SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 of 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _______
Commission file number 0-20382
Danskin, Inc.
-------------
Exact name of registrant as specified in its charter)
Delaware 62-1284179
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation Or organization Identification No.)
111 West 40th Street, New York, NY 10018
----------------------------------------
(Address of principal executive offices)
(212) 764-4630
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
------- -------
The number of shares outstanding of the issuer's Common Stock, $0.01 par value,
as of March 28, 1998, excluding 1,083 shares held by a subsidiary: 10,844,337
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
------------------------------
FORM 10-Q FOR THE FISCAL THREE MONTH PERIODS
ENDED MARCH 29, 1997 AND MARCH 28, 1998
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets (Unaudited)
As of December 27, 1997 and March 28, 1998 3
Consolidated Condensed Statements of Operations (Unaudited)
For the Fiscal Three Month Periods Ended
March 29. 1997 and March 28, 1998 4
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Fiscal Three Month Periods Ended
March 29, 1997 and March 28, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Uses of Proceeds 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
</TABLE>
2
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 27, 1997 March 28, 1998
(unaudited)
----------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 808,000 $ 910,000
Accounts receivable, less allowance for doubtful accounts 14,935,000 17,179,000
of $848,000 at December 27, 1997 and $769,000 at
March 28, 1998
Inventories 28,714,000 28,744,000
Prepaid expenses and other current assets 1,926,000 1,755,000
------------ ------------
Total current assets 46,383,000 48,588,000
Property, plant and equipment - net of accumulated 7,591,000 7,622,000
depreciation and amortization of $8,671,000 at December
27, 1997 and $9,003,000 at March 28, 1998
Other assets 1,028,000 1,025,000
------------ ------------
Total Assets $ 55,002,000 $ 57,235,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan payable (Note 2) $ 8,539,000 $ 10,256,000
Current portion of long-term debt (Note 2) 333,000 833,000
Accounts payable 8,043,000 8,518,000
Accrued expenses 10,398,000 11,737,000
------------ ------------
Total current liabilities 27,313,000 31,344,000
------------ ------------
Long-term debt, net of current maturities (Note 2) 9,667,000 9,167,000
Subordinated Debt (Note 3) 3,000,000 3,000,000
Accrued dividends 216,000 460,000
Accrued retirement costs 1,985,000 1,985,000
------------ ------------
Total long-term liabilities 14,868,000 14,612,000
------------ ------------
Total Liabilities 42,181,000 45,956,000
------------ ------------
Commitments and contingencies
Series D Cumulative Convertible Preferred Stock, Liquidation Value
$12,000,000 and 2,400 shares (Note 3) 11,140,000 11,201,000
------------ ------------
Stockholders' Equity
Common Stock, $.01 par value, 100,000,000 shares authorized,
10,074,290 shares issued at December 27, 1997 and 10,845,420 shares
issued at March 28, 1998, less 1,083 shares held by subsidiary at
December 27, 1997 and March 28, 1998 100,732 108,443
Additional paid-in capital 20,366,268 20,817,557
Accumulated deficit (16,511,000) (18,573,000)
Accumulated other comprehensive loss (Note 14) (2,275,000) (2,275,000)
------------ ------------
Total Stockholders' Equity 1,681,000 78,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 55,002,000 $ 57,235,000
============ ============
</TABLE>
These Statements should be read in conjunction with
the accompanying Notes to Consolidated Condensed Financial Statements
3
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Three Months Ended
-------------------------
March 29, 1997 March 28, 1998
(Unaudited) (Unaudited)
-------------- --------------
<S> <C> <C>
Net revenues $ 30,785,000 $ 28,251,000
Cost of goods sold 19,955,000 17,778,000
------------ ------------
Gross profit 10,830,000 10,473,000
Selling, general and administrative expenses 10,354,000 10,565,000
Non-recurring charges (Note 10) -- 964,000
Provision for doubtful accounts receivable 86,000 82,000
Interest expense 1,185,000 574,000
------------ ------------
Total Expenses 11,625,000 12,185,000
Loss before income tax provision (795,000) (1,712,000)
Provision for income taxes 49,000 45,000
------------ ------------
Net loss (844,000) (1,757,000)
Preferred dividends 125,000 305,000
------------ ------------
Net loss applicable to Common Stock $ (969,000) $ (2,062,000)
============ ============
Basic/Diluted net loss per share: (Note 13)
Net loss per share $ (0.15) $ (0.20)
============ ============
Weighted average number of common shares 6,570,000 10,529,000
============ ============
</TABLE>
These statements should be read in conjunction with
the accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL THREE MONTHS ENDED
-------------------------
March 29, 1997 March 28, 1998
(Unaudited) (Unaudited)
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (844,000) $(1,757,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 662,000 445,000
Provision for doubtful accounts receivable 86,000 82,000
Loss on sale of property, plant and equipment -- 34,000
Changes in operating assets and liabilities:
Increase in accounts receivable (3,703,000) (2,326,000)
Decrease (increase) in inventories 1,159,000 (30,000)
Decrease in prepaid expenses and other current assets 297,000 171,000
Increase in accounts payable 513,000 475,000
Decrease (increase) in accrued expenses (1,430,000) 1,339,000
----------- -----------
Net cash used in operating activities (3,260,000) (1,567,000)
----------- -----------
Cash Flows From Investing Activites:
Capital expeditures (127,000) (462,000)
----------- -----------
Net cash used in investing activities (127,000) (462,000)
----------- -----------
Cash Flows From Financing Activities:
Net receipts under revolving loan payable 4,251,000 1,717,000
Payments of long-term debt (333,000) --
Proceeds from stock options exercised -- 13,000
Sale of Common Stock to Savings Plan (8,000) --
Common Stock grants issued -- 446,000
Expenses associated with issuance of rights -- (42,000)
to purchase Common Stock
Interest earned on Promissory Notes for purchase -- (3,000)
price of Warrants to purchase Common Stock
Financing costs incurred (369,000) --
----------- -----------
Net cash provided by financing activities 3,541,000 2,131,000
----------- -----------
Net increase in Cash and Cash Equivalents 154,000 102,000
Cash and Cash Equivalents, Beginning of Period 1,177,000 808,000
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,331,000 $ 910,000
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 1,037,000 $ 479,000
Income taxes paid 12,000 10,000
Cash refunds received for income taxes 109,000 --
Non-Cash Activities
Common Stock Grant $ 446,000
</TABLE>
These statements should be read in conjunction with the
accompanying notes to Consolidated Condensed Financial Statements.
5
<PAGE>
Item 1. Financial Statements (continued)
1. In the opinion of the management of Danskin Inc. and Subsidiaries (the
"Company"), the accompanying Consolidated Condensed Financial Statements
have been presented on a basis consistent with the Company's fiscal year
financial statements and contain all adjustments (all of which were of a
normal and recurring nature) necessary to present fairly the financial
position of the Company as of March 28, 1998, as well as its results of
operations for the fiscal three month period ended March 28, 1998 and March
29, 1997 and its cash flows for the fiscal three month period ended March
28, 1998 and March 29, 1997. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted. See the Annual Report of the Company on Form 10-K for the Fiscal
Year Ended December 27,1997. Operating results for interim periods may not
be indicative of results for the full fiscal year.
2. Effective October 8, 1997 (the "Refinancing Closing Date"), the Company
replaced its former financing arrangements with First Union National Bank
("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
Refinancing Closing Date, certain warrants issued to First Union in
connection with a prior restructuring 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 security interest in all present and future assets of the Company.
The Loan and Security Agreement contains certain affirmative and negative
covenants including, maintenance of tangible net worth and a limitation on
capital expenditures, respectively. The tangible net worth covenant is
calculated by subtracting from total assets all in tangible assets and
total liabilities. The covenant stipulates that the Company must maintain a
minimum tangible net worth of $2 million dollars. In connection with the
closing on 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 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 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. Availability at March 28, 1998 was approximately $17 million.
Interest on the Company's obligations under the Loan and Security Agreement
generally accrues at a rate per annum equal to the sum of the Prime Rate
plus one half of one percent (1/2%) 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%).
3. In accordance with the terms of a certain Securities Purchase Agreement
dated September 22, 1997 (the "Securities Purchase Agreement") entered into
by the Company and Danskin Investors, LLC. (the "Investor"), the Investor
and certain other persons contributed to the Company in the aggregate (a)
$21.256 million face amount of certain notes executed by the Company and
payable to First Union, and (b) $ 4 million in cash (together the "Capital
Contribution") in exchange for (i) $15 million face amount of debt (the
"Subordinated Debt"), and (ii) convertible preferred stock of the Company
having a liquidation preference of $500,000 (the "Investor Preferred
Stock") (together with the Subordinated Debt, the "Securities") of the
Company. The Investor funded the Capital Contribution through capital
contributions made to it by its members and $544,129 paid by Oppenheimer
Bond Fund for Growth to the Company in exchange for a portion of the
Securities.
In accordance with the terms of the Securities Purchase Agreement, upon the
Refinancing 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
"Warrant"), 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 its issuance, the Series D Stock shall be
redeemed by the Company for an amount equal to the sum of (x) $5,000 per
share (as adjusted for any combinations, divisions, or similar
recapitalizations affecting the shares of Series D Stock), plus (y) all
accrued and unpaid dividends on such shares of Series D Stock to the date
of such redemption. Holders of the Series D Stock are entitled to vote,
together with the holders of the Common Stock and any other class or 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
6
<PAGE>
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
ending 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 at the rate of
8% per annum.
4. 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 10% Cumulative Preferred Stock was entitled to
vote on an as converted basis, and was convertible into 4,403,339 shares of
Common Stock at a conversion price of $1.14 per share following the "reset"
of such conversion price that took place on August 6, 1997. Holders of the
10% Cumulative Preferred Stock had the right to vote separately as a class
for the election of one Director 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
pursuant to the Securities Purchase Agreement on the same terms as the
Investor. Thereupon, the 10% Cumulative Preferred Stock was cancelled and
retired.
5. 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 noncompliance with NASDAQ's minimum capital and surplus
requirements. 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.
6. Inventories are stated at the lower cost or market on a first-in, first-out
basis. Inventories consisted of the following:
March 28, 1998
December 27, 1997 (Unaudited)
----------------- -----------
Finished goods $ 17,557,000 $ 17,385,000
Raw Materials 4,708,000 5,275,000
Works-in-Progress 5,749,000 5,508,000
Packaging Materials 700,000 576,000
------------ ------------
$ 28,714,000 $ 28,744,000
7. Effective February 2, 1998, the Board of Directors voted to amend the
Company's Stock Option Plan to increase the formula grant provided to
non-management Directors thereunder from 20,000 to 50,000 shares. All
shares granted to Directors under the Stock Option Plan vest in equal
amounts on the first, second and third anniversary of such individual's
appointment to the Board of Directors, and are exercisable at the fair
value of the Company's Common Stock on the date of grant
.
8. The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a material
adverse impact on the financial condition, results of operations, liquidity
or business of the Company.
9. The Company has been selected for audit by certain State tax authorities,
the resolution of which 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.
10. Non-recurring charges of $1.0 million consisted of certain executive
employee severance costs primarily relating to the termination of the
former Chief Executive Officer of the Company.
11. On February 2, 1998, the Company entered into an employment agreement with
Cathy 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 upon such quantitative and qualitative indicia 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 not less than $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
7
<PAGE>
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 circumstances of her resignation or termination, fifty
percent (50%) to one-hundred percent (100%) of the previous year's
performance bonus. In connection with the execution of such agreement, Ms.
Volker received a grant of 750,000 shares of Common Stock of the Company.
The Company entered into a Stock Option Agreement, dated February 2, 1998,
with Ms. Volker. Pursuant to the agreement, 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.
12. Included in Selling, General and Administrative Expenses ("SG&A") for the
fiscal three months ended March 1998 were approximately $0.8 million of one
time charges relating to the hiring of the new Chief Executive Officer as
discussed in Note 11 above. Excluding these charges, SG&A was reduced by
$0.6 million to $9.8 million during the three months ended March 1998,
compared to $10.6 million for the fiscal three months ended March 1997.
Excluding these charges, Operating Income, before non-recurring charges,
increased $0.2 million from $0.4 million for the fiscal three months ended
March 1997 to $0.6 million for the fiscal three months ended March 28,
1998.
13. For the fiscal three months ended March 1998 and March 1997, basic and
dilutive net loss per share is computed based on weighted average common
and common equivalent shares outstanding of 10,529,000 and 6,570,000,
respectively. Common Stock equivalents are excluded from basic and dilutive
net loss per share calculation for both fiscal quarters because the effect
would be antidilutive.
At March 28, 1998, the Company had the following common shares and common
share equivalents outstanding:
Common Shares 10,844,000
Preferred Stock 40,000,000
Warrants/Options 20,318,000
----------
Total Shares and Share Equivalents Outstanding 71,162,000
==========
14. Effective December 28, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which modifies the financial statement
presentation of comprehensive income and its components.
Comprehensive loss for the three months ended March 28, 1998 and March
29, 1997, representing all changes in stockholders' equity during the
period other than changes resulting from the Company's stock and
dividends, was $2,062,000 and $969,000, respectively, as the minimum
pension liability adjustment has not changed in the respective periods.
As such, adoption of this standard had no effect on the Company's
financial position or operating results during the periods presented.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statements
---------------------
Certain statements contained in the discussion below, including,
without limitation, statements containing the words "believes,"
"anticipates," "expects," and words of similar import, constitute
"forward-looking" statements within the meaning of the Private
Securities Reform Act of 1995. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others,
the following: the effects of future events on the Company's financial
performance; the risk that the Company may not be able to finance its
planned growth; risks related to the retail industry in which the
Company competes, including potential adverse impact of external
factors such as inflation, consumer confidence, unemployment rates and
consumer tastes and preferences; and the risk of potential increase in
market interest rates from current rates. Given these uncertainties,
current and prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
The following discussion and analysis should be read in conjunction
with the Consolidated Condensed Financial Statements, related notes and
other information included in this quarterly report on Form 10-Q
(operating data for Danskin includes operating data for the Company's
retail activities) and with the Annual Report on Form 10-K for the
fiscal year ended December 27, 1997.
Results of Operations
---------------------
Comparison of the fiscal three month period ended March 28, 1998 with
the fiscal three month period ended March 29, 1997.
Net Revenues:
Net revenues amounted to $28.3 million for the three months ended March
1998, a decrease of $2.5 million, or 8.1% from the three months ended
March 1997. Wholesale revenues for the Company decreased $2.7 million
for the three month period, whereas retail volume increased $0.1
million. The decline consisted of approximately $1.6 million in the
activewear division and approximatley $1.0 million in the Pennaco
legwear division. The decline in activewear revenues resulted primarily
from the decrease in private label manufacturing (a lower margin
business). The decline in legwear revenues reflected continued softness
in the sheer hosiery segment, as well as targeted sku reductions
designed to eliminate low margin and slow turning styles.
Danskin Activewear net revenues, which includes the Company's retail
operations, amounted to $19.9 million for the three months ended March
1998, a decrease of $1.5 million, or 7.0% from $21.4 million in the
three month period ended March 1997. The Company is currently
solidifying its strategic plans for Brand Danskin, and in keeping with
the brand's rich heritage and the lead time it takes to develop new
products, the Company presently anticipates that its new iniatives will
impact fiscal 1999. The Company's 47 retail stores sales increased $0.2
million, or 4.7%, to $4.5 million in net revenues for the three months
ended March 1998 compared to $4.3 million for the three months ended
March 1997. Comparable retail store sales were up 3.0% for the three
months ended March 1998. The Company continues its efforts to improve
store product offerings, renegotiate existing leases and streamline
store operations. During the three month period ended March 1998, the
Company closed two stores and no new stores were opened. In addition,
the Company plans to selectively open new full priced retail
locations in the next two years. Marketing of activewear wholesale
products continues to address the industry's lifestyle casual wear
trends, and to emphasize fashion and dance product offerings.
Pennaco legwear net revenues amounted to $8.4 million for the three
months ended March 1998, a decline of $1.0 million, or 10.6% from the
three months ended March 1997. With the addition of Ms. Volker and her
considerable experience in legwear innovation, the Company is pursuing
selective licensing opportunities, leveraging our manufacturing
expertise as a private label resource and refocusing our efforts on sku
management to enhance product mix to counter the continuing negative
trends in sheer hosiery.
Gross Profit:
Gross profit decreased by $0.3 million, or 2.8%, to $10.5 million in
the three months ended March 1998 from $10.8 million for the three
months ended March 1997. Gross profit as a percentage of net revenues
increased to 37.1% in the three months ended March 1998 from 35.1% in
the three months ended March 1997.
Gross margins for activewear were 39.2% for the three months ended
March 1998 versus 38.3% for the three months ended March 1997. This
improvement was primarily attributable to selected price increases to
customers and improved mix of Danskin brand sales versus lower margin
private label sales.
Legwear gross profit increased to 32.1% for the three months ended
March 1998 from 27.7% in the three months ended March 1997. This
improvement is primarily due to selected price increases and lower
costs in the manufacturing facility.
9
<PAGE>
Selling, General and Administrative Expenses:
Selling, general and administrative expenses, which include retail
store operating costs, increased by $0.2 million, or 1.9%, to $10.6
million, or 37.5% of net revenues in the three months ended March 1998,
from $10.4 million, or 33.8% of net revenues for the three month period
ending March 1997. Selling, general and administrative expenses,
excluding retail store operating costs, increased $0.1 million, or 1.3%
to $7.8 million, or 32.8% of net revenues, in the fiscal three months
ended March 1998, from $7.7 million or 29.1% of net revenues in the
same prior year end period. The wholesale increase in the March 1998
three months period was principally a result of higher compensation
expenses offset by reductions in co-op advertising, selling and
marketing expenses.
Operating Income/Loss:
As a result of the foregoing, loss from operations (i.e., loss before
interest expense, non-recurring charges, extraordinary items and income
taxes) amounted to $0.2 million for the three months ended March 1998,
a decline of $0.6 million from the income of $0.4 million for the three
month period ending March 1997.
Included in Selling, General and Administrative Expenses ("SG&A") for
the fiscal quarter ended March 1998 were approximately $0.8 million of
one time charges relating to the hiring of the new Chief Executive
Officer as discussed in Note 11 to the Consolidated Condensed Financial
Statements. Excluding these charges, SG&A was reduced by $0.6 million
to $9.8 million during the three months ended March 1998, compared to
$10.6 million in the fiscal three months ended March 1997. Excluding
these charges, Operating Income, before non-recurring charges,
increased $0.2 million from $0.4 million for the fiscal three months
ended March 1997 to $0.6 million for the fiscal three months
ended March 28, 1998.
Interest Expense:
Interest expense amounted to $0.6 million for the three months ended
March 1998 and $1.2 million for the three months ended March 1997,
respectively. The Company's effective interest rate was 9.9% and 10.8%
for the three months ended March 1998 and March 1997, respectively. The
effective interest rate decrease over the prior year is principally due
to lower deferred financing costs associated with the refinancing with
Century Business Credit Corporation and an overall lower debt burden.
Non-recurring Charges:
Non-recurring charges were $1.0 million for the three month period
ending March 1998. These charges consisted of certain executive
employee severance costs primarily relating to the termination of the
former Chief Executive Officer of the Company.
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 the three months ended March 1998 and March 1997. The Company's
deferred tax balance was $0 at both March 1998 and December 1997.
Net Loss:
As a result of the foregoing, the net loss was $1.8 million for the
three months ended March 1998, an increase of $1.0 million from the net
loss of $0.8 million in the three months ended March 1997.
Liquidity and Capital Resources
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. Although there
can be no assurances, the Company does not presently anticipate that
the cost to modify its information technology infrastructure to be Year
2000 compliant will be material to both its financial condition and its
results of operations during fiscal 1998 and 1999. Although there can
be no assurances, the Company does not presently anticipate any
material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company does not currently have any
information concerning the Year 2000 compliance status of its suppliers
and customers. In the event that the Company's significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance,
the Company's business or operations could be adversely affected.
The Company's primary liquidity and capital requirements relate to the
funding of working capital needs, primarily inventory, accounts
receivable, capital investments in operating facilities, machinery and
equipment, and principal and interest payments on indebtedness. The
Company's primary sources of liquidity have been from bank financing,
issuance of convertible securities, vendor credit terms and internally
generated funds.
Net cash flow used in operations improved by $1.7 million to $1.6
million for the three months ended March 1998, from a use of cash in
operations of $3.3 million in the three months ended March 1997,
principally attributable to increases in accounts payable and accrued
expenses offset by an increase in accounts receivable. Cash increased
$0.1 million to $0.9 million during the three months ended March 1998,
after $2.1 million in net financing increases and $0.5 million in
capital expenditures.
10
<PAGE>
Working capital decreased $1.8 million to $17.2 million at March 1998
from $19.1 million at December 1997. Accounts receivable increased by
$2.2 million, offset by increases in the revolving loan balance of $1.7
million, accounts payable of $0.5 million and accrued expenses of $1.3
million.
On August 28, 1997, First Union, the Company and Danskin Investors, LLC
(the "Investors") entered into a letter of agreement which among other
things, provided for (i) the purchase by the Investor of certain notes
executed by the Company and payable to First Union under the First
Union Loan and Security Agreement in the approximate principal amount
of $21.265 million (the "Term Loan"), (ii) the restructuring of First
Union's revolving credit commitments to the Company (the "Revolving
Credit Facility") pending a contemplated refinancing thereof, and (iii)
the disposition of the warrants (the "Warrants") issued to First Union
in June 1995 in connection with a prior restructuring of the Company's
obligations to First Union.
On August 28, 1997, the Company also agreed to the terms of a
Memorandum of Understanding with the Investor pursuant to which the
Investor would make a capital investment in the Company. In accordance
with the terms and conditions of the Memorandum of Understanding, the
Investor would (i) contribute the $21.256 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 and term loan to be provided by a new lender.
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 Company's term loan obligations owning to First Union
In accordance with the terms of a certain Securities Purchase
Agreement, dated September 22, 1997, entered into by the Company and
the Investor (the "Securities Purchase Agreement"), the Investor, and
certain other persons, contributed to the Company in the aggregate (a)
the Loan Amount and (b) $4 million (together, the "Capital
Contribution") in exchange for (i) the Subordinated Debt and (ii) the
Investor Preferred Stock (together with the Subordinated Debt, the
"Securities") of the Company. The Investor funded the Capital
Contribution through capital contributions made to it by its members
and $544,129 paid by Oppenheimer Bond Fund for Growth in exchange for a
portion of the Securities.
In connection with the closing of the Capital Contribution, the Board
of Directors approved amendments to both the Certificate of
Incorporation and the By-laws of the Company to effectuate agreements
reached between the Company and the Investor, including, among other
things, increasing the number of authorized shares of its common stock
to 100,000,000.
In addition, in connection with the closing of the Capital
Contribution, the Company announced that (a) its Board of Directors
declared a stock dividend on the Common Stock equal to one share of
Common Stock for each 11.99 shares of Common Stock held of record as of
the close of business on September 22, 1997 (these shares were
retroactively applied in the accompanying financial statements for the
earnings per share calculation), (b) its Board of Directors redeemed
the Rights issued pursuant to the Rights Agreement, dated as of June 5,
1996, between the Company and First Union, as Rights Agent, for $.01
per right in cash to holders of Common Stock held of record as of the
close of business on September 22, 1997 and (c) it would offer to its
shareholders, including the Investor, the right to purchase, pro rata,
10 million shares of Common Stock at a per share price of $0.30. The
Investor agreed to stand by to purchase any shares of Common Stock not
purchased by other shareholders of the Company.
Effective October 8, 1997 (the "Refinancing Closing Date"), the Company
replaced its former financing arrangements with First Union with a new
loan and security agreement (the "Loan and Security Agreement") with
Century Business Credit Corporation ("CBCC" or the "Lender") which
matures on October 8, 2002. Proceeds of the Loan and Security Agreement
were used to pay all of the Company's indebtedness to First Union, and
to establish working capital lines of credit.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement provides the Company with a term loan facility in the
aggregate principal amount of $10 million (the "Term Loan Facility")
and a revolving credit facility, including a provision of 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, of (b) a
formula amount based upon the Company's available inventory and
accounts receivable levels, minus certain discretionary reserves. The
Company's obligations to CBCC under the Loan and Security Agreement are
generally secured by a first priority security interest in all present
and future assets of the Company. The Loan and Security Agreement
contains certain affirmative and negative covenants including,
maintenance of tangible net worth and a limitation on capital
expenditures, respectively. In connection with the closing on the Loan
and Security Agreement, the Company paid CBCC a facility 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 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
11
<PAGE>
commencing on the first day of the forty-third (43) month following the
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. As of March 28, 1998, availability was approximately $17
million.
Interest on the Company's obligations under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of the
Prime Rate plus one half of one percent (1/2%) 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 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 its issuance, the Series
D Stock shall be redeemed-by the Company for an amount equal to the sum
of (x) $5,000 per share (as adjusted for any combinations, divisions,
or similar recapitalizations affecting the shares of Series D Stock),
plus (y) all accrued and unpaid dividends on such shares of Series D
Stock to the date of such redemption. Holders of the Series D Stock are
entitled to vote, together with the holders of the Common Stock and any
other class of series of stock then entitled to vote, as one class on
all matters submitted to a vote of stockholders of the Company, in the
same manner and with the same effect as the holders of the Common
Stock. In any such vote each share of issued and outstanding Series D
Stock shall entitle the holder thereof to one vote per share for each
share of Common Stock that would be obtained upon conversion of all of
the outstanding shares of Series D Stock held by such holder, rounded
up to the next one-tenth of a share. Therefore, the exchange of the
Series D Stock for the Subordinated Debt was highly dilutive of
existing holders of Common Stock. Holders of the Series D Stock are
also entitled to designate a majority of the directors to the Board of
Directors of the Company. The Series D Stock has an 8% annual dividend
rate payment of which is deferred through December 31, 1999, and a
seven year maturity. If, for any fiscal year beginning with the fiscal
year ended December 31, 1999, the Company meets certain agreed upon
financial targets, all accrued dividends for such fiscal year will be
forgiven and the Series D Stock will automatically convert into 40
million shares of Common Stock. The Remaining Subordinated Debt bears
interest, commencing on December 22, 1997, at the rate of 8% per annum.
On August 6, 1996, the Company issued its 10% Convertible Preferred
Stock (the "10% Cumulative Preferred Stock") having a liquidation
preference of $5,000,000, in exchange for the convertible subordinated
debenture previously outstanding. The 10% Cumulative Preferred Stock
was entitled to vote on an as converted basis, and was convertible into
4,403,339 shares of Common Stock at a conversion price of $1.14 per
share following the "reset" of such conversion price that took place on
August 6, 1997. Holders of the 10% Cumulative Preferred Stock had the
right to vote separately as a class for the election of one Director.
The director previously elected to the Board of Directors of the
Company in this capacity resigned in May 1997. The Company had the
right to make quarterly dividend payments by issuing additional shares
of Common Stock in lieu of cash and did so in March 1997 by issuing
56,689 shares at $2.205 per share and in June 1997 by issuing 102,881
shares at $1.21 per share. The Company did not take action with respect
to the dividend payment which was due on September 1, 1997. By
agreement of the Company and the holder of the 10% Cumulative Preferred
Stock, the issuance in June 1997 of Common Stock in Lieu of cash was
rescinded. 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 cancelled and
retired.
In furtherance of the terms of the Securities Purchase Agreement, on
April 28, 1998, the Company filed a Registration Statement on Form S-1
in connection with the registration under the Securities Act of 1933,
as amended, of (i) an aggregate of approximately 10,838,124 rights to
purchase shares of the Company's Common Stock, and (ii) approximately
2,131,889 shares of Common Stock offered in connection with such rights
offering. The Board of Directors has established May 8, 1998 as the
date of record for holders of Common Stock to participate in such
offering. Holders of Common Stock held of record as of the close of
business on the record date will have the right to purchase, pro rata,
approximately 2,131,889 shares of Common Stock at a per share price of
$0.30 (the "Rights Offering").
In addition, the Company, the Investor and BFG have agreed to enter
into separate stock sale agreements pursuant to which the Investor and
BFG will purchase, after the record date, pro rata in proportion to
their respective holdings of Remaining Subordinated Notes,
approximately 7,868,111 shares of Common Stock, in exchange for
approximately $2.4 million aggregate principal amount of Remaining
Subordinated Notes (the "Stock Sale").
Following completion of the Rights Offering and the Stock Sale, the
Company will have issued 10,000,000 shares of Common Stock at $0.30 per
share as contemplated by the Securities Purchase Agreement. In
addition, the outstanding principal amount of Remaining Subordinated
Notes will have been satisfied in full.
12
<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 for distribution. In addition, the
Company is pursuing selective legwear licensing opportunities,
leveraging its manufacturing expertise as a private label resource and
refocusing its efforts on sku management to enhance product mix to
counter the continuing negative trends in sheer hosiery. The Company
intends to expand Danskin(R) and other product lines, pursue growth in
international sales, selectively license the Danskin(R) name for
additional product categories, selectively open additional full price
Danskin(R) stores and evaluate other available brands for selective
licensing opportunities. Further, the Company is seeking to continue to
expand its activewear distribution into the department store class of
trade by launching a new program late in 1998.
There can be no assurance that the Company will be able to implement
this strategy, particularly given the difficulty of predicting hosiery
operations or, if implemented, that this strategy will be successful.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative disclosures called for by this Item 3 and by Rule 305 of
Regulation S-K are inapplicable to the Company at this time.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 8 in the Notes to Consolidated Condensed Financial Statements
in Part I - Financial Information of this Quarterly Report on Form
10-Q.
Item 2. Changes in Securities and Uses of Proceeds
------------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANSKIN, INC.
May 12, 1998 By: /s/ M. Catherine Volker
-----------------------------
M. Catherine Volker
Chief Executive Officer
May 12, 1998 By: /s/ Beverly Eichel
------------------------
Beverly Eichel
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889299
<NAME> Danskin, Inc.
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> MAR-28-1998
<EXCHANGE-RATE> 1.00
<CASH> 910,000
<SECURITIES> 0
<RECEIVABLES> 17,179,000
<ALLOWANCES> 769,000
<INVENTORY> 28,744,000
<CURRENT-ASSETS> 48,588,000
<PP&E> 7,622,000
<DEPRECIATION> 9,003,000
<TOTAL-ASSETS> 57,235,000
<CURRENT-LIABILITIES> 31,344,000
<BONDS> 0
0
11,201,000
<COMMON> 108,443
<OTHER-SE> (30,443)
<TOTAL-LIABILITY-AND-EQUITY> 57,235,000
<SALES> 28,251,000
<TOTAL-REVENUES> 28,251,000
<CGS> 17,778,000
<TOTAL-COSTS> 17,778,000
<OTHER-EXPENSES> 11,529,000
<LOSS-PROVISION> 82,000
<INTEREST-EXPENSE> 574,000
<INCOME-PRETAX> (1,712,000)
<INCOME-TAX> 45,000
<INCOME-CONTINUING> (1,757,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,062,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
