - 1996 41,000 41,000
Common Stock dividend 511,171 5,111 147,889 (153,000)
Purchase and retirement of
Common Stock (9,415) (94) (19,545) (19,639)
Sales and contribution of
Common Stock to Employee
Savings Plan 32,293 323 59,595 59,918
Exchange of 10% Cumulative
Preferred Stock for shares of
Common Stock (1,000) (10) 3,333,333 33,333 (33,323)
Preferred Stock dividend 102,881 1,029 123,971 (125,000)
Series D preferred dividend (216,000) (216,000)
Warrants 358,993 358,993
Accumulated translation
adjustment 15,000 15,000
Rights Redemption (61,272) (61,272)
Minimum pension liability
adjustment 290,000 290,000
Balance, December 27, 1997 0 $ 0 10,073,207 $100,732 $20,366,268 ($16,511,000) ($2,275,000) $1,681,000
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Fiscal Year Ended Fiscal Year Ended
December 30, 1995 December 28, 1996 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ($ 3,222,000) ($4,989,000) $ 412,000
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,122,000 2,616,000 2,476,000
Write-off of certain trademarks and other long-term assets -- -- --
Extraordinary gain on early retirement of debt -- -- (5,245,000)
Provision for doubtful accounts receivable 383,000 (43,000) 49,000
Loss on sale of property, plant and equipment -- 28,000 68,000
Deferred income taxes -- 2,536,000 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 5,200,000 (1,419,000) 1,109,000
(Increase) decrease in inventories 4,235,000 (3,226,000) 5,361,000
(Increase) decrease in prepaid expenses and other
current assets (324,000) (62,000) (1,553,000)
Increase (decrease) in accounts payable (1,746,000) 321,000 (1,639,000)
Increase (decrease) in accrued expenses (984,000) 77,000 (2,184,000)
Other 414,000 -- --
------------ ----------- -----------
Net cash (used in) provided by operating activities 6,078,000 (4,161,000) (1,146,000)
------------ ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (1,714,000) (738,000) (241,000)
------------ ----------- -----------
Net cash used in investing activities (1,714,000) (738,000) (241,000)
------------ ----------- -----------
Cash Flows From Financing Activities:
Net (payments) receipts under revolving loan payable (9,225,000) 5,868,000 (1,430,000)
Payments of long-term debt (22,399,000) (411,000) (333,000)
Proceeds from borrowings and debt restructuring 22,000,000 -- --
Proceeds from issuance of subordinated convertible
debentures 5,000,000 -- --
Purchase and retirement of Common Stock (31,000) (139,000) (20,000)
Sale of Common Stock to Savings Plan 30,000 79,000 60,000
Common Stock option exercises -- 318,000 --
Expenses associated with issuance of Preferred Stock -- (305,000) --
Proceeds from recapitalization (Note 15) -- -- 4,000,000
Financing costs incurred (1,290,000) (275,000) (1,259,000)
Purchase of interest rate cap (338,000) -- --
Preferred Stock Dividend -- (202,000) --
------------ ----------- -----------
Net cash provided by (used in) financing activities (6,253,000) 4,933,000 1,018,000
------------ ----------- -----------
Net increase (decrease) in Cash and Cash Equivalents (1,889,000) 34,000 (369,000)
Cash and Cash Equivalents, Beginning of Period 3,032,000 1,143,000 1,177,000
------------ ----------- -----------
Cash and Cash Equivalents, End of Period $ 1,143,000 $ 1,177,000 $ 808,000
============ =========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 3,319,000 $ 4,242,000 $ 3,767,000
Income taxes paid 146,000 123,000 345,000
Cash refunds received for income taxes (376,000) (10,000) (121,000)
</TABLE>
Non-Cash Activities
The Company declared a stock dividend of 1 share for every 11.99 shares of
common stock on 9/29/97.
Early extinguishment of long term debt resulted in an extraordinary gain
of $5,245,000 (Note 15)
The Company issued 159,570 shares to the Bond Fund for Growth as a
dividend in lieu of cash.
See Notes to Consolidated Financial Statements
F-7
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
Danskin, Inc. (the "Company") was incorporated on February 21, 1986 to own and
operate the business and assets of two divisions of a corporation acquired on
July 22, 1986.
The Company currently operates under two divisions: Danskin, which designs,
manufactures and markets dance wear, bodywear, tights and exercise apparel; and
also operates 45 retail stores and 3 full price stores; and Pennaco, which
designs, manufactures and markets hosiery under the brand names
Round-the-Clock(R), Givenchy(R), and Anne Klein(R) and under private labels for
major retailers, as well as socks under Round- the-Clock(R), Anne Klein(R) and
Danskin(R) brands. The licenses with Givenchy Corporation and Anne Klein &
Company expire on December 31, 1998. The Company allowed its license arrangement
for hosiery with Christian Dior(R) to expire in December 1996.
Basis of Presentation
The financial statements of the Company include the accounts of the Company,
including all of its operating divisions, and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Certain reclassifications were made to prior year information to conform to
current year presentations.
Fiscal Year
The Company changed its fiscal year end to the last Saturday in December
effective December 1995. Fiscal 1995 ended on March 25, 1995, a nine month
transitional fiscal year ended on December 30, 1995, fiscal 1996 ended on
December 28, 1996 and fiscal 1997 ended on December 27, 1997.
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. Inventories consist of:
December 28, 1996 December 27, 1997
----------------- -----------------
Finished goods $19,742,000 $17,557,000
Work-in-process 7,663,000 5,749,000
Raw materials 5,767,000 4,708,000
Packaging materials 903,000 700,000
----------- -----------
$34,075,000 $28,714,000
=========== ===========
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Furniture and fixtures, machinery and equipment and buildings
are depreciated by the straight-line method over the estimated useful lives of
the assets, ranging from 5 to 20 years. Leasehold improvements are amortized by
the straight-line method over the related lease terms.
F-8
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Excess of Purchase Price Over Fair Value of Net Tangible Assets Acquired
The excess of purchase price over fair value of net tangible assets acquired is
amortized on a straight-line basis over 20 years.
Deferred Financing Charges
Deferred financing charges are amortized over the respective terms of debt
obtained under financing agreements.
Cash Equivalents
The Company considers all highly liquid financial instruments purchased with a
maturity of three months or less to be cash equivalents.
Trademarks
The Company amortizes capitalized costs to acquire trademarks over the estimated
useful life of the trademark, generally 15 years.
Loss Per Common Share
During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
per Share" which requires presentation of basic and diluted earnings per share.
Basic income (loss) per share is calculated by dividing net income (loss)
applicable to Common Stock by the weighted average Common Stock outstanding
during the year. Diluted net income (loss) per share is calculated by dividing
net income (loss) applicable to Common Stock by the weighted average Common
Stock and Common Stock equivalents outstanding. Common Stock equivalents,
including Convertible Series D Preferred Stock, management options and warrants,
are reflected in diluted net income (loss) per share except to the extent they
are antidilutive. Net income (loss) per share has been restated for all periods
presented for the adoption of SFAS No. 128.
At December 27, 1997 the Company had the following common shares and common
shares equivalents outstanding:
Common Shares 10,074,000
Preferred Stock 40,000,000
Warrants 16,168,000
Options 4,171,000
---------
Total Shares and Share Equivalents Outstanding 70,413,000
==========
Due to the net loss before extraordinary items for all periods presented the
assumed exercise of common stock equivalents would be antidilutive and thus have
not been included as common stock equivalents for purposes of the calculation of
diluted earnings per share.
Net income (loss) per share has been restated for all periods presented to
reflect a stock dividend of one share for every 11.99 shares of Common Stock
declared on September 29, 1997.
F-9
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Statements of Cash Flows
The Company presents the consolidated statements of cash flows on the indirect
method. Additional required information follows:
Supplemental disclosure of cash flow information:
Fiscal
Nine Months Fiscal Year Fiscal Year
Ended Ended Ended
December 30, December 28, December 27,
1995 1996 1997
Cash paid for interest $ 3,319,000 $ 4,242,000 $ 3,767,000
Cash paid for
income taxes 146,000 123,000 345,000
Cash refunds received
for income taxes (376,000) (10,000) (121,000)
Non-cash activities:
The Company contributed 29,629 of its common shares to the Danskin, Inc. Savings
Plan on March 22, 1996 at a fair market value of approximately $100,000.
The Company issued 7% warrants to First Union National Bank in July 1994,
subsequently increased in June 1995 to 10%, of the then outstanding common
stock. The warrants were surrendered to the Company without the payment of
further consideration in connection with the refinancing of the Company's
revolving credit obligations (See Note 11). Such warrants have been recorded as
additional financing fees totaling $764,000 and additional paid-in-capital
equity. The unamortized portion of such fees was offset against extraordinary
gain from the early retirement of debt during the 1997 fiscal year.
The Company issued 10% Cumulative Convertible Preferred Stock with a $5,000,000
principal value on August 6, 1996, in exchange for subordinated convertible
debentures having an aggregate face value of $5,000,000. By agreement, between
the Company and the holder of the 10% Cumulative Preferred Stock, such preferred
stock, and any accrued but unpaid dividends, were exchanged for 3,436,214 shares
of Common Stock and certain additional consideration. (See Note 12).
The Series D Preferred Stock is presented at its fair value at the date of
issuance, as determined by an independent valuation firm, less fees incurred to
effect the placement of the Series D Preferred Stock. The difference between
this amount and the Series D Preferred Stock's liquidation value of $12,000,000
is being amortized over the period through the October 8, 2004 maturity of the
Series D Preferred Stock as a component of preferred stock dividends.
Income Taxes
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, which requires the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-10
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Long-lived assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement requires long-lived assets as well as
identifiable intangibles to be reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of assets may not be
recoverable. This is effective for fiscal years beginning after December 15,
1995. This statement was adopted by the Company effective December 31, 1995 and
was not material to the Company's financial position or results of operations.
The Company continually evaluates the carrying value and the economic useful
life of its long-lived assets based upon the Company's operating performance and
its expected future net cash flows and will adjust the carrying amount of assets
which may not be recoverable. The Company does not believe that any impairment
exists in the recoverability of its long-lived assets.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and other equity instruments used for compensation purposes, and
requires companies electing to report in accordance with the standard to
recognize or disclose such compensation in its financial statements. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. The Company, as is permitted, continues to account
for such transactions under Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees," but discloses in a note to the
financial statements pro forma net income and earnings per share as if the
Company had adopted the new fair value method of accounting. (See Note 2).
Financial Instruments
In assessing the fair value of financial instruments at December 28, 1996 and
December 27, 1997, the Company has used a variety of methods and assumptions,
which were based on estimates of market conditions and risks existing at that
time. For certain instruments, including cash and cash equivalents, it was
assumed that the carrying amount approximated fair value for the majority of
these instruments because of their short maturity. The interest rate cap is
valued at unamortized cost. Bank debt obligations are valued at carrying amount
due to floating interest rates on such debt. These values merely represent a
general approximation of possible value and may never actually be realized.
F-11
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
The estimated fair values of the Company's financial instruments are summarized
as follows:
December 28, 1996 December 27, 1997
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Cash and cash
equivalents $ 1,177,000 $ 1,177,000 $ 808,000 $ 808,000
Interest rate cap 187,000 187,000 -- --
Revolving loan payable (9,969,000) (9,969,000) (8,539,000) (8,539,000)
Long-term debt (31,589,000) (31,589,000) (10,000,000) (10,000,000)
2. Stock Option Plan
On July 1, 1992, the Company's Board of Directors adopted the 1992 Stock Option
Plan (the "Plan"), pursuant to which 339,474 shares of common stock were
reserved for issuance. The Plan provides for the granting of options to
directors, officers and certain key employees of the Company. The option price
shall not be less than 100% of the fair market value on the date of grant. No
options may be granted after 10 years from the date of adoption but all options
then outstanding will remain outstanding in accordance with the exercise terms
as determined at each grant date. On July 29, 1993, the stockholders of Danskin
authorized an increase to the number of options available for distribution to
600,000. Options become exercisable at the discretion of the Compensation
Committee of the Board of Directors and the plan provides for discretion on
vesting requirements.
Effective October 19, 1994, the Board of Directors of the Company amended the
Plan to increase the number of options available for grant from 600,000 to
660,000. On October 27, 1994, the Board of Directors of the Company increased
the number of options available for grant from 660,000 to 900,000, which
received the approval of stockholders as voted upon at the 1995 annual meeting.
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 market 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.
In October, 1997, a total of 239,943 options were repriced with an exercise
price of $.625. All participants granted options prior to repricing, 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 $4.875).
Under provisions of the Plan, as a result of deemed changes in control, prior
vesting and fully vested grants, 628,978 options outstanding under the Plan as
of December 27, 1997 were fully exercisable.
F-12
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Stock Option Plan (continued)
The following table summarizes the activity relating to the Plan as of and for
the fiscal nine months ended December 30, 1995, for the fiscal year ended
December 28, 1996 and for the fiscal year ended December 27, 1997:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Fiscal Nine Months Fiscal Year Ended Fiscal Year Ended
December 30, 1995 December 28, 1996 December 27, 1997
- - ---------------------------------------------------------------------------------------------------------------
Exercise # of Shares Weighted # of Shares Weighted # of Shares Weighted
Price Average Average Average
Range Exercise Exercise Exercise
Price Price Price
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, $1.875- 618,873 $4.403 755,328 $3.800 701,918 $3.594
beginning of year $ 13.00
- - ---------------------------------------------------------------------------------------------------------------
Granted $ .625- 214,730 $3.304 168,000 $3.970 369,999 $.7628
$ 4.875
- - ---------------------------------------------------------------------------------------------------------------
Canceled $1.875- (78,275) $6.432 (111,410) $6.244 (312,883) $3.444
$ 13.00
- - ---------------------------------------------------------------------------------------------------------------
Exercised $1.875- -- -- (110,000) $2.898 -- --
$ 3.00
- - ---------------------------------------------------------------------------------------------------------------
Outstanding, end $ .625- 755,328 $3.800 701,918 $3.594 759,034 $2.275
of year $ 13.00
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
Options exercisable and shares available for future grant amounted to:
December 28, 1996 December 27, 1997
----------------- -----------------
Options exercisable 664,087 628,978
Shares available for grant* 88,082 30,966
The Company's former Chairman of the Board purchased 100,000 shares of the
Company's common stock on June 3, 1996, through exercise of options at $3.00 per
share.
The weighted average fair value of total stock options granted during 1997 was
$.77 per share. The fair value of each stock option grant is estimated on the
date of grant using a pricing model, which approximates the Black-Scholes
pricing model, with the following weighted average assumptions used for grants
in 1997: risk-free interest rate of 6.13%; no expected dividend yield; expected
life of seven years; and expected volatility of 24%, and for grants in 1996:
risk-free intrest rate of 5.75%; no expected dividend yield; expected life of
five years; and expected volatility of 94%. Stock options generally expire 10
years from the grant date or at termination, if earlier. The outstanding stock
options at December 28, 1996 have a weighted average contractual life of 8.1
years. The stock options exercisable at December 28, 1996 have a weighted
average exercise price of $2.89 per share.
- - -----------------------------------
* "Shares available for grant" under the Plan is equal to (a) the total number
of options available for grant under the Plan, less (b) the sum of (x) options
presently exercisable, (y) non-exercisable options, and (z) previously exercised
options.
F-13
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Stock Option Plan (continued)
The Company accounts for stock options in accordance with APB No. 25, under
which no compensation cost has been recognized for stock option awards. Had
compensation cost for the Plan been determined consistent with SFAS 123, the
Company's pro forma net income would have been $237,000 and net loss applicable
to Common Stock and net loss per share (basic and diluted) for the year ended
December 27, 1997 would have been $188,000 and $0.02 per share, respectively;
for the year ended December 28, 1996 the Company's pro forma net loss and loss
per share (basic and diluted) would have been $5.5 million and $0.90 per share,
respectively. For the fiscal nine months ended December 30, 1995, the Company's
pro forma net loss and net loss per share (basic and diluted) would have been
$3.4 million and $0.58 per share. Since SFAS 123 was not applicable to options
granted prior to March 26, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
3. Stockholder Rights Plan
The Company adopted a stockholder 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 acquirer. 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. In September 1997, the Board of Directors of the
Company, redeemed the Right issued pursuant to the Rights Agreement for $.01 per
right in cash to holders of Common Stock held of record as of the close of
business on September 22, 1997.
4. Stock Market Listing
The Company's Common Stock was traded over-the-counter on the Nasdaq National
Market under the symbol "DANS" until August 8, 1996, at which time it was moved
to The Nasdaq SmallCap(TM) Market under the same symbol. Effective June 27,
1997, the Company's Common Stock was delisted due to the Company's
non-compliance with Nasdaq's minimum capital and surplus requirement. Bid
quotations for the Company's Common Stock may be obtained from the "pink sheets"
published by the National Quotation Bureau, and the Common Stock is traded in
the over-the-counter market.
5. Savings and Profit Sharing Plan
The Company maintains a savings and profit sharing plan (the "Savings Plan") for
the benefit of employees meeting certain eligibility requirements. Company
profit sharing contributions are made at the discretion of the Board of
Directors. Effective April 1, 1987, under a 401(k) vehicle, eligible employees
may elect to defer a portion of their base salary, up to the maximum allowed, as
a deduction for Federal income tax purposes. The Company will match 25% of each
participant's investment, up to 6% of the participant's base salary. Total
expense for this plan, for the fiscal nine months ended December 30, 1995, the
fiscal year ended December 28, 1996 and the fiscal year ended December 27, 1997,
was approximately $100,000, $100,000 and $150,000, respectively. On April 1,
1993, the Company established the Danskin Division Hourly Employees' Savings
Plan, for which the Company will match 10% of each participant's investment up
to 6% of base salary, with nominal plan expense.
On October 28, 1992, the Company registered a total of 200,000 shares of the
Company's common stock and participating interests in the Savings Plan in
conjunction with an amendment to the Savings Plan to add shares of the Company's
common stock as an investment option under such plan. All shares issued to or
purchased from the Savings Plan are issued or sold at the then current market
price.
F-14
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property, Plant and Equipment:
Property, plant and equipment consisted of:
December 28, 1996 December 27, 1997
----------------- -----------------
Land $ 56,000 $ 56,000
Buildings and improvements 2,310,000 2,374,000
Machinery and equipment 7,010,000 6,396,000
Furniture and fixtures 3,887,000 3,989,000
Leasehold improvements 3,382,000 3,280,000
Construction in progress 368,000 167,000
----------- -----------
17,013,000 16,262,000
Accumulated depreciation and amortization 7,721,000 8,671,000
----------- -----------
$ 9,292,000 $ 7,591,000
=========== ===========
7. Other Assets
Other assets consisted of:
Excess of purchase over fair value of net
tangible assets acquired (net of
accumulated amortization of
$613,000 at December 1996 and
$635,000 at December 1997) $ 227,000 $ 205,000
Deferred financing charges and interest
rate cap (net of accumulated
amortization of $1,850,000 at
December 1996 and $16,000
at December 1997) 2,415,000 611,000
Unrecognized net pension obligation 114,000 2,000
Notes Receivable - Related Party -- 95,000
Trademarks (net of accumulated
amortization of $377,000
at December 1996 and
$412,000 at December 1997) 150,000 115,000
----------- -----------
$ 2,906,000 $ 1,028,000
=========== ===========
8. Accrued Expenses
Accrued expenses consisted of:
Salaries, wages and other compensation $ 875,000 $ 381,000
Employee benefits 3,116,000 2,526,000
Accrued advertising and promotion costs 4,520,000 4,795,000
Other accrued expenses 2,021,000 2,912,000
----------- -----------
$10,532,000 $10,614,000
=========== ===========
F-15
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Net Revenues
Net revenues consisted of:
<TABLE>
<CAPTION>
Fiscal
Nine Months Ended Fiscal Year Ended Fiscal Year Ended
December 30, 1995 December 28, 1996 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $93,314,000 $127,168,000 $120,965,000
Royalties and
licensing fees 473,000 977,000 1,021,000
----------- ------------ ------------
$93,787,000 $128,145,000 $121,986,000
=========== ============ ============
</TABLE>
10. Non-recurring Charges
Non-recurring charges of $300,000 for the fiscal year ended December 27, 1997
consisted of certain executive employee severance costs.
Non-recurring charges were $1,100,000 for the fiscal nine months ended December
1995 and consisted of losses on certain license arrangements and certain
executive employee severance costs.
11. Bank Financing
December 28, 1996 December 27, 1997
----------------- -----------------
Current portion of revolver $ 9,969,000 $ 8,539,000
=========== ===========
Long-term debt:
Term notes $21,589,000 $10,000,000
Long-term portion of revolver note 10,000,000 --
----------- -----------
31,589,000 10,000,000
Less current maturities of
long-term debt -- 333,000
----------- -----------
$31,589,000 $ 9,667,000
=========== ===========
Maturities of term notes for
the years ending:
December 1998 $ 333,000
December 1999 2,000,000
December 2000 2,000,000
December 2001 2,000,000
December 2002 3,667,000
-----------
$10,000,000
F-16
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Bank Financing (continued)
On June 22, 1995, the Company entered into an Amended and Restated Loan and
Security Agreement with First Union National Bank of North Carolina ("First
Union") (the "Loan and Security Agreement"). The Loan and Security Agreement was
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
factoring arrangements for purposes of selling direct to customers in Canada, to
restate certain financial covenants, to obtain approval for the issuance of a
subordinated convertible debenture, the exchange of such debenture for preferred
stock and payment of the related dividends, and to increase an annual capital
expenditure limitation to $2,000,000.
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 during a specific period of time, (iii)
amended financial covenants with respect to fiscal 1997, (iv) deferred all
fiscal 1997 term loan amortization payments until fiscal 1998, (v) required the
Company to pay First Union an "additional equity fee" of $3,000,000 in 2002,
unless the Company obtained 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 strategies plans.
On August 28, 1997, First Union, the Company and Danskin Investors, LLC, (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 $21.256 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 the 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
$21.256 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.
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 $21.256 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 applicable interest rates, (ii) reset
the maturity date for such Facility to March 31, 1998 and (iii) eliminate the
Additional Equity Fee.
F-17
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Bank Financing (continued)
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. On the closing
date, the Warrants were surrendered to the Company without the payment of any
additional consideration.
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 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.
Availability at December 27, 1997 was approximately $15 million.
Interest on the Company's obligations and 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%).
12. Preferred Stock and Subordinated Convertible Debentures
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 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
F-18
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Preferred Stock and Subordinated Convertible Debentures (continued)
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.
On August 6, 1996, the Company issued to a bond fund, certain 10% Cumulative
Preferred Stock, having a liquidation preference of $5,000,000, in exchange for
an 8% subordinated convertible debenture, which had an aggregate face value of
$5,000,000. The 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 Preferred Stock had the right to vote
separately as a class for the election of one Director, and the right to require
the Company to redeem their shares for liquidation value in the event of a
"change of control", as defined. 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
of Common Stock at $2.205 per share and in June 1997 by issuing 102,881 shares
of Common Stock 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.
13. Related Party Activities
The Company is a judgment creditor of Esmark, its former parent, and it has
fully reserved the amount of $6,099,000 owed to it through March 1995. In light
of Esmark's financial condition, the Company no longer accrues interest on this
indebtedness for financial statement purposes. 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.
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.
In 1992, Esmark was granted 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 Electra has not yet revoked it. 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
F-19
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Related Party Activities (continued)
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.
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 could not 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. In September 1997, SunAmerica and the Company
terminated the 1996 Agreement.
14. Pension Plans
The Company sponsors and administers two defined benefit pension plans, the
Danskin Division Hourly Employees' Pension Plan and the Pennaco Hosiery Division
Hourly Employees' Pension Plan. Substantially all of the hourly employees of the
Danskin division and the Pennaco Hosiery division participate in these plans.
Benefits under the plans are based on years of service. The Company's funding
policy is to contribute the minimum required contribution for each plan year.
Effective April 15, 1997, the Pennaco Hosiery Division Hourly Employees' Pension
Plan was frozen. No person who is not already a Participant can now become a
participant and no additional credited service shall be granted to any
Participant. The resulting loss from curtailment of this Plan, amounting to
$178,000, has been reflected as a component of net pension cost in 1997.
In addition, as of December 28, 1996 and December 27, 1997, the Company recorded
a minimum pension liability adjustment to equity of $2,565,000 and $2,275,000
respectively.
F-20
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Pension Plans (continued)
The following table sets forth the plans' funded status at December 28, 1996 and
December 27, 1997:
<TABLE>
<CAPTION>
December 28, 1996 December 27, 1997
----------------- -----------------
Danskin Pennaco Danskin Pennaco
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation:
Vested $ 5,476,000 $ 7,223,000 $ 5,764,000 $ 7,762,000
Nonvested 35,000 36,000 41,000 25,000
----------- ----------- ----------- -----------
$ 5,511,000 $ 7,259,000 $ 5,805,000 $ 7,787,000
=========== =========== =========== ===========
Plan assets at fair value, primarily cash equivalents,
stocks and bonds $ 5,068,000 $ 5,140,000 $ 5,573,000 $ 6,055,000
Projected benefit obligation for service rendered
to date 5,511,000 7,259,000 5,805,000 7,787,000
----------- ----------- ----------- -----------
Plan assets less than projected benefit obligation (443,000) (2,119,000) (232,000) (1,732,000)
Unrecognized net loss 1,442,000 1,338,000 1,256,000 1,245,000
Unrecognized prior service cost 2,000 185,000 2,000 --
Implementation asset not yet recognized to be
amortized over 15 years (279,000) -- (226,000) --
Additional minimum liability (1,165,000) (1,523,000) (1,032,000) (1,245,000)
----------- ----------- ----------- -----------
Net accrued pension cost recognized in the Company's
balance sheet ($ 443,000) ($2,119,000) ($ 232,000) ($1,732,000)
=========== =========== =========== ===========
</TABLE>
Combined net pension cost for the fiscal nine months ended December 30, 1995,
the fiscal year ended December 28, 1996 and the fiscal year ended December 27,
1997 included the following components:
<TABLE>
<CAPTION>
Fiscal Nine Fiscal Year Fiscal Year
Months Ended Ended Ended
December 1995 December 1996 December 1997
------------- ------------- -------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 153,000 $ 240,000 $ 124,000
Interest cost on projected benefit obligation 673,000 896,000 931,000
Actual return on plan assets (1,154,000) (1,114,000) (1,987,000)
Net amortization and deferral 693,000 437,000 1,094,000
Curtailment loss -- -- 178,000
----------- ----------- -----------
Net pension cost $ 365,000 $ 459,000 $ 340,000
=========== =========== ===========
Significant actuarial assumptions used in the valuation include:
Discount rate 7.0% 7.5% 7.5%
=========== =========== ===========
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
=========== =========== ===========
</TABLE>
F-21
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Recapitalization
In connection with the Capital Infusion (as discussed in Note 11), an investor
group in the Company contributed $21,256,000 of the Company's then outstanding
term loan, and $4,000,000 in cash in exchange for Series C Preferred Stock and
$15,000,000 in Subordinated Debt. Shortly thereafter, upon a refinancing of the
Company's then existing revolving credit facility, the $15,000,000 in
Subordinated Debt and the Series C Preferred Stock were exchanged for $3,000,000
in Subordinated Debt, $12,000,000 (liquidation value) of Series D Preferred
Stock and warrants to purchase 10,000,000 shares of Common Stock at $0.30 per
share. This effectively created a non-cash reduction in the Company's debt of
$10,256,000. Refer to Note 12 for a discussion of the Subordinated Debt and the
Series D Preferred Stock and Note 16 for a discussion of the Warrants.
16. Warrants
In accordance with the debt restructuring, the Company granted warrants to the
investor group to purchase 10,000,000 shares of the Company's common stock at a
price of $0.30 per share. This has been accounted for as an addition to paid-in
capital at their fair value of $244,000, as determined by an independent
valuation firm, and a reduction of the extraordinary gain described in Note 17.
In addition, the Company sold warrants to purchase 5,372,315 and 795,900 of the
Company's common shares at $0.30 per share to two members of the Company's Board
of Directors for their fair values aggregating to $115,000. These have been
accounted for as additions to paid in capital.
17. Extraordinary Gain
As discussed herein, the Company restructured its debt during 1997. This has
been accounted for as a troubled debt restructuring. The write-off of old
deferred financing costs and legal and other costs that the Company incurred to
effect this debt restructuring have been offset against the extraordinary gain.
The extraordinary gain is comprised of the following:
<TABLE>
<S> <C>
Gain for forgiveness of debt $ 10,256,000
Valuation of warrants given to Investor Group (244,000)
Write-off of deferred financing costs relative to First Union (2,603,000)
Fees incurred in effecting the debt restructuring (2,164,000)
------------
Total $ 5,245,000
============
</TABLE>
18. Income Taxes
The provision for income taxes was as follows:
Fiscal Nine Fiscal Year Fiscal Year
Months Ended Ended Ended
December 26, December 28, December 27,
1995 1996 1997
------------ ------------ ------------
Federal:
Current Provision $ -- $ -- $ 50,000
Deferred Provision -- 2,536,000 --
---------- ---------- --------
-- 2,536,000 50,000
State:
Current Provision 178,000 241,000 195,000
---------- ---------- --------
$ 178,000 $2,777,000 $245,000
========== ========== ========
The following represented the significant items comprising net deferred taxes as
of December 28, 1996 and as of December 27, 1997:
December 28, 1996 December 27, 1997
----------------- -----------------
Future deductible items
Accounts receivable allowances $ 375,000 $ 339,000
Inventory allowances 980,000 1,269,000
Non-deductible accruals 3,327,000 2,834,000
Pension and retirement accruals 1,044,000 718,000
Net operating loss carryforward 5,470,000 4,514,000
Other 1,585,000 2,468,000
------------ ------------
12,781,000 12,142,000
Future taxable items
Prepaid expenses (327,000) (307,000)
Property, plant and equipment (1,603,000) (901,000)
Other (226,000) --
------------ ------------
(2,156,000) (1,208,000)
Valuation allowance (10,625,000) (10,934,000)
------------ ------------
Net Deferred Tax Asset $ -- $ --
============ ============
F-22
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Income Taxes (continued)
The difference between income tax expense and the tax computed by applying the
statutory income tax rate to income before taxes was as follows:
Fiscal Nine Fiscal Year Fiscal Year
Months Ended Ended Ended
December 30, December 28, December 27,
1995 1996 1997
------------ ------------ ------------
Statutory Federal income tax rate (34)% (34)% 34%
State income taxes, net of
Federal benefit 4 7 30
Change in valuation allowance -- 115 47
Losses not utilized 37 36 --
Losses utilized -- -- (81)
Alternative Minimum Tax -- -- 7
Other (1) 1 --
--- ---- ---
Effective income tax rate 6% 125% 37%
=== ==== ===
The valuation allowance for the period ended December 1995 increased $1,127,000
to $6,076,000. The valuation allowance for the period ended December 1996
increased $4,549,000 to $10,625,000. The valuation allowance for the period
ended December 1997 increased $309,000 to $10,934,000. Valuation allowances have
been established since it is more likely than not that certain tax benefits will
not be realized.
Deferred income taxes result primarily from certain inventory adjustments not
currently deductible for income tax purposes, the use of accelerated
depreciation methods for income tax purposes, accruals and reserves not
currently deductible, and differences in reporting pension expense for financial
statement and income tax purposes.
F-23
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Income Taxes (continued)
Net operating losses amounting to approximately $11,000,000 at December 27,
1997 expire during the years 2010 to 2011; Annual usage is subject to the
limitations discussed below.
During 1997, the Company underwent a change of ownership within the meaning of
Internal Revenue Code Section 382. As a result of this change in ownership, the
future utilization the Company's net operating loss (NOL) carryforward will be
limited. Under these rules, the amount of the Company's NOL carryforward that
can be used in each subsequent year is limited to an annual amount. This annual
limitation is determined by multiplying the value of the Company on the date of
the ownership change by the Federal long-term interest rate of approximately
5.5%.
19. Commitments and Contingencies
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), in 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.
On July 2, 1997, the parties entered into a Settlement Agreement and Mutual
Release. Management does not believe that the liability of the Company under the
Settlement Agreement and Mutual Release is material to the Company's
consolidated financial position, results of operations, liquidity or business of
the Company.
The Company is a party to a number of other legal proceedings arising 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.
Tax Audits
The Company has been selected for audit by certain state tax authorities, for
which resolution cannot be determined at this time. Management believes that any
possible ultimate liability resulting from these audits will not materially
affect the consolidated financial position or results of operations of the
Company.
Operating Leases
The minimum annual rental commitments under non-cancelable operating leases at
December 27, 1997 for office space, manufacturing space, equipment and retail
stores were approximately as follows:
Fiscal Years Ending: Amount
-------------------- -----------
December 1998 $5,103,000
December 1999 4,046,000
December 2000 3,425,000
December 2001 2,634,000
December 2002 1,477,000
Thereafter 2,766,000
-----------
Total minimum rental payments $19,451,000
===========
F-24
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Commitments and Contingencies (continued)
The majority of operating leases are for three-year to five-year terms,
generally with options to renew for similar terms, except for the corporate
office, certain full price retail stores, and the Pennaco mill and warehouse
space which are for terms of 9 to 15 years. Certain leases require the payment
of contingent rent based upon sales and other factors.
Rent expense was approximately as follows:
Fiscal Nine Fiscal Year Fiscal Year
Months Ended Ended Ended
December 30, December 28, December 27,
1995 1996 1997
---------- ---------- ----------
Minimum rent $4,168,000 $6,637,000 $6,150,000
Contingent rent 619,000 829,000 892,000
---------- ---------- ----------
Rent expense $4,787,000 $7,466,000 $7,042,000
Employment Agreements
The Company has entered into employment agreements that provide for base and
incentive compensation, and that are terminable for "cause", as defined, or
resignation following a "change of control", as defined. The Company's total
minimum commitment pursuant to the term of these agreements for 1998 and future
years is $962,500, unless employment is terminated in which case total pay will
generally continue for 12 to 24 months following such termination.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of accounts receivable from department stores,
sporting goods stores and other specialty retailers as well as commercial
letters of credit. Although the concentration of risk is limited due to the
large number of customers included within the Company's customer base, various
of the Company's retail customers have experienced financial difficulties in
recent years. These financial difficulties have increased the risk of extending
credit to such customers. The Company subjects all customers to credit
evaluation prior to acceptance and maintains ongoing reviews based on
established policies.
Minimum Royalty Commitments
The Company generally enters into licensing arrangements, as a licensee, that
provide for minimum annual royalty payments and additional royalty payments
based on a percentage of net revenues. The Company also licenses its Danskin(TM)
and Round-the-Clock(TM) names to selected companies. As of December 27, 1997,
the Company was committed to certain licensing arrangements as follows:
Royalty Expense Royalty Income
--------------- --------------
Fiscal Years Ending:
December 1998 $671,000 $221,000
December 1999 -- 243,000
December 2000 -- 165,000
December 2001 -- 120,000
-------- --------
$671,000 $749,000
======== ========
20. Subsequent Events
On March 2, 1998, Cathy Volker replaced Mary Ann Domuracki as Chief Executive
Officer of the Company. On February 2, 1998, the Company entered into an
employment agreement with Ms. Volker, employing her as Chief Executive Officer
of the Company from March 2, 1998 until February 28, 2003, subject to earlier
termination for death, resignation or removal. Ms. Volker's annual base salary
is $375,000. She is entitled to receive an annual performance bonus of up to
100% of her base salary as determined by the Board of Directors, in its sole
discretion, based on such quantitative and qualitative initiatives as
identified by the Board upon consultation with Ms. Volker and upon approval of
the budget for the respective fiscal year. The performance bonus for fiscal year
ended December 26, 1998 shall be no less that $187,500. Under Ms. Volker's
agreement, if she resigns her employment for 'good reason' (as defined), if the
Company terminates her employment without 'cause' (as defined), or she resigns
by reason of a 'change of control' (as defined), the Company will be obligated
to continue her base salary payments for a period of one year, and she will be
entitled to a performance bonus in an amount equal to, depending upon the
circumstance of her resignation or termination, fifty percent (50%) to
one-hundred percent (100%) of the previous year's performance bonus.
In addition, the Company entered into a Stock Option Agreement, dated February
2, 1998 with Ms. Volker. The Company granted Ms. Volker six options, each
representing the right to purchase 425,000 shares of Common Stock. The purchase
price of the shares of Common Stock covered by each option shall be $.65 per
share. Each option is generally exercisable until January 31, 2008, unless
earlier terminated in accordance with the Stock Option Agreement.
F-25
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Quarters Ended
---------------------
March June September December
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
The fiscal year ended December 27, 1997:
Net revenues $30,785,000 $29,469,000 $32,699,000 $ 29,033,000
=========== =========== =========== ============
Gross profit $10,830,000 $ 9,308,000 $11,631,000 $ 8,395,000
=========== =========== =========== ============
Net (loss) income ($844,000) ($1,587,000) $ 4,931,000 ($2,088,000)
=========== =========== =========== ============
Net (loss) income applicable to Common Stock ($969,000) ($1,712,000) $ 4,819,000 ($2,151,000)
=========== =========== =========== ============
Basic net (loss) earnings per share ($0.15) ($0.25) $ 0.50 ($0.20)
=========== =========== =========== ============
Weighted average shares 6,570,000 6,812,000 9,677,000 10,516,000
=========== =========== =========== ============
Diluted net (loss) earnings per share ($0.15) ($0.25) $ 0.50 ($0.20)
=========== =========== =========== ============
Weighted average shares & share equivalents 6,570,000 6,812,000 9,677,000 10,516,000
=========== =========== =========== ============
The fiscal year ended December 28, 1996:
Net revenues $31,421,000 $29,644,000 $34,818,000 $ 32,243,000
=========== =========== =========== ============
Gross profit $10,389,000 $10,621,000 $12,365,000 $ 11,160,000
=========== =========== =========== ============
Net (loss) income ($2,037,000) ($437,000) $ 503,000 ($3,018,000)
=========== =========== =========== ============
Net (loss) income applicable to Common Stock ($2,037,000) ($437,000) $ 426,000 ($3,143,000)
=========== =========== =========== ============
Basic net (loss) earnings per share ($0.32) ($0.07) $ 0.06 ($0.48)
=========== =========== =========== ============
Weighted average shares 6,428,000 6,524,000 7,210,000 6,549,000
=========== =========== =========== ============
Diluted net (loss) earnings per share ($0.32) ($0.07) $ 0.06 ($0.48)
=========== =========== =========== ============
Weighted average shares & share equivalents 6,428,000 6,524,000 7,210,000 6,549,000
=========== =========== =========== ============
</TABLE>
Totals for the four quarters may not agree to full year amounts due to rounding
differences.
S-1
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
SCHEDULE II
-----------
Column A Column B Column C - Addition Column D Column E
-------- -------- ------------------- -------- --------
Charged to
Balance at Charged to Other Balance
Beginning of Costs and Accounts - Deductions - at End of
Description Period Expenses Describe Describe (a) Period
------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 27, 1997:
Allowance for doubtful accounts receivable $ 938,000 $ 49,000 $ -- $139,000 $ 848,000
========== ========= ====== ======== ==========
Year Ended December 28, 1996:
Allowance for doubtful accounts receivable $1,631,000 ($ 43,000) $ -- $650,000 $ 938,000
========== ========= ====== ======== ==========
Nine Months Ended December 30, 1995:
Allowance for doubtful accounts receivable $1,601,000 $ 383,000 $ -- $353,000 $1,631,000
========== ========= ====== ======== ==========
</TABLE>
- - ------------------------------------------------------
(a) Uncollectible accounts receivable written off, net of recoveries
S-2
PAGE 1
State of Delaware
Office of the Secretary of State
1, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "DANSKIN, INC.", FILED IN THIS OFFICE ON THE TWENTY-SEVENTH DAY OF JANUARY,
A.D. 1998, AT 9 O'CLOCK A.M.
[Seal of the /s/ Edward J. Freel
State of --------------------------------------------
Delaware] Edward J. Freel, Secretary of State
2084008 8100 AUTHENTICATION: 8887711
981031849 DATE: 01-27-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 01/27/1998
981031849 - 2084008
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Of
DANSKIN, INC.
Pursuant to Section 242 of the Delaware
General Corporation Law
MARY ANN DOMURACKI, President, and MARGARET B. PRITCHARD, Secretary,
of DANSKIN, INC., a corporation organized and existing under the laws of the
State of Delaware, hereby certify as follows:
FIRST: The name of the Corporation is "Danskin, Inc." The original
name of the Corporation was "Danpen, Inc."
SECOND: The Certificate of Incorporation of the Corporation was filed
in the Office of the Secretary of State of Delaware on February 21, 1986. An
Amended and Restated Certificate of Incorporation of the Corporation was filed
in the Office of the Secretary of State of Delaware on July 2, 1992, a
Certificate of Correction thereof was filed in the Office of the Secretary of
State of Delaware on July 9, 1992, an Amended and Restated Certificate of
Incorporation was filed in the Office of the Secretary of State of Delaware on
August 11, 1993, a Certificate of Designations, Preferences and Rights of Series
A Junior Participating Preferred Stock was filed in the Office of the Secretary
of State of Delaware on June 6, 1996, a Certificate of Designations of 10%
Cumulative Convertible Preferred Stock was filed in the Office of the Secretary
of State of Delaware on August 5, 1996, a Certificate of Designations,
Preferences and
<PAGE>
Rights of Series C Cumulative Convertible Preferred Stock was filed in the
Office of the Secretary of State of Delaware on September 22, 1997, and a
Certificate of Designations, Preferences and Rights of Series D Cumulative
Convertible Preferred Stock was filed in the Office of the Secretary of State of
Delaware on September 22, 1997 (collectively, the "Certificate of
Incorporation".
THIRD: The first paragraph of Article FOUR of the Certificate of
Incorporation of Danskin, Inc. is hereby amended to read as follows:
"The total number of shares of all classes of stock which the
Corporation shall have authority to issue is One Hundred Million, Ten
Thousand (100,010,000) shares, of which Ten Thousand (10,000) shares,
designated as Preferred Stock, shall have a par value of One Cent
($.01) per share (the "Preferred Stock"), and One Hundred Million
(100,000,000) shares, designated as Common Stock, shall have a par
value of One Cent ($.01) per share (the "Common Stock")."
FOURTH: The foregoing amendment has been duly adopted in accordance
with the provisions of Sections 141(f), 228 and 242 of the General Corporation
Law of the State of Delaware. Written consent to the foregoing amendment has
been given by the holders of a majority of the stock of the Corporation entitled
to vote thereon in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have made and signed this
Certificate of Amendment as of this 27th day of January, 1998.
/s/ Mary Ann Domuracki
----------------------
Mary Ann Domuracki
President
ATTESTED:
/s/ Margaret B. Pritchard
- - -------------------------
Margaret B. Pritchard
Secretary
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 MARY ANN DOMURACKI ("Employee"):
NOW, THEREFORE, in consideration of 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 1.02 of the Employment Agreement is hereby amended to include the
following:
Position. The Employee is employed to be and serve as the Chief Executive
Officer of the Employer, reporting to the Employer's Board of Directors,
and shall serve on the Employer's Board of Directors.
Article II of the Employment Agreement is hereby amended to include the
following:
2.01 Primary Duty. The primary duty of the Employee shall be to exercise
general power and control of all of the Employer's business affairs. The
Employee shall devote her best efforts and substantially all of her working
time and attention to the affairs of the Employer.
2.02 Other Duties. In addition to the Employee's primary duties, she shall
also perform such other work commensurate with her position that may from
time to time be assigned to her by the Board of Directors of the Employer.
Paragraph 4.02 of the Employment Agreement is hereby amended to include the
following:
vi) a lump sum payment in the amount of $62,917, 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."
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 4
as of the date first set forth above.
DANSKIN, INC.
By: /s/ Edwin W. Dean
----------------------------------
Name: Edwin W. Dean
Title: Vice Chairman and Secretary
/s/ Mary Ann Domuracki
----------------------------------
Mary Ann Domuracki
AMENDMENT NO. 5
TO
EMPLOYMENT AGREEMENT
This Amendment No. 5 ("Amendment No. 5"), being made as of the 22nd day of
September 1997, is to the Employment Agreement (the "Agreement") dated August 1,
1994 by and between Danskin, Inc. and Mary Ann Domuracki as amended by Amendment
No. 1 dated November 1, 1994, Amendment No. 2 dated January 1, 1995, Amendment
No. 3 dated as of April 4, 1996 and Amendment No. 4 dated as of November 1,
1996. All capitalized terms which are used in this Amendment No. 5 and are not
defined herein shall have the meaning ascribed to them in the Agreement.
WHEREAS, the Employer is entering into a Securities Purchase Agreement
dated the date hereof with Danskin Investors, LLC (the "Securities Purchase
Agreement");
WHEREAS, it is a condition precedent to the Securities Purchase
Agreement that the Employer and the Employee amend the Agreement on terms
acceptable to Danskin Investors, LLC to provide for: (1) the agreement of
the Employee to continue to work for the Employer; (ii) the waiver, for the
period of one year, of certain of the Employee's rights under the change in
control provisions of the Agreement on account of the transactions described
in the Securities Purchase Agreement; and (iii) certain other amendments to
the Agreement as provided herein; and
WHEREAS, the Employer and the Employee each desire to amend the
Agreement to facilitate the transactions contemplated by the Securities
Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Change of Control/Severance Arrangements
(a) Notwithstanding anything contained in the Agreement to the
contrary, no compensation or benefits shall be due or payable to the
Employee if the Employee resigns her employment following a "change of
control" within the meaning of Article IV of the Agreement on account of the
closing of the transactions described in the Securities Purchase Agreement
(the "Closing"), except for such a resignation during the thirty (30) day
period commencing on September 22, 1998, in which case such compensation and
benefits shall be due and payable to the Employee.
<PAGE>
(b) The definition of "change of control" in Section 4.02(d) of the
Employment Agreement shall be deleted in its entirety and the following shall be
inserted in its stead (it being agreed that such amendment to the definition of
"change in control" shall not affect the ability of the Employee to resign
during the thirty (30) day period set forth in Section I(a) of this Amendment
No. 4 with full compensation and benefits as set forth in Section 4.02 of the
Agreement):
(d) A "change of control" shall be deemed to have taken place
upon the occurrence of any of the following events:
(i) A majority of the directors elected at any annual or special
meeting of stockholders or by stockholder consent are not individuals
nominated by the Employer's Incumbent Directors (as defined below); or
(ii) any "person" (as such term is defined in Section 3(a)(9) and
13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"1934 Act")), other than Danskin Investors, LLC or its current members
or any group (within the meaning of Rule 13d-1(f) of the Rules and
Regulations promulgated under the Securities Act of 1933, as amended)
of which Danskin, LLC or its current members comprise a majority in
interest becomes a beneficial owner (as defined in Section 13(d)(3) of
the 1934 Act), directly or indirectly, of (x) securities of the
Employer representing greater than fifty percent (50%) of the
Employer's then outstanding securities having the right to vote for
the election of directors or (y) all or substantially all of the
assets of the Employer. Incumbent Directors shall mean the members of
the Company's Board of Directors (A) holding office on the date
hereof, (B) elected or appointed by the Company's Board of Directors
or (C) elected by the Company's stockholders after having been
nominated by the Company's Board of Directors. The parties hereto and
Danskin Investors, LLC agree, promptly after the Closing, to review
reasonably the effect, if any, of a member of Danskin Investors, LLC
acquiring a majority of the membership interests in Danskin Investors,
LLC, on the "change of control" definition in the Employment Agreement
as described above and the impact, if any, on the Employee considering
the intention of establishing a definition of an "economic change of
control" and to discuss any reasonable amendment to the definition.
(c) Except as amended or waived in this Amendment No. 4, the severance
compensation and benefits payable to the Employee upon termination not for cause
or resignation following a change of control set forth in Section 4.02 of the
Agreement remain in full force and effect.
2. Non-Competition. Reference in Article 6 of the Employment Agreement to "the
period of twelve (12) months" shall be deleted and replaced with "the period of
nine (9) months."
2
<PAGE>
3. Grant of Stock Options
(a) In connection herewith, the Employer hereby grants to the Employee
options to purchase 1,020,000 shares of the Employer's common stock, $.01 par
value per share ("Common Stock"), at an initial exercise price equal to $.30 per
share. Options relating to 630,000 shares of Common Stock will vest upon the
Closing Date and options relating to 130,000 shares of Common Stock will vest
upon each of the first three anniversaries of the Closing Date; provided, that
the Employee is at such time a full time employee of the Employer. Such options
shall have a term of seven years from the date of grant and be issued pursuant
to a stock option agreement entered into by the Employer and the Employee.
(b) The provisions of Section 4.02(a)(iii) of the Employment Agreement
regarding accelerated vesting of options shall not govern the 1,020,000 options
to be granted to Employee as described in subsection (a) above. Rather, the
vesting provisions with respect to such options shall be as set forth in the
option agreement dated the date hereof in respect of such option grant.
4. Annual Bonus.
The Board of Directors of the Employer shall consider an annual bonus for
the Employee during each fiscal year the Employee continues in the employ of the
Employer, and shall grant such bonus in its discretion, taking into
consideration the recommendation of the Chairman of the Board of Directors and
performance criteria. For each fiscal year after the fiscal year ending December
1997, the Chairman of the Board in consultation with the Employee will recommend
the establishment of an annual bonus plan which shall include such benchmarks
and hurdles as shall be approved by the Board.
5. Miscellaneous
(a) Except as amended in this Amendment No. 5 all other provisions of the
Agreement remain in full force and effect.
(b) This Amendment No. 5 may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute a single
instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 5
as of the date first set forth above.
DANSKIN, INC.
By: /s/ Edwin W. Dean
--------------------------------
Name: Edwin W. Dean
Title: Vice Chairman and Secretary
/s/ Mary Ann Domuracki
--------------------------------
Mary Ann Domuracki
AMENDMENT NO. 5
TO
EMPLOYMENT AGREEMENT
This Amendment No. 5 ("Amendment No. 5"), being made as of the 22nd day of
September 1997, is to the Employment Agreement (the "Agreement") dated August 1,
1994 by and between Danskin, Inc. and Beverly Eichel as amended by Amendment
No. 1 dated November 1, 1994, Amendment No. 2 dated January 1, 1995, Amendment
No. 3 dated as of April 4, 1996 and Amendment No. 4 dated as of November 1,
1996. All capitalized terms which are used in this Amendment No. 5 and are not
defined herein shall have the meaning ascribed to them in the Agreement.
WHEREAS, the Employer is entering into a Securities Purchase Agreement
dated the date hereof with Danskin Investors, LLC (the "Securities Purchase
Agreement");
WHEREAS, it is a condition precedent to the Securities Purchase
Agreement that the Employer and the Employee amend the Agreement on terms
acceptable to Danskin Investors, LLC to provide for: (i) the agreement of
the Employee to continue to work for the Employer; (ii) the waiver, for the
period of one year, of certain of the Employee's rights under the change in
control provisions of the Agreement on account of the transactions described
in the Securities Purchase Agreement; and (iii) certain other amendments to
the Agreement as provided herein; and
WHEREAS, the Employer and the Employee each desire to amend the
Agreement to facilitate the transactions contemplated by the Securities
Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Change of Control/Severance Arrangements
(a) Notwithstanding anything contained in the Agreement to the
contrary, no compensation or benefits shall be due or payable to the Employee if
the Employee resigns her employment following a "change of control" within the
meaning of Article IV of the Agreement on account of the closing of the
transactions described in the Securities Purchase Agreement (the "Closing"),
except for such a resignation during the thirty (30) day period commencing on
September 22, 1998, in which case such compensation and benefits shall be due
and payable to the Employee.
<PAGE>
(b) The definition of "change of control" in Section 4.02(d) of the
Employment Agreement shall be deleted in its entirety and the following shall be
inserted in its stead (it being agreed that such amendment to the definition of
"change in control" shall not affect the ability of the Employee to resign
during the thirty (30) day period set forth in Section l(a) of this Amendment
No. 5 with full compensation and benefits as set forth in Section 4.02 of the
Agreement):
(d) A "change of control" shall be deemed to have taken place upon the
occurrence of any of the following events:
(i) A majority of the directors elected at any annual or special
meeting of stockholders or by stockholder consent are not individuals
nominated by the Employer's Incumbent Directors (as defined below); or (ii)
any "person" (as such term is defined in Section 3(a)(9) and 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "1934 Act")), other
than Danskin Investors, LLC, or any group (within the meaning of Rule
l3d-l(f) of the Rules and Regulations promulgated under the Securities Act
of 1933, as amended) other than Danskin Investors, LLC, becomes a
beneficial owner (as defined in Section 13(d)(3) of the 1934 Act), directly
or indirectly, of (x) securities of the Employer representing greater than
fifty percent (50%) of the Employer's then outstanding securities having
the right to vote for the election of directors or (y) all or substantially
all of the assets of the Employer. Incumbent Directors shall mean the
members of the Company's Board of Directors (A) holding office on the date
hereof, (B) elected or appointed by the Company's Board of Directors or (C)
elected by the Company's stockholders after having been nominated by the
Company's Board of Directors. The parties hereto and Danskin Investors, LLC
agree, promptly after the Closing, to review reasonably the effect, if any,
of a member of Danskin Investors, LLC acquiring a majority of the
membership interests in Danskin Investors, LLC, on the "change of control"
definition in the Employment Agreement as described above and the impact,
if any, on the Employee considering the intention of establishing a
definition of an "economic change of control" and to discuss any reasonable
amendment to the definition.
(c) Except as amended or waived in this Amendment No. 5, the severance
compensation and benefits payable to the Employee upon termination not
for cause or resignation following a change of control set forth in
Section 4.02 of the Agreement remain in full force and effect.
2. Non-Competition. Reference in Article 6 of the Employment Agreement to
"the period of twelve (12) months" shall be deleted and replaced with "the
period of nine (9) months."
2
<PAGE>
3. Grant of Stock Options
(a) In connection herewith, the Employer hereby grants to the Employee
options to purchase 680,000 shares of the Employer's common stock, $.01 par
value per share ("Common Stock"), at an initial exercise price equal to $.30 per
share. Options relating to 420,000 shares of Common Stock will vest upon the
Closing Date, options relating to 86,667 shares of Common Stock will vest upon
each of the first two anniversaries of the Closing Date and options relating to
86,666 shares of Common Stock will vest upon the third anniversary of the
Closing Date; provided, that the Employee is at such time a full time employee
of the Employer. Such options shall have a term of seven years from the date of
grant and be issued pursuant to a stock option agreement entered into by the
Employer and the Employee.
(b) The provisions of Section 4.02(a)(iii) of the Employment Agreement
regarding accelerated vesting of options shall not govern the 680,000 options to
be granted to Employee as described in subsection (a) above. Rather, the vesting
provisions with respect to such options shall be as set forth in the option
agreement dated the date hereof in respect of such option grant.
4. Annual Bonus.
The Board of Directors of the Employer shall consider an annual bonus
for the Employee during each fiscal year the Employee continues in the
employ of the Employer, and shall grant such bonus in its discretion, taking
into consideration the recommendation of the Chairman of the Board of
Directors and performance based criteria. For each fiscal year after the
fiscal year ending December 1997, the Chairman of the Board in consultation
with the Employee will recommend the establishment of an annual bonus plan
which shall include such benchmarks and hurdles as shall be approved by the
Board.
5. Miscellaneous
(a) Except as amended in this Amendment No. 5 all other provisions of the
Agreement remain in full force and effect.
(b) This Amendment No. 5 may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute a single
instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No.
5 as of the date first set forth above.
DANSKIN, INC.
By: /s/ Edwin W. Dean
-------------------------------------
Name: Edwin W. Dean
Title: Vice Chairman and Secretary
/s/ Beverly Eichel
-------------------------------------
Beverly Eichel
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of February 2, 1998 (this "Agreement"), by
and between DANSKIN, INC., a Delaware corporation ("Danskin" or the "Company"),
and CATHERINE VOLKER ("Executive").
RECITALS
WHEREAS, the Company desires to employ Executive as Chief Executive
Officer of the Company and Executive desires to accept such employment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties agree as follows:
1. Employment.
1.1 Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive during the Term (as herein defined). As of
March 2, 1998, Executive shall be employed as Chief Executive Officer of the
Company and as such shall report to the Board of Directors of the Company. As
Chief Executive Officer of the Company, Executive shall perform such duties and
responsibilities as are customarily performed by the chief executive officer of
a company the size and nature of the Company, and such other managerial duties
and responsibilities with the Company which are appropriate for her position at
the Company as, from time to time, may be assigned to her by the Board of
Directors of the Company. During the period of the Term which is prior to March
2, 1998, Executive shall report to the Chairman of the Board of Directors and
perform such duties as may be assigned to her by the Chairman of the Board of
Directors.
1.2 Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment hereunder and with respect to the period of
the Term which commences on March 2, 1998, accepts employment as Chief Executive
Officer of the Company and agrees to devote her full working time and efforts to
the performance of services, duties and responsibilities in connection therewith
(other than during periods of illness, disability or vacation). Nothing in this
Agreement shall preclude Executive, so long as, such activities are not
prohibited under Section 9.2 hereof and, in the reasonable determination of the
Board of Directors of the Company (the "Board"), such activities do not
materially interfere with her duties and responsibilities hereunder, from
engaging in charitable and community affairs, from managing any passive
investment made by her in real estate or other property (provided that no such
investment may exceed 2% of the equity securities of any entity, without the
prior approval of the Board), or from serving, subject to the prior approval of
the Board, as a member of boards of directors or as a trustee of any other
company, association or entity.
1.3 From the time Executive commences her duties as Chief
Executive Officer of the Company, the Company shall cause Executive to be
nominated for election to the Board of Directors of the Company.
1
<PAGE>
2. Term of Employment. The term of this Agreement shall commence on the
date hereof and continue through February 28, 2003 (the "Term"); subject to
earlier termination in accordance with the terms and conditions contained in
Section 7 hereof. The Term shall be extended automatically for successive one
year periods unless terminated by written notice not less than (thirty) 30, days
prior to the end of the Term or any successive one year extension by either of
the parties hereto.
3. Place of Employment. During the Term, Executive shall perform her
services at the principal place of business of the Company which is presently
located in New York City. Executive shall be furnished with office facilities
and services suitable to her position and suitable for the performance of her
duties. The Company hereby covenants and agrees that during the Term, it will
not, without Executive's consent, move the location of the Company's principal
place of business to a location which is more than 50 miles from New York City.
Executive acknowledges and agrees that in connection with her employment,
however, she may be required to travel on behalf of the Company.
4. Compensation.
4.1 Salary. With respect to the period of the Term which commences
on March 2, 1998, the Company shall pay Executive a base salary ("Base Salary")
at the rate of Three Hundred Seventy Five Thousand Dollars ($375,000) per annum
(pro rated for the balance of fiscal 1998 ending December 31, 1998, and for any
partial year during the Term). The Base Salary shall be payable in accordance
with the ordinary payroll practices of the Company for its executive officers
but in no event less frequently than semi-monthly. During the period of the Term
which is prior to March 2, 1998, the Company shall pay the Executive $200 per
week, payable in accordance with the ordinary payroll practices of the Company
but in no event less frequently than semi-monthly. As used in this Agreement,
the term "Base Salary" shall include Executive's base salary as it may be
adjusted from time to time.
4.2 Signing Bonus. The Company shall pay Executive a signing bonus
of One Hundred Fifty Thousand Dollars ($150,000) upon the execution and delivery
of this Agreement.
4.3 Performance Bonus. Executive shall be entitled to receive an
annual performance bonus (each, a "Performance Bonus") of up to 100% of Base
Salary for the most recently completed fiscal year in which such bonus is
earned. The amount of any such Performance Bonus shall be determined by the
Board of Directors, in its sole discretion, based on such quantitative and
qualitative initiatives as identified by the Board upon consultation with
Executive and upon approval of the budget for the respective fiscal year. Any
such Performance Bonus shall be paid to Executive within 120 days of the end of
the fiscal year to which it relates. Notwithstanding the foregoing, the
Performance Bonus for 1998 shall be based upon such criteria as agreed upon
between the Company and Executive and shall be no less than $187,500.
2
<PAGE>
4.4 Stock Award, Signing Bonus. As an inducement to Executive to
enter into this Agreement, the Company shall issue to Executive 750,000 shares
of common stock, par value $.01 per share, of the Company ("Common Stock") upon
the execution and delivery of this Agreement.
5. Employee Benefits.
5.1 Employee Benefit Programs, Plans and Practices. The Company
shall provide Executive, during the Term, with coverage under all employee
benefit programs, plans and practices which the Company makes available from
time to time to its senior executives, with at least the same opportunity to
participate as the other senior executives of the Company including, without
limitation, retirement, pension, profit sharing, medical, dental,
hospitalization, life insurance, short and long term disability, accidental
death and dismemberment and travel accident coverage.
5.2 Vacation and Fringe Benefits.
(a) Executive shall be entitled to three (3) weeks paid
vacation in each year (pro rated as necessary for partial calendar years during
the Term). Executive may take her allotted vacation days at such times as are
mutually convenient for the Company and Executive, consistent with the Company's
vacation policy in effect from time to time with respect to its executive
officers.
(b) The Company shall provide the Executive with a
non-accountable automobile allowance of One Thousand Dollars ($1,000.00) per
month which includes all costs associated with use of an automobile, including
lease or loan payments, fuel, maintenance and insurance.
(c) Executive shall be entitled to the perquisites and
fringe benefits normally made available to other senior executives of the
Company, commensurate with her position with the Company.
5.3 Expenses. Executive is authorized to incur reasonable expenses
in carrying out her duties and responsibilities under this Agreement, (in
accordance with the policies and procedures established from time to time by the
Company for its senior executive officers) including, without limitation,
entertainment and travel expenses (and the cost of living while away from home
on business or at the request of, and in the service of the Company) and similar
items related to such duties and responsibilities. The Company will promptly
reimburse Executive in full for all such out-of-pocket expenses upon
presentation by Executive from time to time of a proper account of such
expenditures in accordance with the policies and procedures established by the
Board and applicable to executive officers of the Company.
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5.4 Relocation Expenses. The Company will reimburse Executive for
(or pay directly) all expenses of moving Executive's possessions from
Winston-Salem, North Carolina to Executive's new residence in the New York
metropolitan area. In addition, the Company will reimburse Executive for (or pay
directly) the following costs and expenses relating to her relocation to the New
York metropolitan area, up to an aggregate maximum of $100,000 (the "Relocation
Cap"):
(a) Lease or rental payments incurred by Executive for
temporary housing of Executive in the New York metropolitan area during the
first six months of the Term, subject to the reasonable approval of the Chairman
of the Board;
(b) plane fare between New York and Winston, Salem, North
Carolina, for Executive and her husband until Executive has sold her residence
in Winston-Salem, North Carolina;
(c) the difference between net proceeds (if less than
$575,000) received by Executive (i.e., gross proceeds less brokers' commissions)
on the sale of her existing residence in Winston-Salem, North Carolina and
$575,000;
(d) points on a mortgage for Executive's new residence in
the New York metropolitan area;
(e) reasonable attorney's fees on the sale of Executive's
existing home and the purchase of her new home in the New York metropolitan
area;
(f) title insurance on Executive's new home in the New York
metropolitan area; and
(g) reasonable inspection fees on Executive's new home in
the New York metropolitan area.
5.5 Indemnification. Executive shall be entitled, at all times
(including after the termination of this Agreement for any reason), to the
benefit of the maximum indemnification and advancement of expenses available
from time to time under the Company's Articles of Incorporation and By-laws,
and, if not set forth therein, to the maximum extent available under the laws of
the Company's state of incorporation.
6. Key-Person Insurance Executive agrees that, the Company may at any
time and from time to time, and for the Company's own benefit, apply for and
take out term life, health, accident, and/or other insurance covering Executive
("Key-Person Insurance") in an amount to be determined in the sole discretion of
the Board in consultation with Executive. The Company shall own all rights in
any such Key-Person Insurance policies and proceeds thereof and Executive shall
not have any right, title or interest therein; except that if Executive is no
longer employed by the Company (other than as a result of her death or
Disability (as herein defined)) then the Company shall terminate such Key-Person
Insurance policies or, at the option of Executive, arrange for such Key-Person
Insurance
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policies to be assigned to Executive; provided, however, that said policies
permit such assignment and Executive is solely responsible for the payment of
any premiums after such assignment. Executive agrees to assist the Company at
the Company's expense in obtaining any such Key-Person Insurance by, among other
things, submitting to the customary examinations and correctly preparing,
signing and delivering such applications and other documents as may be required
by insurers.
7. Termination of Employment.
7.1 Good Reason. Executive shall be entitled to terminate her
employment for "Good Reason." For purposes of this Agreement, "Good Reason"
shall mean (without Executive's express prior written consent as a shareholder,
director or otherwise) (i) failure by the Company to pay any compensation when
due hereunder, (ii) any significant reduction by the Company of Executive's
authorities, powers, functions, duties or responsibilities in managing the
Company's business or the assignment of duties to Executive by the Board of
Directors of the Company inconsistent with Executive's position (except in
connection with termination of Executive's employment for Cause, as a result of
Disability, as a result of Executive's death or by Executive other than for Good
Reason), (iii) a reduction by the Company in Executive's Base Salary or any
other compensation due hereunder, (iv) any material breach by the Company of any
other material provision of this Agreement, or (v) the relocation of the
Company's principal place of business to a location more than 50 miles from New
York City. If Executive desires to terminate her employment with the Company,
she shall first give written notice of the facts and circumstances providing
Good Reason to the Company, and shall allow the Company no less than twenty (20)
days to remedy, cure or rectify the situation giving rise to Good Reason.
7.2 Disability. If Executive shall fail during the Term, because
of illness, physical or mental disability or other incapacity, for a period of
90 days in any 365 consecutive days, to render the services provided for by this
Agreement or be adjudged an incompetent ("Disability"); provided that the date
on which the Disability will be deemed to occur shall be such 90th day or the
date on which Executive is adjudged an incompetent, as the case may be, the
Company may terminate Executive's employment on not less than two (2) weeks
written notice thereof, setting forth the facts and circumstances claimed to
provide a basis for termination of Executive's employment under this Section
7.2.
7.3 Death. Executive's employment hereunder will terminate
automatically if she should die.
7.4 Termination for Cause. The Company shall have the right to
terminate the employment of Executive with or without Cause (as hereinafter
defined). The term "Cause," as used herein, shall mean (i) Executive's willful
refusal and failure (other than during periods of illness, disability) to
perform her duties hereunder or under any lawful directive of the Board of
Directors of the Company (consistent with the terms of this Agreement), (ii)
Executive's willful misconduct or gross neglect in the performance of her duties
hereunder, (iii) the willful material breach of this Agreement by Executive,
(iv) the indictment, conviction, plea of guilty or nolo contendere of
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Executive in respect of any felony, other than motor vehicle offenses or for any
misdemeanor constituting theft or embezzlement from the Company or, (v) other
fraudulent action against the Company. For purposes of this Section 7.4, no act,
or failure to act, on Executive's part, will be considered "willful" unless done
or omitted to be done by her not in good faith or without a reasonable belief
that her action or omission was in furtherance of the Company's business.
Termination by the Company for Cause may be effected by written notice of the
Company to Executive; provided, however, that if the Company determines to
terminate the Executive's employment pursuant to clause (i) or (iii) hereof, the
Company shall give the Executive written notice of the facts and circumstances
providing Cause and shall allow Executive no less than twenty (20) days in the
case of a proposed termination pursuant to clause (i) or (iii) above to remedy,
cure or rectify the situation giving rise to Cause.
7.5 Termination upon a Change of Control. Executive shall be
entitled to terminate her employment at any time within six (6) months following
a "Change of Control" if such Change of Control has resulted in a significant
reduction or modification by the Company of the Executive's authorities, powers,
functions, duties or responsibilities or the assignment of duties to Executive
by the Board of Directors of the Company inconsistent with Executive's position
(except in connection with termination of Executive's employment for Cause, as a
result of Disability, or as a result of Executive's death). For purposes of this
Agreement, a "Change of Control" shall mean that (i) any "person" (as such term
is defined within the meaning of Rule 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "1934 Act")), other than any person who as of the date
hereof beneficially owns (as defined in Rule 13(d)(3) of the 1934 Act) directly
or indirectly 5% or more of the Company's outstanding Common Stock or as of the
date hereof is on, or has designated a member of, the Board of Directors of the
Company or has directly or indirectly made an investment in Danskin Investors,
LLC of at least $2,000,000, becomes a beneficial owner directly or indirectly of
securities of the Company representing in excess of fifty percent (50%) of the
Company's then outstanding securities having the right to vote for the election
of directors, or (ii) the Company shall have consummated the sale of all or
substantially all of the assets of the Company.
8. Compensation Upon Termination.
8.1 Constructive Termination; Termination by Company Without
Cause; Termination by Executive upon a Change of Control.
(a) If Executive terminates her employment pursuant to (i)
Section 7.1 or 7.5, or (ii) if Executive's employment is terminated by the
Company without Cause, or (iii) if the Company, pursuant to Section 2 hereof,
delivers written notice of its determination not to extend the Term of this
Agreement for any successive one year period and the Company does not elect to
waive Executive's compliance with Section 9.2 hereof, Executive shall be
entitled to receive Executive's Base Salary paid consistent with the Company's
payroll practices for one (1) year; and, in the case of termination described in
clauses (i) and (ii) above, Executive shall be entitled to receive a Performance
Bonus for the year of termination (to the extent the qualitative and
quantitative benchmarks are achieved for the year of termination), pro-rated for
a partial fiscal year and payable
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at the time provided in Section 4.3. Executive also shall be entitled to
receive, during the period she is being paid Base Salary under this Agreement,
the benefits provided under Section 5.1; except to the extent that such
continued participation is not permitted under the plan, program or practice or
would cause the plan, program or practice to cease to be qualified under any
applicable law or regulation. Notwithstanding the foregoing, nothing herein
shall cause the Company to maintain Executive's status as an employee of the
Company after termination.
(b) In addition to the payments provided in Section 8.1(a)
above, upon termination by Executive of her employment under Section 7.1,
Executive shall be entitled to receive a Performance Bonus payment equal to
one-half of the Performance Bonus paid to Executive in respect of the fiscal
year prior to termination; such Performance Bonus to be paid within 120 days of
the end of the fiscal year of termination. If Executive terminates her
employment pursuant to Section 7.5, then Executive shall be paid a Performance
Bonus equal to the Performance Bonus paid to Executive in respect of the fiscal
year prior to termination; such Performance Bonus to be paid within 120 days of
the end of the fiscal year of termination. If the Company terminates Executive's
employment without Cause, then (subject to the further provisions of this
Section 8.1(b)) Executive shall be paid a Performance Bonus equal to the
Performance Bonus for the fiscal year prior to termination; such Performance
Bonus to be paid within 120 days of the end of the fiscal year of termination;
and provided, however, Executive shall not be paid any Performance Bonus
following such termination of employment without Cause if the Executive
Committee of the Board certifies to Executive that the termination of
Executive's employment was related to her performance. The determination of the
Executive Committee of the Board shall be final and binding on Executive and may
not be challenged (including, without limitation, under Section 20).
Nothwithstanding foregoing, if the Executive Committee has determined to
terminate Executive other than for Cause on account of her performance, then
Executive shall be granted an opportunity to appear before the Executive
Committee for the sole purpose of attempting to convince the Executive Committee
to reverse its reason for terminating Executive so that Executive would be
entitled to be paid a Performance Bonus under this Section 8.1(b); and not to
challenge the termination itself.
8.2 Termination by Executive other than for Good Reason;
Termination by Company for Cause. If Executive's employment is terminated by the
Company for Cause or by Executive other than pursuant to Section 7.1 or 7.5,
Executive only shall be entitled to receive Executive's Base Salary and benefits
as set forth in Section 5 to which Executive is entitled up to and including the
effective date of Executive's termination of employment hereunder. After such
termination of employment, the obligations of the Company under this Agreement
to make any further payments or to provide any benefits specified herein, to
Executive shall thereupon cease and terminate.
8.3 No Substitution. Nothing contained in Section 8.1 shall be
construed to represent a substitution for compensation already paid to or earned
by Executive. In addition, Executive shall be entitled to receive all amounts in
respect of the period prior to the date of termination otherwise payable herein
(without double counting), including such payments provided for in Sections 4
and 5.
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9. Nondisclosure of Confidential Information; Non-Competition.
9.1 Executive shall not during the Term and thereafter, without
the prior written consent of the Company, divulge, disclose or make accessible
to any other person, firm, partnership, corporation or other entity any
Confidential Information (as herein defined) pertaining to the business of the
Company, except (i) while employed by the Company, in the business of and for
the benefit of the Company or (ii) when required to do so by a court of
competent jurisdiction, by any governmental agency having supervisory authority
over the business of the Company, or by any administrative body or legislative
body (including a committee thereof) with purported or apparent jurisdiction to
order Executive to divulge, disclose or make accessible such information. For
purposes of this Agreement, "Confidential Information" shall mean non-public
information concerning the Company's financial data, strategic business plans,
product development (or other proprietary product data), customer information,
discoveries, practices, processes, methods, marketing plans and other material
non-public, proprietary and confidential information of the Company, that, in
any case, is not otherwise generally available to the public. In the event
Executive's employment is terminated hereunder, she shall immediately return to
the Company all Confidential Information in her possession other than
information which Executive is entitled to receive in her capacity as a
shareholder of the Company. "Confidential Information" shall not include
information which becomes available to Executive on a non-confidential basis
from a source other than the Company or was available to Executive on a
non-confidential basis prior to its disclosure to Executive by the Company.
9.2 During the period of her employment with the Company (other
than on behalf of the Company) and for twelve (12) months after the date of
termination of her employment with the Company, Executive agrees that, without
the prior written consent of the Company: (i) she will not, directly or
indirectly, either as principal, manager, agent, consultant, officer,
stockholder, partner, investor, lender or employee, or in any other capacity
(and whether or not for compensation) carry on, be engaged in or employed by or
be a consultant to or have any financial interest in, any business which is in
competition with the business of the Company (as defined in Section 9.3) and
(ii) she shall not, on her own behalf or on behalf of any person or entity,
directly or indirectly, solicit or offer employment to any employee who has been
employed by the Company at any time during twelve (12) months immediately
preceding such solicitation. In the event the Company, pursuant to Section 2
hereof, delivers written notice of its determination not to extend the Term of
the Agreement for any successive one year period, the Company shall have the
right, exercisable by written notice to Executive, to waive compliance by
Executive with this Section 9.2.
9.3 For purposes of this Section 9, a person or entity which is
"in competition with the business of the Company" shall mean an entity engaged,
in any country in which the Company sells or to which the Company's products are
sold by a distributor or licensee of the Company, or in which the products of
the Company are designed or manufactured, in the business of designing,
manufacturing and marketing women's activewear apparel, dancewear and such
classifications or categories of womens ready-to-wear apparel as are marketed or
planned to be marketed during the Term by the Company as well as designing,
manufacturing and marketing legwear and hosiery in the same distribution
channels in which, or the same class of trade to which, Pennaco markets or plans
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to market legwear and/or hosiery at any time during the Term of Executive's
employment. Nothing in this Section 9 shall be construed so as to preclude
Executive from (i) investing in any publicly held company provided Executive's
beneficial ownership of any class of such company's securities does not exceed
2% of the outstanding securities of such class, (ii) owning memberships, or
other similar rights or interests therein, of any United States or foreign
securities, commodities, options or similar exchange, board of trade, contract
market or terminal association (collectively "Exchanges") and exercising the
rights and privileges attendant to such ownership for her own personal account
or for the account of any spouse, child, parent or sibling or any trust created
for the benefit of Executive or any of the foregoing or for the account of any
entity wholly owned by Executive or any of the foregoing relatives or trusts or
(iii) trading or dealing on any Exchanges for Executive's own personal account
or for the account of any relative or any trust created for the benefit of any
relative of Executive.
9.4 Executive and the Company agree that this covenant not to
compete is a reasonable covenant under the circumstances, and further agree that
if in the opinion of any court of competent jurisdiction such restraint shall be
held to be excessively broad as to duration, geographic scope, activity or
subject, such provisions shall be construed by limiting and reducing them in
order that such provisions be enforceable to the maximum extent compatible with
applicable law. Executive agrees, solely for purposes of any attempt by the
Company to obtain an injunction for breach of any covenant contained in this
Section 9, that such breach would irreparably injure the Company. Accordingly,
Executive agrees that the Company, in addition to pursuing any other remedies it
may have in law or in equity, may obtain an injunction against Executive from
any court having jurisdiction over the matter, restraining any further violation
of this Section 9 without the necessity of posting a bond or security.
10. Mitigation of Damages. Executive shall not be required to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment (which may include self-employment) or otherwise, and,
after her termination of employment hereunder, any payments made by the Company
hereunder shall not be reduced by any amount Executive receives from any other
such employment.
11. Certain Provisions Applicable to Stock Award. The issuance of shares
of Common Stock to the Executive pursuant to Section 4.4 hereof will not be
registered under the Securities Act of 1933, as amended (the "Securities Act").
Such shares of Common Stock may not be transferred or sold other than pursuant
to an effective registration statement under the Securities Act or pursuant to
an exemption from the registration requirements of the Securities Act. Executive
hereby represents and warrants that she is an "accredited investor" within the
meaning of Rule 501 promulgated under Regulation D of the Securities Act and is
acquiring such shares of Common Stock for her own account investment purposes
only and not with a view to resale or distribution thereof except in compliance
with the Securities Act.
12. Notices. Any notice, request, demand or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand,
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electronic transmission (with a copy following by hand or by overnight courier),
by registered or certified mail, postage prepaid, return receipt requested or by
overnight courier addressed to the other party. All notices shall be addressed
as follows, or to such other address or addresses as may be substituted by
notice in writing:
To the Company:
Danskin, Inc.
111 West 40th Street
New York, New York 10018
Attention: Chairman of the Board
Fax No.: (212) 764-7265
with a copy to the Company's attorneys as directed
To Executive:
Catherine Volker
8570 Brook Meadow Court
Lewisville, North Carolina 27023
with a copy to:
Richard Menson, Esq.
Gardner, Carton & Douglas
321 N. Clarke
Suite 3200
Chicago, Illinois 60610
Fax No.: (312) 644-3381
Communications delivered by hand or by overnight courier shall be deemed
received on the date of delivery; communications sent by electronic means shall
be deemed received one (1) business day after the sending thereof, and
communications sent by registered or certified mail shall be deemed received
three (3) business days after the sending thereof.
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13. Severability; Legal Fees. If any provision of this Agreement shall
be declared to be invalid or unenforceable, in whole or in part, such invalidity
or unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect. Each party shall bear the costs of any legal
fees and other fees and expenses which may be incurred in respect of enforcing
its respective rights under this Agreement.
14. Assignment.
(a) This contract shall be binding upon and inure to the benefit
of the heirs and representatives of Executive and the assigns and successors of
the Company. Neither this Agreement nor any rights hereunder shall be assignable
or otherwise subject to hypothecation by Executive (except by will or by
operation of the laws of intestate succession) or by the Company, except that
the Company may assign this Agreement to any successor (whether by merger,
acquisition of stock, purchase or otherwise) to all or substantially all of the
assets or business of the Company, if such successor expressly agrees in writing
to assume the obligations of the Company hereunder.
15. Amendment; Waiver. This Agreement may only be amended by written
agreement signed by the parties hereto. A waiver by the Company or Executive of
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
16. Beneficiaries; References. Executive shall be entitled to select
(and change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Executive's death, and may change such election, in either case by giving the
Company written notice thereof. In the event of Executive's death or a judicial
determination of her incompetence, reference in this Agreement to Executive
shall be deemed, where appropriate, to refer to her beneficiary, estate or other
legal representative. Any reference to the masculine gender in this Agreement
shall include, where appropriate, the feminine.
17. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations. The
provisions of this Section 16 are in addition to the survivorship provisions of
any other section of this Agreement.
18. Governing Law. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of New York, without reference
to rules relating to conflicts of law.
19. Entire Agreement. This Agreement and the Stock Option Plan and
Agreement dated as of February 2, 1998, by and between the Company and the
Executive contain the entire understanding among Executive and the Company and
supersede in all respects any prior or other agreement or understanding between
the Company and Executive as to the matters set forth herein and therein. Except
for the obligations specifically set forth herein and
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therein, the Company does not owe any obligations to Executive and Executive
does not owe any obligations to the Company with respect to the matters set
forth herein.
20. Arbitration. Any dispute arising under, out of, in connection with,
or in relation to this Agreement, or any claimed breach hereof, shall be
determined and settled by arbitration in the City of New York under the auspices
of and pursuant to the rules then obtaining of the American Arbitration
Association; provided, however, that any such dispute shall be determined by a
panel of three (3) arbitrators selected in accordance with this Section 20. Each
of the Company and Executive shall select one member of the panel and such two
members shall select the third member of the panel. Any award rendered upon any
such arbitration shall be final and conclusive and a judgment thereon may be
entered in any court of competent jurisdiction.
21. Withholding. The Company shall withhold from any payments due to
Executive hereunder, all taxes, FICA or other amounts required to be withheld
pursuant to any applicable law.
22. Headings. The section headings contained in this Agreement are for
the convenience of reference only and shall not affect the construction of any
provision of this Agreement.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed as of the date and year first above written.
DANSKIN, INC.
By:
-----------------------------
Name:
Title:
---------------------------------
Catherine Volker
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STOCK OPTION PLAN AND AGREEMENT
STOCK OPTION AGREEMENT dated as of February 2, 1998 (this
"Agreement"), by and between DANSKIN, INC., a Delaware corporation (the
"Company"), and CATHERINE VOLKER (the "Optionee").
WHEREAS, the Optionee is currently employed pursuant to that certain
employment agreement dated as of the date hereof (the "Employment Agreement");
and
WHEREAS, the Compensation Committee (the "Committee") of the Board
of Directors of the Company (the "Board") has determined that it is in the best
interest of the Company and its stockholders to grant to the Optionee the
Options (as defined below) to purchase shares of common stock, par value $.01
per share, of the Company (the "Common Stock") as provided for herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
1. Option Grant. On the date hereof and subject to the provisions
of Section 9 hereof, the Company grants to the Optionee six options (each such
option being referred to herein individually as "Option 1" through "Option 6",
or as an "Option," and collectively as the "Options"), each Option representing
the right to purchase 425,000 shares of Common Stock, upon the terms and
conditions set forth herein. The Options are not intended to qualify as an
incentive stock option within the meaning of section 422 of the Internal Revenue
Code of 1986, as amended.
2. Option Price. The purchase price of the shares of Common Stock
covered by each Option shall be $.65 per share without commission or other
charge.
3. Exercisability. Each Option shall become fully exercisable on
the date which is thirty (30) days prior to the Expiration Date (as defined
below); provided, that the right to exercise such Option is subject to
acceleration as provided herein.
(a) Prior to the sixth anniversary of the date hereof, each
Option will be subject to acceleration of exercisability pursuant to which such
Option shall become immediately exercisable with respect to 212,500 shares of
Common Stock subject to such Option upon the satisfaction during any fiscal year
of the EBT Target (as defined below) with respect to such Option (and each
Option as to which 212,500 shares have become immediately exercisable is
referred to herein as a "Partially Accelerated Option") and the remaining
212,500 shares of Common Stock subject to such Option shall accelerate as to
exercisability upon the satisfaction of the EBT Target with respect to such
Option during either of the two fiscal years immediately following the fiscal
year in which the EBT Target with respect to such Option was first met. The EBT
Target with respect to an Option shall be deemed satisfied if Actual EBT (as
defined herein) for a fiscal year is equal to or greater than the EBT Target.
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(b) "Actual EBT" shall be determined by the Committee and
shall be calculated as earnings before federal income taxes of the Company as
reflected in its audited financial statements for the prior fiscal year, as
reviewed by the Company's auditors and reported in the Company's Annual Report
on Form 10-K (the "Form 10-K") divided by the number of shares of Common Stock
outstanding on a fully diluted basis as of the last day of such fiscal year.
Except and to the extent that equity capital raised by the Company after the
date hereof ("New Capital") is used for the operation of the business (whether
by way of capital investment or working capital) or to fund acquisitions, any
income attributable to, or shares of stock issued in consideration of such New
Capital shall be excluded from the calculation of Actual EBT. (For example, any
interest income attributable to New Capital and used in treasury investments not
related to the operation of the business, and any interest reductions resulting
from the application of New Capital and used to reduce outstanding indebtedness
shall be excluded from the calculation of Actual EBT, and shares issued in
consideration of such New Capital shall likewise be excluded.) To the extent
income from New Capital is excluded from the calculation of Actual EBT during
any part of a fiscal year, and included during any other part of such fiscal
year, the Committee shall make such adjustment to the number of shares to be
utilized in determining Actual EBT as the Committee deems equitable. In the
event that the EBT Target for a specific Option is met, the date upon which the
exercisability of such Option shall become accelerated (with respect to the
first 212,500 shares or the remaining 212,500 shares, as the case may be) shall
be April 15 of the year following the fiscal year in which the EBT Target was
met, or such later date which is fifteen days from the date the Form 10-K for
such year is filed.
(c) The EBT Target for each Option is as set forth below
(the "EBT Target"):
OPTION EBT TARGET
- - ------ ----------
Option 1 $.06 pre-tax earnings per share (and a minimum of $5 million of
pre-tax earnings)
Option 2 $.10 pre-tax earnings per share (and a minimum of $8 million of
pre-tax earnings)
Option 3 $.13 pre-tax earnings per share (and a minimum of $11 million of
pre-tax earnings)
Option 4 $.17 pre-tax earnings per share (and a minimum of $14 million of
pre-tax earnings)
Option 5 $.20 pre-tax earnings per share (and a minimum of $17 million of
pre-tax earnings)
Option 6 $.24 pre-tax earnings per share (and a minimum of $20 million of
pre-tax earnings)
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The EBT Targets are based on 83,323,228 shares (representing
the number of shares of Common Stock outstanding on a fully diluted basis taking
into account shares of Common Stock issuable upon the exercise or conversion of
outstanding warrants, options (including the Options) and Series D Preferred
Stock of the Company, and such measure of outstanding shares being referred to
herein as "Fully Diluted Shares") of Common Stock outstanding as of the date
hereof. In the event of any decrease in the number of Fully Diluted Shares by
consolidation, combination, reclassification or similar transaction or in the
event of any increase in the number of Fully Diluted Shares by stock dividend,
stock split, recapitalization, or similar transaction, the Committee shall cause
there to be made such equitable adjustments to the per share measures of each
EBT Target as necessary so that the Executive shall be in the same economic
position with respect to the exercise of the Option subsequent to such as event
as she would have been prior to such event; provided, that adjustments deemed de
minimis by the Committee shall not be made, but shall be carried forward and
taken into account and included in determining any subsequent adjustment. Any
such adjustment made by the Committee shall be final and binding upon the
Optionee, the Company and all other interested persons.
(d) If any "person" (as such term is defined within the
meaning of Rule 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"1934 Act")), other than any person who as of the date hereof beneficially owns
(as defined in Rule 13(d)(3) of the 1934 Act) directly or indirectly 5% or more
of the Company's outstanding Common Stock or as of the date hereof is on, or has
designated a member of, the Board of Directors of the Company or has directly or
indirectly made an investment in Danskin Investors, LLC of at least $2,000,000,
becomes a beneficial owner directly or indirectly of securities of the Company
representing in excess of fifty percent (50%) of the Company's then outstanding
securities having the right to vote for the election of directors, then each
Partially Accelerated Option shall become accelerated as to exercise with
respect to all shares of Common Stock subject to such Option, and if all Options
have not become accelerated as to exercise by virtue of the foregoing, then the
Option with the next highest EBT Target that had not at such time become
accelerated as to exercise shall become immediately exercisable with respect to
all shares of Common Stock subject to such Option.
(e) If, at any time within six years of the date hereof, the
Company consummates the sale of all or substantially all of the assets of the
Company or all or substantially all of the outstanding Common Stock, at a per
share price as determined by the Committee, in its discretion, of $2.25 to $2.49
per share of Common Stock (subject to such equitable adjustment as determined by
the Committee in the event of any decrease in the number of shares of Common
Stock by consolidation, combination, reclassification or similar transaction, or
in the event of any increase in the number of shares of Common Stock by stock
dividend, stock split, recapitalization or similar transaction), then each
Partially Accelerated Option shall become immediately exercisable with respect
to all shares of Common Stock subject to such Option, and if all Options have
not become accelerated as to exercise by virtue of the foregoing, then each of
the two Options with the next highest EBT Targets that had not at such time
become accelerated as to exercise shall become immediately exercisable with
respect to all shares of Common Stock subject to each such Option. If, at any
time within six years of the date hereof, the Company consummates the sale of
all or
3
<PAGE>
substantially all of the assets of the Company or all or substantially all of
the outstanding Common Stock, at a per share price as determined by the
Committee, in its discretion, of $2.50 per share of Common Stock or more
(subject to adjustment as set forth above in this Section 3(e)), then each
Option shall become immediately exercisable with respect to all shares of Common
Stock subject to each such Option. Any determination by the Committee as to the
per share consideration applicable to a transaction referred to in this Section
3(e) shall be final and binding upon the Optionee, the Company and all other
interested persons.
(f) Each Option shall terminate upon the termination of
Executive's employment except as otherwise provided in this Section 3(f). Upon
the termination of the Optionee's employment with the Company by Optionee
pursuant to Section 7.5 of the Employment Agreement, or the termination of the
Optionee's employment by the Company for any reason other than Cause (as defined
in the Employment Agreement) or if the Company does not renew the term of
Optionee's employment for any successive one year period pursuant to Section 2
of the Employment Agreement, then each Option which is exercisable in whole or
part on the date of such termination (the "Termination Date") shall remain
exercisable for a period of thirty (30) days from the Termination Date with
respect to that portion of such Option which is exercisable on the Termination
Date. Upon the termination of the Optionee's employment due to death or
Disability (as defined in the Employment Agreement), each Option which is
exercisable in whole or part on the date of such termination (such date also
being referred to herein as the "Termination Date") shall remain exercisable for
a period of three (3) months from the Termination Date with respect to that
portion of such Option which is exercisable on the Termination Date. Each Option
which is not exercisable on the Termination Date, or the portion of any Option
which is not exercisable on the Termination Date, shall terminate and expire on
the Termination Date.
4. Option Term. Unless terminated earlier in accordance with Section
3(f) hereof, each Option shall be exercisable by the Optionee only until January
31, 2008 (the "Expiration Date"). In the event that any Option or any portion
thereof remains unexercised on the Expiration Date, such Option or any such
unexercised portion thereof shall be forfeited to the Company and shall no
longer be exercisable by the Optionee.
5. Payment for Shares. Each Option may be exercised in whole or in part
at any time and from time to time up to the amount permitted pursuant to Section
3 of this Agreement by providing the Company with a duly executed notice, in a
form as may be designated by the Company from time to time. Payment for the
shares of Common Stock deliverable upon exercise of an Option shall be made by
delivery of a check to the order of the Company in U.S. dollars in the amount of
the aggregate price for such shares plus all amounts which, under federal, state
or local tax law, the Company is required to withhold upon exercise of the
Option or portion thereof, or on such other payment terms as shall be mutually
agreeable to the Company and the Optionee at such time.
6. Adjustments in Option. If the outstanding shares of the stock
subject to an Option are changed into or exchanged for a different number or
kind of shares of the Company or other securities of the Company by reason of
merger, consolidation, recapitalization, reclassification,
4
<PAGE>
stock split up, stock dividend or combination of shares (an "Adjustment Event"),
then the Committee shall make an appropriate and equitable adjustment in the
number and kind of shares or other securities as to which the portion of such
Option that is then unexercised shall be exercisable, to the end that after such
event, the Optionee shall be entitled to acquire, upon exercise of the
unexercised portion of such Option, such shares or other securities as the
Optionee would have received with respect to such portion if the Optionee had
exercised such portion immediately prior to such Adjustment Event. Such
adjustment in an Option shall be made without change in the total price
applicable to the unexercised portion of the Option. Any such adjustment made by
the Committee shall be final and binding upon the Optionee, the Company and all
other interested persons.
7. Transfer or Sale of Shares; Registration Form S-8. Within a
reasonable period of time after the date of this Agreement, the Company shall
file one or more registration statements covering the appropriate number of
shares of Common Stock on a registration statement on Form S-8 to be issued or
granted to the Optionee, as the case may be, which registration statement shall
be effective upon the filing thereof. The Company shall use reasonable efforts
to keep such Form S-8 current and effective until the Optionee has exercised the
Options. Shares of Common Stock issued upon the exercise of the Options may be
transferred or sold by the Optionee only as set forth in this Section 7. Such
shares may be transferred or sold (i) at any time subsequent to the termination
of the employment of the Optionee by the Company, (ii) at any time subsequent to
the fifth anniversary of the date hereof, or (iii) pursuant to a plan of merger
of the Company and another entity or an agreement for the sale of all or
substantially all of the outstanding Common Stock of the Company. In addition,
the Optionee may transfer or sell (on a non-cumulative basis) up to 250,000 of
such shares per year.
8. Pennaco Sale or Disposition. In the event the Company makes a
distribution to shareholders of the proceeds of a sale or other distribution of
Pennaco (or shares in the case of a spinoff of Pennaco) prior to the exercise of
the Options, the Company shall reserve the proceeds which would have been paid
to Executive upon such distribution had the Executive previously exercised the
Options, and upon exercise of each Option shall pay to the Executive the
proceeds or other property of the Pennaco sale which would have been paid to
Executive had she held the Common Stock issuable on exercise of the Option at
the time of the Pennaco sale. Any determination made by the Committee as to the
amount of the proceeds applicable hereunder shall be final and binding upon the
Optionee, the Company and all other interested persons.
9. Shareholder Approval. The exercise of the Options hereunder is
subject to the approval and adoption of this Agreement by a vote of shareholders
representing not less than a majority of the shares of Common Stock and Series D
Preferred Stock (voting on an as converted basis) then outstanding and entitled
to vote.
10. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire
agreement between the Company and the Optionee with respect to the matters
contained herein.
5
<PAGE>
(b) Binding Effects; Benefits. This Agreement shall inure to the
benefit of and shall be binding upon the Company and the Optionee and their
respective heirs, legal representatives, successors and assigns. Nothing in this
Agreement, expressed or implied, is intended to or shall confer on any person
other than the Company and the Optionee, or their respective heirs, legal
representatives, successors or assigns, any rights, remedies, obligations or
liabilities.
(c) Amendments and Waivers. This Agreement may not be modified or
amended except by an instrument in writing signed by the Company and Optionee.
The Company and the Optionee may, by an instrument in writing, waive compliance
by the other party with any term or provision of this Agreement on the part of
such other party hereto to be performed or complied with. The waiver by any such
party of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach.
(d) Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not be
deemed to be a part of this Agreement or to affect the meaning or interpretation
of this Agreement.
(e) Further Assurances. The Company and the Optionee shall do and
perform all such further acts and things and execute and deliver all such other
certificates, instruments and/or documents (including without limitation, such
proxies and/or powers of attorney as may be necessary or appropriate) as either
party hereto may, at any time and from time to time, reasonably request in
connection with the performance of any of the provisions of this Agreement.
(f) Separability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable any other term or provision of this Agreement
or affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction.
(g) Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of any Option. With respect
to any fraction of a share called for upon any exercise of an Option, the
Company shall pay to the Optionee an amount in cash equal to such fraction
multiplied by the current market price (as determined as of the date of
exercise, and with reference to the applicable trading market) of a share of the
Common Stock as of the date of such exercise.
(h) Options Not Transferable. The Options shall not be
transferable by sale, alienation, anticipation, pledge, encumbrance, assignment,
or by any other means other than by will or the laws of descent and
distribution.
(i) No Rights of the Holder. The Optionee shall not, solely by
virtue of this Agreement, be entitled to any rights of a stockholder of the
Company, either at law or in equity.
6
<PAGE>
(j) No Right To Continue as an Employee. Nothing contained in this
Agreement shall confer or be implied to confer upon the Optionee any right to
continue her employment with the Company.
(k) Governing Law. This Agreement shall be deemed to be a contract
made under the laws of the State of Delaware and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts made and performed in Delaware.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed as of the date and year first above written.
DANSKIN, INC.
By:
-----------------------------------
Name:
Title:
--------------------------------------
Catherine Volker
7
Exhibit 21.1
Subsidiaries of the Registrant
Danpen, Inc.
Danskin Sports, Inc.
Danskin Canada, Inc.
Danskin Assemblies De Mexico S.A. de C.V.
Custom Collection, Inc.
International Activewear
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 6, 1998 included in this Form 10-K, into the
Company's previously filed Registration Statement File Nos. 33-89692, 33-53852
and 33-67644.
ARTHUR ANDERSEN LLP
New York, New York
March 27, 1998
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
Numbers 33-89692, 33-53852 and 33-67644 of Danskin, Inc. and Subsidiaries on
Form S-8 of our report dated March 14, 1997 [except for Note 11 for which the
date is March 27, 1997] appearing in and incorporated by reference in this
Annual Report on Form 10-K of Danskin, Inc. and Subsidiaries for the year ended
December 27, 1997.
DELOITTE & TOUCHE LLP
New York, New York
March 27, 1998
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