April 28, 1998
VIA EDGAR
- ---------
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Danskin, Inc. Registration Statement on Form S-1
Ladies and Gentlemen:
On behalf of Danskin, Inc., a Delaware corporation (the "Company"), transmitted
herewith for filing via EDGAR pursuant to the Securities Act of 1933, as amended
(the "Act") is the Company's Registration Statement on Form S-1 (the
"Registration Statement"), together with exhibits, in connection with the
registration under the Act of (i) an aggregate of 10,838,124 rights to purchase
shares of the Company's Common Stock, par value $.01 per share (the "Common
Stock") and (ii) 2,131,889 shares of Common Stock offered in connection with
such rights offering.
Please note that the filing fee in the amount of $179 payable to the order of
the Securities and Exchange Commission was wired today to Mellon Bank in
Pittsburgh, Pennsylvania.
If we can be of any further assistance, please do not hesitate to contact the
undersigned at (212) 309-6209 or Pamela Guardo at (212) 309-6813.
Sincerely,
MORGAN, LEWIS & BOCKIUS LLP
John E. McCarrick
Attachments
cc: Margaret B. Pritchard, Esq.
Danskin, Inc.
Samuel B. Fortenbaugh III, Esq.
<PAGE>
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1 REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
DANSKIN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
Delaware 2339 62-1284179
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
111 West 40th Street
New York, New York 10018
(212) 764-4630
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------
M. Catherine Volker
President and Chief Executive Officer
111 West 40th Street
New York, New York 10018
(212) 764-4630
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
--------------------
Copies to:
Samuel B. Fortenbaugh III, Esq.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
(212) 309-6000
--------------------
Approximate date of commencement of proposed sale to
the public: As soon as practicable after the effective date of
this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended, please check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.|_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.|_|
<PAGE>
<TABLE>
<CAPTION>
--------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Proposed Proposed
Title of Each Maximum Maximum Amount of
Class of Securities Amount to be Offering Price Aggregate Offering Registration
to be Registered(1) Registered(2) Per Share(1) Price(1) Fee
--------------------------------------------------------------------------------------------------------------
Rights to purchase
Common Stock............. 10,838,124 $ 0 $ 0 $ 0(3)
--------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par 2,131,889 $ 0.30(5) $639,566 $179
value(4).................
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(1) This Registration Statement relates to the Company's rights (the
"Rights") to purchase its shares of Common Stock, par value $.01
per share (the "Common Stock"), and to the shares deliverable upon
exercise of the Rights. This Registration Statement also relates
to resales and reoffers of certain of these Rights by holders
thereof who may be deemed to be affiliates of the Company.
(2) Pursuant to Rule 416(a) of the Securities Act of 1933, this
Registration Statement also relates to any and all Rights issued
hereby due to the rounding up of Rights distributed hereby to the
nearest whole number for each recipient thereof, and the Common
Stock issuable upon exercise thereof.
(3) Since both the Rights and the Common Stock underlying the Rights
are being registered for distribution under this Registration
Statement, for purposes of Rule 457 there is no separate
registration fee for the Rights.
(4) These shares of Common Stock are deliverable upon exercise of the
Rights. This Registration Statement also relates to resales and
reoffers of certain of these shares of Common Stock to be
purchased by certain holders of Rights who may be deemed to be
affiliates of the Company upon exercise of their Rights.
(5) The subscription price for purchase of a share of Common Stock
upon exercise of the Rights.
The registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION - DATED APRIL __, 1998
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
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PROSPECTUS
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2,131,889 Shares
Danskin, Inc. [LOGO]
Common Stock
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Danskin, Inc. (the "Company" or "Danskin") is issuing at no cost
to holders of record on ____________, 1998 of its common stock, par value $.01
per share ("Common Stock"), one transferable right (individually, a "Right") for
each share of Common Stock held, entitling the holders thereof to subscribe for
an aggregate of 2,131,889 shares of Common Stock (the "Rights Offering"). Each
Right entitles the holder to purchase, at any time prior to 5:00 p.m., New York
City time, on ________, 1998, .1967 shares of Common Stock ("Primary
Subscription") at a subscription price equal to $0.30 per share of Common Stock
(the "Subscription Price"). Danskin Investors, L.L.C., a Delaware limited
liability company ("Danskin Investors"), is a significant stockholder of the
Company and the holder of a majority of the Company's Series D Cumulative
Convertible preferred stock, par value $.01 per share (the "Series D Preferred
Stock"). Danskin Investors, along with the other holder of the subordinated
notes of the Company (the "Remaining Subordinated Notes"), will not receive
Rights on Primary Subscription; however, Danskin Investors has agreed to
purchase at the Subscription Price, any shares not purchased on Primary
Subscription by the other stockholders of the Company. Accordingly, the Company
will realize gross proceeds of $639,566 from the Rights Offering, which will be
applied to repay in full the Remaining Subordinated Notes in the outstanding
principal amount of $639,566. See "Use of Proceeds." The Rights are transferable
by the holders thereof. See "The Rights Offering."
See "Risk Factors" on pages 11 to 15 for a discussion of certain material
factors that should be considered in connection with an investment in the Common
Stock offered hereby.
<PAGE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AND COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
-MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Subscription Proceeds to
Price Company(1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Per Share.................................. $.30 $.30
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total ..................................... $639,566 $639,566
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</TABLE>
(1) Before deducting expenses payable by the Company estimated to be $280,000.
The shares of Common Stock are being offered and sold directly by the
Company, and no commission or other remuneration will be paid to any person
for soliciting purchases of shares of Common Stock in the Rights Offering.
See "The Rights Offering -- Method of Conducting the Rights Offering."
The Rights may not be exercised by any person, and neither this Prospectus
nor any subscription certificate shall constitute an offer to sell or a
solicitation of an offer to purchase any shares of Common Stock, in any
jurisdiction in which such transaction would be unlawful. See "The Rights
Offering -- State and Foreign Securities Laws."
__________, 1998
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
(and notes thereto) appearing elsewhere in this Prospectus. The information
contained in this Prospectus assumes the consummation of the private sale by the
Company of 7,868,111 shares of Common Stock to the holders of the Remaining
Subordinated Notes. Each investor is urged to read this Prospectus in its
entirety prior to making an investment in the shares of Common Stock offered
hereby.
The Company
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(TM) 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: the Danskin division (the "Danskin
Division") for activewear, dancewear and legwear and the Pennaco division
("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. The Company
believes that its domestic manufacturing facilities allow it to respond to
customer orders quickly and also allows its designers to respond quickly to
market trends. See "Business--Operations."
The Company's market includes products intended for activewear, dancewear
and legwear. The Company has developed a diversified portfolio of quality
branded and private label products 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: (i)
to expand the activewear and legwear product lines; (ii) expand international
sales revenues; (iii) to pursue additional licensing opportunities; and (iv) to
expand channels of distribution for the Company's products, including the
selective opening of additional full-priced stores.
See "Business--Strategy."
Pennaco(TM) hosiery is widely recognized for its quality, fit and
innovation. Pennaco is one of the oldest manufacturers of hosiery in the United
States, is the second largest supplier of sheer hosiery to domestic, full line
department stores and apparel specialty stores, and is the leading supplier of
private label hosiery to such stores. The Company markets Round-the-Clock(R), a
brand which has been in the market since 1919, as well as two licensed brands of
hosiery: Givenchy(R) and Anne Klein(R).
- --------------------------------------------------------------------------------
3
<PAGE>
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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, also provide a distribution channel for irregular and excess
inventory. The Company presently anticipates closing certain unprofitable outlet
stores and selectively opening full-priced stores during the next two years.
On September 22, 1997, the Company and Danskin Investors, an entity newly
formed by an investment group led by Onyx Partners, Inc., entered into a
securities purchase agreement (the "Securities Purchase Agreement") pursuant to
which Danskin Investors purchased preferred stock and subordinated notes of the
Company. In accordance with the Securities Purchase Agreement, in exchange for
contributing in part to the capital of the Company and canceling in part the
approximately $21.3 million face amount (the "Loan Amount") of the Company's
term loan obligations (the "Term Loan") owing to First Union National Bank
("First Union") and contributing $4 million in cash to the capital of the
Company (together, the "Capital Contribution"), Danskin Investors received (i)
$15 million aggregate principal amount of subordinated notes (the "Subordinated
Notes") and (ii) Series C Cumulative Convertible preferred stock, par value $.01
per share, of the Company having a liquidation preference of $500,000 (the
"Series C Preferred Stock" and together with the Subordinated Notes, the
"Securities"). The Capital Contribution was funded (i) through capital
contributions made to Danskin Investors by its members and (ii) with $544,129
paid to the Company by the Oppenheimer Bond Fund for Growth ("BFG"), a
significant stockholder of the Company, in exchange for a portion of the
Securities. In connection with the closing of the Capital Contribution, three of
the members of the then Board of Directors resigned and four new members
designated by Danskin Investors were elected.
On October 8, 1997, the Company completed the refinancing of its
obligations to First Union (the "Refinancing") with a new loan and security
agreement (the "Loan and Security Agreement") with Century Business Credit
Corporation ("CBCC" or the "Lender"), and the Series C Preferred Stock and the
Subordinated Notes were automatically exchanged in accordance with their terms
for (i) the Series D Preferred Stock of the Company, having a liquidation
preference of $12 million, (ii) a seven-year warrant (the "Warrant") to purchase
10,000,000 shares of Common Stock at a per share price of $0.30, and (iii) $3
million aggregate principal amount of Remaining Subordinated Notes. 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 (at an initial conversion rate of 16,666.66 shares
of Common Stock for each share of Series D Preferred Stock so converted).
On December 8, 1997, one member of the Board of Directors resigned. On
December 10, 1997, the Company's bylaws (the "Bylaws") were amended to increase
the number of members of the Board of Directors from nine to ten, and two
additional members were elected to the Board of Directors. As the majority
holder of the Series D Preferred Stock, Danskin Investors is entitled to
designate for election to the Board of Directors a majority of the members
constituting the Board of Directors.
In April, 1998 the Company, and each of Danskin Investors and BFG entered
into separate securities purchase agreements (the "Stock Sale Agreements")
pursuant to which each of Danskin Investors and BFG agreed to purchase, on the
date one day after the Record Date (as defined herein), pro rata in proportion
to their respective holdings of Remaining Subordinated Notes, 7,868,111 shares
of Common Stock (the "Stock Sale") in exchange for approximately $2.4 million
aggregate principal amount of the Remaining Subordinated Notes.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Danskin Investors, a significant stockholder of the Company and the holder
of a majority of the Series D Preferred Stock, is entitled to cast 46,107,509
votes, or 78.5% of the votes entitled to be cast by the holders of all of the
Company's voting securities, and is entitled to vote the Series D Preferred
Stock, together with the holders of the Common Stock, as one class on all
matters subject to a vote of stockholders of the Company. See "Risk Factors --
Control of the Company," "The Capital Contribution and the Refinancing,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Management -- Board of
Directors."
The Company's principal executive offices are located at 111 West 40th St.,
New York, New York 10018, and its telephone number is (212) 764-4630.
The Rights Offering
The Company is distributing to holders of record of Common Stock on
_______________, 1998 one transferable Right for each share of Common Stock
held.
Primary
Subscription..................... Each Right entitles the holder to purchase
.1967 shares of Common Stock at a price of
$0.30 per share of Common Stock (the
"Subscription Price"). See "The Rights
Offering."
Oversubscription................. There will be no oversubscription privilege
available to stockholders participating in
the Rights Offering. Danskin Investors and
BFG will not receive Rights on Primary
Subscription; however, Danskin Investors has
agreed with the Company to purchase, at the
Subscription Price, any shares of Common
Stock not purchased by the stockholders on
Primary Subscription. Danskin Investors is a
significant stockholder of the Company and
the holder of a majority of the Series D
Preferred Stock, and is entitled to cast
46,107,509 votes, or 78.5%, of the votes
entitled to be cast by the holders of all of
the Company's voting securities. If all the
stockholders exercise in full the Rights
issued to them on Primary Subscription,
Danskin Investors will beneficially own
approximately 79.1% of the Common Stock
immediately following consummation of the
Rights Offering. In the event that none of
the stockholders exercise their Rights,
Danskin Investors will beneficially own 82.1%
of the Common Stock after giving effect to
the purchase by it of the shares of Common
Stock not subscribed for by the other
stockholders on Primary Subscription. See
"The Rights Offering -- Background of and
Purposes for the Rights Offering" and "--
Purchase of Shares by Danskin Investors" and
"The Capital Contribution and the Refinancing
-- The Capital Contribution."
Record Date...................... , 1998 (the "Record Date").
--------------
Expiration Date.................. , 1998 (the "Expiration Date").
--------------
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5
<PAGE>
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Subscription Agent............... First Union National Bank.
Transferability
of Rights........................ The Rights are transferable. See "The Rights
Offering -- Transferability of Rights."
Dilution......................... To the extent a stockholder does not exercise
its Rights, such stockholder's percentage
equity interest in the Company and its voting
power will be diluted. Conversely, because
the Subscription Price is greater than the
net tangible book value per share of the
Common Stock at December 27, 1997, on a pro
forma basis, to the extent that a stockholder
does exercise its rights, there will be an
immediate dilution on a per share basis from
the Subscription Price paid by such
stockholder to the pro forma net tangible
book value per share of the Common Stock
immediately following consummation of the
Rights Offering. See "Risk Factors --
Dilution" and "The Rights Offering --
Dilutive Effects of Rights Offering."
Common Stock
Outstanding After the
Offering......................... 20,838,124 shares, assuming no exercise of
options or warrants.
Risk Factors..................... An investment in the Common Stock offered
hereby involves a high degree of risk. See
"Risk Factors."
Use of
Proceeds......................... The gross proceeds to the Company from the
sale of the Common Stock offered hereby will
be $639,566. Such gross proceeds will be used
by the Company to repay in full the Remaining
Subordinated Notes held by Danskin Investors
and BFG. See "Use of Proceeds."
Tax
Consequences..................... The receipt or exercise of Rights by a holder
of Common Stock should not be treated as a
taxable event for federal income tax
purposes, but may have certain tax effects.
See "The Rights Offering -- Federal Income
Tax Consequences."
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6
<PAGE>
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SUMMARY CONSLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Nine Twelve
Months Ended Months Fiscal Years Ended
Fiscal Years Ended March December Ended December
------------------------------ ----------------- -----------------------------
1993 1994 1995 1994 1995 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Revenues (1) $134,490 $131,497 $128,118 $95,967 $93,787 $125,938 $128,145 $121,986
-------- -------- -------- ------- ------- -------- -------- --------
Cost of goods sold (1) 87,500 86,004 87,346 65,409 62,181 84,118 83,610 81,822
Gross profit(1) 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
-------- -------- -------- ------- ------- -------- -------- --------
Total expenses (Loss) income before
extraordinary item 1,703 (6,941) (11,376) (5,809) (3,044) (86,616) (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 (5) $ 15,000 -- -- -- -- -- -- --
======== ======== ======== ======= ======= ======== ======== ========
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
Cummulative 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 oustanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942
======== ======== ======== ======= ======= ======== ======== ========
Net income (loss) per share
on a fully diluted basis:
Net income (loss) per share before $0.24 ($1.14) ($1.51) ($0.67) ($0.50) ($1.34) ($0.80) ($0.66)
extraordinary items (5,6)
Net income per share for extraordinary
items (4) -- -- -- -- -- -- -- 0.66
Cummulative 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
oustanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942
Balance Sheet Data:
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>
7
<PAGE>
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(1) Pennaco recorded a $1.0 million pre-tax charge against income for the
fiscal year ended March 27, 1993, related to production problems cause 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 Amended and Restated First Union
Loan and Security Agreement (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 to Consolidated
Financial Statements.
(5) On August 19, 1992, the Company consummated an initial public offering (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 September 22,
1997 the ("Contribution Closing Date"), by and between Donald Schupak,
Chairman of the Board of Directors, and the Company, Mr. Schupak purchased
a warrant (the "Schupak Warrant") to purchase up to 5,372,315 shares of
Common Stock (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 (the "warrant Price") comprised of (x) $20,000 in
cash and (y) a seven year promissory note in the amount of $80,000 (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
which has been satisified in full. 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.
(See "The Capital Contribution and the Refinancing.")
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
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$1.875 to $4), were repriced with the exception of certain options held by
executives and outside directors. Under provisions of the Company's 1992
Stock Option Plan ("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.
(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 retroactively 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 Contribution options to purchase 3,291,797 shares of Common Stock
were granted to certain key personnel by the Company at an exercise price
of $0.30 per share (the "Key Personnel Stock Options"), 1,845,899 of which
were exercisable immediately. See Note 15 in the Notes to Consolidated
Financial Statements.
(7) Effective October 8, 1997, 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 to 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 in the Notes to Consolidated
Financial Statements. (See the "Capital Contribution and the Refinancing.")
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 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.
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RISK FACTORS
Prospective investors, prior to purchasing shares of Common Stock, should
consider carefully the specific risk factors set forth below, as well as the
other information regarding the Company appearing elsewhere in this Prospectus.
This Prospectus contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"). Such statements appear in a number of places in
this Prospectus and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operations; (ii) the Company's financing plans; (iii) the Company's
business and growth strategies; (iv) the use of the proceeds of the Offering;
and (v) the declaration and payment of dividends. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in such forward-looking statements as a
result of various factors. The accompanying information contained in this
Prospectus, including without limitation the information set forth under the
headings "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," identifies important
factors that could cause such differences.
Future Profitability Uncertain
The Company has experienced cumulative net operating losses during the past
several years. For the fiscal year ended December 27, 1997, the Company had a
net loss, before extraordinary items, of $4.8 million, and over the past three
fiscal years the Company had cumulative net operating losses of approximately
$18.4 million. These losses were due in part to declines in the Company's
hosiery operations, a difficult retail environment and reduced cash flow. The
Company has undertaken a number of steps to improve its operating results,
including: (i) entering into the Loan and Security Agreement, which provides
significantly more flexible financial terms than the Company's prior credit
facility; (ii) reducing selling, general and administrative costs; (iii)
developing new channels of distribution for the Company's products; and (iv)
taking measures to improve efficiencies at both of the Company's manufacturing
facilities. Although the Company expects to achieve improved cash flow as a
result of the Capital Contribution, the Refinancing, the Stock Sale, the Rights
Offering and the steps described above, there is no assurance that such
improvement will be achieved or sustained. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Leverage Restrictions Under Debt Instruments
As of December 27, 1997, the Company's total indebtedness, as adjusted to
give effect to the repayment of the Remaining Subordinated Notes, would have
been approximately 72% of its total capitalization. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company's leverage may impair its ability to (i) obtain additional
financing in the future, (ii) withstand competitive pressure and adverse
economic conditions (including a further downturn in the Company's business),
(iii) take advantage of significant business opportunities that may arise, or
(iv) invest in new or developing technologies. The Company's ability to meet its
debt service requirements, including any obligations under the Loan and Security
Agreement, will require significant and sustained
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growth in cash flow. There can be no assurance that the Company will not
continue to experience net operating losses or that, if required, the Company
will be able to obtain additional financing on terms and conditions acceptable
to the Company, or that additional capital contributions will be provided by its
stockholders.
The Company's operations and financial performance are subject to covenants
contained in the Loan and Security Agreement. Among other things, these
agreements (i) limit the Company's flexibility, including the ability to incur
liens, incur additional indebtedness, dispose of assets, or engage in mergers or
certain other transactions and (ii) require the Company to meet certain
financial performance tests. These restrictions could limit the Company's
ability to respond to adverse changes in economic and industry conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Net Operating Losses of the Company; Section 382 Limitation
At March 29, 1997 (the end of the Company's last full taxable year for
which a return has been 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 severely limited by the "ownership change" rules of Section 382 of the
Internal Revenue Code ("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. 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.
Control of the Company
Following the completion of this offering (assuming each stockholder
exercises its rights), as a result of holding the majority of the Series D
Preferred Stock, Common Stock and the Warrant, Danskin Investors will
beneficially own, in the aggregate, approximately 55,793,708 shares or 79.1% of
the Common Stock. Danskin Investors is entitled to vote the Series D Preferred
Stock, together with the holders of the Common Stock, as one class on all
matters subject to a vote of stockholders of the Company. As a majority holder
of the Series D Preferred Stock and the holder of 7,578,720 shares of Common
Stock, Danskin Investors is entitled to cast 46,107,509 votes or 78.5%, of the
votes entitled to be cast by the holders of all of the Company's voting
securities. As a result of its ownership of a majority of the Series D Preferred
Stock, Danskin Investors is entitled to designate for election a majority of the
directors constituting the Board of Directors of the Company and has sufficient
voting
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power to influence the operations and policies of the Company, including to
prevent or cause a change in control of the Company. See "Management -- Board of
Directors." The Bylaws do not provide for cumulative voting. See "Security
Ownership of Certain Beneficial Owners and Management." This may have the effect
of discouraging offers to acquire the Company or otherwise inhibiting a "change
in control" of the Company.
Fashion and Apparel Industry Risks
The Company believes that its success depends in part on its ability to
originate and define product and fashion trends as well as to anticipate, gauge
and react to changing consumer demands in a timely manner. There can be no
assurance that the Company will be successful in this regard. See "Business." In
addition, weak sales and resulting markdown requests from customers could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The apparel industry and the retail environment in general historically
have been subject to substantial cyclical variation, with purchases of apparel
and related goods tending to decline during recessionary periods when disposable
income is low. Therefore, a recession in the general economy or uncertainties
regarding future economic prospects that affect consumer spending habits could
have an adverse effect on the Company's results of operations. The Company had
no customer which accounted for more than 10% of its wholesale net sales during
any of the last three fiscal years. The Company's 10 largest customers accounted
for 45.4% and 46.9% of the Company's wholesale net sales for the fiscal year
ended 1996 and for the fiscal year ended December 27, 1997, respectively. The
Company generally enters into a number of purchase order commitments with its
customers every season and does not enter into any long-term agreements with any
of its customers. A decision by the controlling owner of a group of stores or
any other significant customer, whether motivated by competitive conditions,
financial difficulties or otherwise, to decrease the amount of merchandise
purchased from the Company or its licensing partners, or to change its manner of
doing business could have a material adverse effect on the Company's financial
condition and results of operations.
The Company sells its merchandise primarily to major department stores and
sport and specialty stores across the United States and extends credit based on
an evaluation of each customer's financial condition, generally without
requiring collateral. While various retailers, including some of the Company's
customers, have experienced financial difficulties in the past few years, which
increased the risk of extending credit to such retailers, the Company's losses
due to bad debts have been limited. However, financial difficulties of a
customer could cause the Company to curtail business with such customer or
require the Company to assume more credit risk relating to such customer's
receivables. The Company's inability to collect on its trade accounts receivable
relating to any one of its major customers could have a material adverse effect
on the Company's business or financial condition.
The Company also sells its merchandise through its three full-priced stores
and, currently, 45 outlet stores and intends to selectively open full-priced
stores during the next two years. The performance of its existing stores and the
success of any new stores will depend on various factors, including the
condition of the retail environment and the availability of desirable locations
for new stores. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General."
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Competition
Competition is strong in the segments of the apparel industry in which the
Company competes. Many of the Company's competitors have substantially greater
financial and other resources than the Company. Accordingly, there can be no
assurance that the Company will be able to compete effectively with its
competitors. See "Business--Competition."
Dependence on Licenses
Pennaco markets certain of its hosiery products under licenses from
Givenchy Corporation and Anne Klein & Company. Sales of these products accounted
for an aggregate of approximately 31% of the Company's legwear revenues and 10%
of the Company's net revenues for the fiscal year ended December 27, 1997. The
Givenchy(R) license covers the United States, Canada and Mexico and expires on
December 31, 1998. The Anne Klein(R) license covers the United States, certain
other countries and duty-free shops throughout most of the world, and expires on
December 31, 1998. Although the Company believes it has good relationships with
each of the licensors, there can be no guarantee that upon expiration of either
of these licenses a renewal agreement can or will be obtained. See
"Business--Products--Legwear."
Trademarks
The Company believes that its trademarks and other proprietary rights are
important to its success and its competitive position. Accordingly, the Company
devotes resources to the establishment and protection of its trademarks on a
worldwide basis. There can be no assurance that the actions taken by the Company
to establish and protect its trademarks and other proprietary rights will be
adequate to prevent imitation of its products by others or to prevent others
from seeking to block sales of the Company's products as violative of trademarks
and proprietary rights of others. Moreover, no assurance can be given that
others will not assert rights in, or ownership of, trademarks and other
proprietary rights of the Company or that the Company will be able to
successfully resolve such conflicts. In addition, the laws of certain foreign
countries may not protect proprietary rights to the same extent as do the laws
of the United States. See "Business -- Trademarks."
Seasonality
Retail sales of apparel, including apparel of the kind produced by the
Company, have traditionally been seasonal in nature. Customarily, over 27% of
the Company's sales is generated in the third quarter of its fiscal year,
principally as a result of "back-to-school" purchases. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
Reliance on Key Personnel
Since March 2, 1998, M. Catherine Volker has been the Chief Executive
Officer of the Company. The success of the Company is dependent to a significant
degree upon the efforts of Ms. Volker and the Company's other executive
officers, and the loss or unavailability of any such individuals could have an
adverse effect on the Company. The Company is currently the beneficiary of a
key-executive life insurance policy for Ms. Beverly Eichel, the Chief Financial
Officer of the Company, in an amount equal
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to $1,000,000. The Company is the in process of obtaining a key executive life
insurance policy for Ms. Volker. The Company has entered into employment
agreements with each of Ms. Volker and Ms. Eichel. See "Management -- Employment
Agreements."
No Public Market for Common Stock; Lack of Liquidity
The Common Stock was delisted from the Nasdaq SmallCap(TM) Market effective
June 27, 1997 due to the Company's non-compliance with Nasdaq's minimum capital
and surplus requirement. There is currently no public trading market for the
Common Stock. The Common Stock is quoted in the "pink sheets" published by the
National Quotation Bureau and is traded in the over-the-counter market. See
"Price Range of Common Stock." 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 SmallCap(TM) Market in
the immediate future. The Rights are transferable, and the Company anticipates
that the Rights will be quoted over-the-counter in the "pink sheets" published
by the National Quotation Bureau. However, neither the Rights nor the underlying
shares of Common Stock will be listed on a national securities exchange. See
"The Rights Offering -- Transferability of Rights."
Dilution
The net tangible book value of the Company at December 27, 1997 was
$748,000, net of the value of the Series D Preferred Stock of $11.14 million, or
$0.07 per share of Common Stock. "Net tangible book value per share" represents
the amount of tangible assets less total liabilities and any preferred stock at
liquidation value, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of the 2,131,889 shares of Common
Stock offered hereby (after deduction of the estimated offering expenses), the
pro forma net tangible book value of the Company at December 27, 1997 would have
been $3.4 million or $0.16 per share of Common Stock. This represents an
immediate increase in net tangible book value of $0.09 per share to current
stockholders and an immediate dilution of $0.14 per share to stockholders
purchasing shares of Common Stock in this offering. Accordingly, purchasers of
Common Stock in this offering will experience immediate dilution. Furthermore,
earnings per share in future periods will be diluted as the result of the
issuance of Common Stock equivalents in connection with the Capital
Contribution. See "The Rights Offering -- Dilutive Effects of Rights Offering."
Lack of Dividends; Priority of Series D Preferred Stock.
The Company has paid no cash dividends on its Common Stock, and there is no
assurance that the Company will achieve sufficient earnings to pay cash
dividends on its Common Stock in the future. The Company intends to retain any
earnings for use in its business, and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. In addition, no
cash dividends may be paid until all accrued and unpaid dividends on the Series
D Preferred Stock are paid. The Series D Preferred Stock has an 8% annual
dividend rate, payment of which accrues but is not required to be paid during
the period ended December 25, 1999, and a seven year maturity. If the Company
achieves certain agreed upon financial targets for any of the fiscal years ended
1999, 2000, 2001 or 2002, then all accrued but unpaid dividends for such fiscal
year (or, in the case of the fiscal year ended 1999, all preceding fiscal years)
together with any interest thereon will be forgiven, and the Series D Preferred
Stock will automatically convert into 40,000,000 shares of Common Stock.
Moreover, in the event of the
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redemption of the Series D Preferred Stock or the liquidation, insolvency or
winding up of the Company, the liquidation preference of $12 million of the
Series D Preferred Stock and all accrued but unpaid dividends must be paid
before any payments or distributions are made to the holders of the Common
Stock. See "Description of Capital Stock -- Series D Preferred Stock." In
addition, except in certain limited circumstances with respect to the Series D
Preferred Stock, the Loan and Security Agreement prohibits the payment of
dividends without CBCC's consent. See "Dividends" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Shares Eligible for Future Sale; Conversion Rights
Following the completion of this offering, the Company will have 20,838,124
shares of Common Stock outstanding (assuming no exercise of options or
warrants). As part of the Capital Contribution, the Company issued Series D
Preferred Stock to Danskin Investors and BFG, having a liquidation preference of
$12 million. The 2,400 shares of Series D Preferred Stock held by Danskin
Investors and BFG are convertible into 40,000,000 shares of Common Stock (an
initial conversion rate of 16,666.66 shares of Common Stock for each share of
Series D Preferred Stock so converted). The Series D Preferred Stock is
convertible at the option of the holders and, in certain circumstances,
mandatorily upon the achievement of certain financial targets for any fiscal
year beginning December 25, 1999, at a per share conversion price of $0.30,
subject to adjustment in certain circumstances. In addition, the Company also
has options and warrants outstanding to acquire 22,687,833 shares of Common
Stock, including options to acquire approximately 759,034 shares of Common Stock
under its Stock Option Plan. See "Shares Eligible for Future Sale."
Certain Anti-takeover Provisions
The Company's Amended and Restated Certificate of Incorporation provides
for a classified Board of Directors and for "blank check" Preferred Stock. No
director may be removed by a vote of a majority of the stockholders except for
cause. The ability of the Company to issue shares of such Preferred Stock
without further stockholder approval may inhibit a "change in control" of the
Company. See "Description of Capital Stock." In addition, the acquisition by a
person other than Danskin Investors or any of its members of more than 25% of
the Common Stock would constitute a default under the Loan and Security
Agreement. Such provisions could impede any merger, consolidation, takeover or
other business combination involving the Company, or discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
the Company. The existence of such provisions could also adversely affect the
market price of the Common Stock.
Computer Systems -- Year 2000
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 of the programming of changes required to
address this issue.
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THE RIGHTS OFFERING
Terms of the Rights Offering
The Company is issuing to the holders of record of its Common Stock on the
Record Date rights to subscribe for shares of Common Stock. Each stockholder is
being issued one transferable Right for each share of Common Stock held. The
Rights entitle each stockholder to acquire at the Subscription Price .1967
shares of Common Stock for each Right held. Rights may be exercised at any time
during the Subscription Period, which commences on _______, 1998 and ends at
5:00 p.m., New York City time, on _______, 1998.
Background of and Purposes for the Rights Offering
The Rights Offering is an integral part of the recapitalization of the
Company and is being conducted in connection with the Capital Contribution and
the Refinancing. See "Use of Proceeds and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The immediate effect of Danskin Investors' investment in the Company
on September 22, 1997 was to reduce the debt on the Company's balance sheet with
a view to enhancing the equity value of the Company. The Company's debt was
further reduced by the consummation of the Stock Sale. The completion of the
Rights Offering will not only further reduce the amount of debt on the Company's
balance sheet (since the entire outstanding amount of Remaining Subordinated
Notes will be repaid with the gross proceeds of the Rights Offering), but will
also enable stockholders of the Company to participate in any potential enhanced
equity value of the Company by permitting them to purchase additional shares of
Common Stock at $0.30 per share.
The Board of Directors determined that the Rights Offering should be
structured in a manner that generally permits each public stockholder to
maintain its percentage ownership interest in the Company, but not to increase
it through an oversubscription procedure pursuant to which such public
stockholder could purchase shares not subscribed for by other stockholders on
Primary Subscription.
The Board of Directors also considered the possibility that not all
stockholders would exercise fully their rights in the Rights Offering. In the
absence of some assurance that the Rights Offering would be fully subscribed,
the Board was concerned that the Company would incur the expense of the Rights
Offering without obtaining the funds necessary to retire in full the Remaining
Subordinated Notes. Accordingly, the Board discussed with Danskin Investors
whether it would be willing to agree to purchase any shares of Common Stock not
subscribed for by other stockholders on Primary Subscription in order to ensure
that the Rights Offering would be fully subscribed. Danskin Investors informed
the Board of Directors that it would be willing to agree to purchase on
oversubscription, at the Subscription Price, such number of unsubscribed shares
sufficient to result in gross proceeds to the Company of $639,566 from the
Rights Offering.
Balancing the interests of all stockholders, the Board of Directors
proposed to Danskin Investors that the Company pursue a Rights Offering of
Common Stock in which public stockholders could maintain their percentage
ownership (but not increase it, except as described above) and in which Danskin
Investors would agree to purchase on oversubscription such number of shares, if
any, not subscribed for by the stockholders on Primary Subscription, sufficient
to result in gross proceeds to the
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<PAGE>
Company of $639,566 from the Rights Offering. The Board of Directors further
proposed that each share purchased by Danksin Investors on oversubscription be
purchased at the Subscription Price. Danskin Investors agreed to this proposal,
provided that the Company grant to Danskin Investors registration rights with
respect to the shares of Common Stock purchased by them. See "Shares Eligible
for Future Sale." The Board of Directors concurred with this request and
unanimously approved that a Rights Offering incorporating such features be
pursued by the Company. See "-- Terms of the Rights Offering."
Method of Conducting the Rights Offering
The Rights Offering is being made directly by the Company. The Company will
pay no underwriting discounts or commissions, finders' fees or similar
remuneration in connection with any distribution of the Rights or sales of the
shares of Common Stock offered hereby.
The Subscription Price
The Subscription Price for a share of Common Stock to be issued pursuant to
the Rights will be $0.30. The Subscription Price was determined by the Board of
Directors based upon negotiations with Danskin Investors in connection with the
Capital Contribution. See "Risk Factors -- History of Losses; Future
Profitability Uncertain" and "-- No Public Market for Common Stock."
Expiration of the Rights Offering
The Rights Offering will expire at 5:00 p.m., New York City time, on
________________, 1998. Rights will expire on the Expiration Date and thereafter
may not be exercised. The Company reserves the right, in its sole discretion, to
extend the Expiration Date in order to deal with any unanticipated contingencies
relating to the conduct of the Rights Offering, but does not otherwise expect to
extend the Expiration Date.
Subscription Agent
The Subscription Agent is First Union National Bank, which will receive a
fee for its administrative processing, invoicing and other services as
Subscription Agent and reimbursement for all out-of-pocket expenses related to
the Rights Offering. Such fees and expenses are estimated to be $5,500 in the
aggregate.
Method of Exercise of Rights
Rights may be exercised by filling in and signing the reverse side of the
subscription certificate and mailing it in the envelope provided, or otherwise
delivering the completed and signed subscription certificate to the Subscription
Agent, together with payment for the shares of Common Stock as described below
under "-- Payment for Shares." Completed subscription certificates must be
received by the Subscription Agent prior to 5:00 p.m., New York City time, on
the Expiration Date (unless payment is effected by means of a notice of
guaranteed delivery as described below under "-- Payment for Shares") at the
offices of the Subscription Agent at one of the addresses set forth below.
Rights may also be exercised through a stockholder's broker, who may charge such
stockholder a servicing fee.
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SIGNED SUBSCRIPTION CERTIFICATES SHOULD BE SENT TO FIRST UNION NATIONAL BANK,
Attention: Michael Klotz, by one of the methods described below:
(1) BY MAIL:
First Union National Bank
Reorganization Department, 3C3
1525 West W.T. Harris Blvd.
Charlotte, NC 28262
(2) BY HAND, EXPRESS MAIL OR OVERNIGHT COURIER:
First Union National Bank
Reorganization Department, 3C3
1525 West W.T. Harris Blvd.
Charlotte, NC 28262
(3) BY FACSIMILE (TELECOPIER)
First Union National Bank
Fax: 704-590-7628
Confirm by Telephone
704-590-7408
Payment for Shares
Stockholders who acquire shares of Common Stock on Primary Subscription may
choose between the following methods of payment:
(1) A stockholder can send the subscription certificate together with
payment for the shares of Common Stock acquired on Primary Subscription to
the Subscription Agent. To be accepted, such payment, together with the
executed subscription certificate, must be received by First Union National
Bank at one of the addresses set forth above prior to 5:00 p.m., New York
City time, on the Expiration Date. The Subscription Agent will deposit all
stock purchase checks received by it prior to the final due date into a
segregated interest bearing account (which interest will accrue to the
benefit of the Company). A PAYMENT BY THIS METHOD MUST BE IN UNITED STATES
DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED
STATES, MUST BE PAYABLE TO DANSKIN INC. OR TO FIRST UNION NATIONAL BANK AND
MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED.
(2) Alternatively, a subscription will be accepted by the Subscription
Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date,
the Subscription Agent has received a notice of guaranteed delivery by
facsimile (telecopy) or otherwise from a bank or a trust company
guaranteeing delivery of (i) payment of the full Subscription Price for the
shares of Common Stock subscribed for on Primary Subscription, and (ii) a
properly completed and executed subscription certificate. The Subscription
Agent will not honor a notice of guaranteed delivery if a properly
18
<PAGE>
completed and executed subscription certificate and full payment for shares
of Common Stock are not received by the Subscription Agent by the close of
business on the fifth business day after the Expiration Date (the
"Confirmation Date") (_______________, 1998).
Within five business days following the Expiration Date, a confirmation
will be sent by the Subscription Agent to each stockholder (or, if the
stockholder's shares of Common Stock are held by Cede & Co. ("Cede") or any
other depository or nominee, to Cede or such other depository or nominee),
showing (i) the number of shares of Common Stock acquired on Primary
Subscription; and (ii) the Subscription Price and total price for the shares of
Common Stock acquired. All payments by a stockholder must be in United States
dollars by money order or check drawn on a bank located in the United States of
America and payable to Danskin, Inc. or to First Union National Bank.
Whichever of the two methods described above is used, issuance and delivery
of certificates for the shares of Common Stock purchased are subject to
collection of checks and actual payment pursuant to any notice of guaranteed
delivery.
If a stockholder who subscribes for shares of Common Stock on Primary
Subscription does not make payment of any amounts due, the Company reserves the
right to take any or all of the following actions: (i) allow Danskin Investors
to subscribe for such subscribed and unpaid shares of Common Stock; (ii) apply
any payment actually received by it toward the purchase of the greatest number
of shares of Common Stock which could be acquired by such holder upon exercise
of the Rights; and/or (iii) exercise any and all other rights or remedies to
which it may be entitled.
Transferability of Rights
The Rights are transferable, and the Company anticipates that the Rights
will be quoted over-the-counter in the "pink sheets" published by the National
Quotation Bureau. Neither the Rights nor the underlying shares of Common Stock
will be listed on a national securities exchange.
Delivery of Stock Certificates
Stockholders whose shares of Common Stock are held of record by Cede or by
any other depository or nominee on their behalf or on behalf of their
broker-dealers will have their shares of Common Stock acquired on Primary
Subscription credited to the account of Cede or such other depository or
nominee. With respect to all other stockholders, stock certificates for all
shares of Common Stock acquired on Primary Subscription will be mailed as soon
as practicable after the Confirmation Date and after payment for the shares of
Common Stock subscribed for has cleared, which clearance may take up to 15 days
from the date of receipt of the payment.
Federal Income Tax Consequences
The receipt of the Rights by a holder of Common Stock pursuant to the
Rights Offering should be treated as a nontaxable distribution with respect to
the Common Stock, with the consequences described below. If the fair market
value of a Right on the date of distribution is less than 15% of the value of
the Common Stock with respect to which the Right is issued, then the tax basis
of the Right will be zero and the basis of the Common Stock with respect to
which the Right was issued will remain unchanged, unless the stockholder
affirmatively elects (in a manner set out in applicable United States Treasury
19
<PAGE>
regulations) to allocate to the Right a portion of the basis of the Common
Stock. If such an election is made, then the allocation of basis between the
Right and the Common Stock will be in proportion to the respective fair market
values of the Right and the Common Stock on the date that the Rights are
distributed. If the value of the Right is 15% or more of the value of the Common
Stock, then a portion of the basis of the Common Stock must be allocated to the
Right in the manner described above.
No loss will be recognized by a stockholder if a Right expires unexercised,
because basis may be allocated from Common Stock to a Right only if the Right is
exercised or sold. No gain or loss will be recognized by a stockholder upon the
exercise of a Right; the tax basis of any Common Stock acquired upon exercise
will equal the subscription price paid therefor plus the tax basis, if any, of
the Right. The holding period for the Common Stock will begin with the date on
which the Right is exercised.
Upon the sale of a Right, a stockholder will recognize gain or loss in an
amount equal to the difference between the amount realized on the sale and the
tax basis, if any, of the Right.
The foregoing is a general summary of the applicable provisions of the
Internal Revenue Code and Treasury regulations presently in effect and does not
cover state or local taxes. The Internal Revenue Code and such regulations are
subject to change by legislative or administrative action. The Company has not
sought or received any opinion of counsel or ruling from the Internal Revenue
Service with respect to the income tax consequences of the Rights Offering.
Stockholders should consult their tax advisors regarding specific questions as
to federal, state or local taxes.
Purchase of Shares by Danskin Investors
Danskin Investors and BFG will not receive Rights; however, pursuant to the
Securities Purchase Agreement, Danskin Investors will purchase any shares of
Common Stock not purchased by the stockholders on Primary Subscription at the
Subscription Price. Danskin Investors, the holder of a majority of the Series D
Preferred Stock, Common Stock and the Warrant, beneficially owns 55,739,708
million shares of Common Stock, which represents approximately 81.56% of the
Common Stock. If all other stockholders exercise in full their Rights on Primary
Subscription, Danskin Investors will beneficially own approximately 79.10% of
the Common Stock immediately following consummation of the Rights Offering. In
the event that none of the stockholders exercise their Rights, Danskin Investors
will beneficially own 57,871,597 shares of Common Stock (representing the
beneficial ownership of approximately 82.1% of the Common Stock immediately
following consummation of the Rights Offering) after giving effect to the
purchase by it of the shares not subscribed for by the stockholders on Primary
Subscription. See "Risk Factors -- Control by Danskin Investors."
Purposes of the Company's Agreement with Danskin Investors
Danskin Investors has agreed to purchase, at the Subscription Price, any
shares of Common Stock not purchased by the stockholders on Primary
Subscription. The Company has entered into such agreement in order to ensure
that the Rights Offering will be fully subscribed and result in gross proceeds
of $639,566 to the Company, which is the amount necessary to retire in full the
Remaining Subordinated Notes.
20
<PAGE>
Interpretation; Termination of Rights Offering
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of any subscription or request for division will be
determined by the Company, in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any
subscription if it is not in proper form or if the acceptance thereof or the
issuance of Common Stock or Rights pursuant thereto could be deemed unlawful.
The Company also reserves the right to waive any defect with regard to any
particular subscription. The Company shall not be under any duty to give
notification of any defect or irregularity in subscription, nor shall it incur
any liability for failure to give such notification. Subscriptions will not be
deemed to have been made until any such defect or irregularity has been cured or
waived within such time as the Company shall determine. Subscriptions with
defects or irregularities which have not been cured or waived will be returned
by the Company to the appropriate holder of the Rights as soon as possible. See
also "-- State and Foreign Securities Laws."
The Company further reserves the right to terminate the Rights Offering
prior to acceptance of subscriptions by the Company; however, in the absence of
a material adverse change in its business, financial condition or results of
operations, the Company expects to consummate the Rights Offering. Danskin
Investors will not be obligated, however, to purchase any shares of Common Stock
not purchased by the Stockholders on Primary Subscription under certain
circumstances, including in the event of any material adverse change in the
results of operations, financial condition or prospects of the Company. See "The
Rights Offering -- Purchase of Shares by Danskin Investors."
Risk of Delivery; Delivery by Mail
The risk of delivery of all documents and payments is on subscribers, not
the Company. If the mail is used, it is recommended that insured, registered
mail be used and that a sufficient number of days be allowed to ensure delivery
to the Subscription Agent before the Expiration Date. The Company will accept
subscriptions delivered via U.S. Mail before 5:00 p.m., New York City time, on
_______________, 1998 (one week after the Expiration Date), provided such
subscriptions are postmarked on or before the Expiration Date. Thereafter,
unexercised Rights will be void.
Dilutive Effects of Rights Offering
To the extent a stockholder does not exercise its Rights, such
stockholder's percentage equity interest in the Company and voting power
immediately upon completion of the Rights Offering will be diluted as a result
of the 2,131,889 shares of Common Stock issuable in connection with the Rights
Offering. Consequently, such stockholder's participation in any potential future
increase in the value of the Company would be reduced. See "-- Purchase of
Shares by Danskin Investors" and "Risk Factors -- Control by Danskin Investors;
- -- Elimination of Protective Charter Provisions."
The pro forma net tangible book value of the Company at December 27, 1997
was $748,000, net of the liquidation value of the Series D Preferred Stock of
$12 million, or $0.07 per share of Common Stock. "Net tangible book value per
share" represents the amount of tangible assets less total liabilities and any
preferred stock at liquidation value, divided by the number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of the
2,131,889 shares of Common Stock offered hereby (after deduction of the
estimated offering expenses), the pro forma net tangible book value of the
Company at December 27, 1997 would have been $3.4 million or $0.16 per share of
Common Stock. This represents an immediate decrease in net tangible book value
of $0.09 per share to current stockholders and an immediate dilution of $0.14
per share to stockholders purchasing shares
21
<PAGE>
of Common Stock in this offering. Accordingly, purchasers of Common Stock in
this offering will experience immediate dilution. Furthermore, earnings per
share for future periods will be diluted as the result of the issuance of Common
Stock equivalents in connection with the Capital Contribution. See "Risk Factors
- -- Dilution."
State and Foreign Securities Laws
The Company will not offer, sell or issue any of the Rights or the Common
Stock in any jurisdiction where it is unlawful to do so or whose laws, rules,
regulations or orders would require the Company, in its sole discretion, to
incur costs, obligations or time delays disproportionate to the net proceeds to
be realized by the Company from such offers, sales or issuances. The Rights may
not be exercised by any person, and neither this Prospectus nor any subscription
certificate shall constitute an offer to sell or a solicitation of an offer to
purchase any shares of Common Stock, in any jurisdiction in which such
transactions would be unlawful. No action has been taken in any jurisdiction
outside the United States to permit offers and sales of the Rights or the Common
Stock. Consequently, the Company may reject subscriptions pursuant to the
exercise of Rights by any holder of Rights outside the United States, and the
Company may also reject subscriptions from holders in jurisdictions within the
United States if it should later determine that it may not lawfully issue shares
to such holders, even if it could by qualifying the shares for sale or by taking
other actions in such jurisdictions, or that the costs, obligations or time
delays related thereto are disproportionate to the net proceeds to be realized
therefrom.
No Revocation
Once a holder of Rights has exercised the subscription privilege, such
exercise may not be revoked.
22
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the sale of the 2,131,889 shares of
Common Stock offered hereby are expected to be $639,566 and estimated offering
expenses are expected to be $280,000. The Company intends to use the gross
proceeds to retire in full the Remaining Subordinated Notes. The Remaining
Subordinated Notes bear interest at a rate of 8% per annum and were scheduled to
mature on March 31, 1998. The proceeds of the Remaining Subordinated Notes were
used for the Company's working capital. See "The Rights Offering -- Background
of and Purposes for the Rights Offering" and "The Capital Contribution and the
Refinancing."
DIVIDEND POLICY
The Company has paid no cash dividends on its Common Stock, and there is no
assurance that the Company will achieve sufficient earnings to pay cash
dividends on its Common Stock in the future. The Company intends to retain any
earnings for use in its business, and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. No cash dividends
may be paid until all accrued and unpaid dividends on the Series D Preferred
Stock are paid. The Series D Preferred Stock has an 8% annual dividend rate,
payment of which accrues but is not required to be paid during the period ended
December 31, 1999, and a seven year maturity. If the Company achieves certain
agreed upon financial targets for any of the fiscal years ended 1999, 2000, 2001
or 2002, then all accrued dividends for such fiscal year (or, in the case of the
fiscal year ending 1999, all preceding fiscal years) together with any interest
thereon will be forgiven and the Series D Preferred Stock will automatically
convert into 40,000,000 shares of Common Stock. Moreover, in the event of the
redemption of the Series D Preferred Stock or the liquidation, insolvency or
winding up of the Company, the liquidation preference of the Series D Preferred
Stock and all accrued but unpaid dividends must be paid before any payments or
distributions are made to the holders of the Common Stock. See "Description of
Capital Stock -- Series D Preferred Stock." In addition, except in certain
limited circumstances with respect to the Series D Preferred Stock, the Loan and
Security Agreement prohibits the payment of dividends without CBCC's consent.
See "Dividends" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
23
<PAGE>
PRICE RANGE OF COMMON STOCK
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 and for 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 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.
<TABLE>
<CAPTION>
High Low
-----------------------------------
Fiscal Year ended December 28, 1996
<S> <C> <C>
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
</TABLE>
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.
24
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 27, 1997, and as adjusted to reflect: (i) the Stock Sale and
the repayment of approximately $2,360,000 of Remaining Subordinated Notes; and
(ii) the sale of the Common Stock offered by the Company in the Rights Offering
and the application of the gross proceeds therefrom and estimated expenses as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
December 27, 1997
------------------------------------------
Pro Forma Pro Forma As
Actual As Adjusted(2) Adjusted(3)
----------- --------------- --------------
(in thousands, except share amounts)
<S> <C> <C> <C>
Current portion of long-term debt................ 333 333 333
Long-term debt less current portion:
Subordinated Debt.............................. 3,000 640 ---
Total long-term debt........................... 9,667 9,667 9,667
Series C Convertible 8% Preferred Stock,
Liquidation Value $500,000..................... --- --- ---
Series D Redeemable Convertible 8% Preferred Stock,
Liquidation Value $12 million................. 11,140 11,140 11,140
Stockholder's equity:
Preferred Stock, $.01 par value; 10,000 shares
authorized; 1,000 shares issued
at December 28, 1996 .....
Common Stock, 100,000,000 shares authorized;
10,088,123 shares issued at December 27, 1997
(actual), 17,956,234 shares outstanding
(as adjusted(2)) and 20,088,123 shares
outstanding (as adjusted(3)) (excluding 1,083
shares held by a subsidiary).................. 101 180 201
Additional paid-in capital..................... 20,366 22,597 22,936
Accumulated deficit............................ (16,511) (16,511) (16,511)
Minimum pension liability adjustment(1)........ (2,275) (2,275) (2,275)
----- ----- ------
Total stockholders' equity.................... 1,681 3,991 4,351
----- ----- ------
Total capitalization........................ 25,821 25,771 25,491
</TABLE>
(1) Represents the amount by which the minimum pension liability required by
Statement of Financial Accounting Standards No. 87 exceeds the unrecognized
prior service cost. See Note 14 of Notes to Consolidated Financial
Statements.
(2) As adjusted to reflect the Stock Sale and the repayment of approximately
$2.4 million of Remaining Subordinated Notes.
(3) As adjusted to reflect the sale of the Common Stock offered hereby and the
application of the gross proceeds therefrom to reduce in full the Remaining
Subordinated Notes. The Company intends to pay estimated expenses of
$280,000 of the Rights Offering out of working capital.
25
<PAGE>
THE CAPITAL CONTRIBUTION AND THE REFINANCING
Background
First Union Credit Facility
On August 28, 1997, First Union, the Company and Danskin Investors entered
into a letter agreement (the "Letter Agreement") which, among other things,
provided for (i) the purchase by Danskin Investors of the Term Loan of $21.3
million, (ii) the restructuring of the Revolving Credit Facility pending a
contemplated refinancing thereof, and (iii) the disposition of the warrants
issued to First Union in June 1995 (the "First Union Warrant").
The conditions to the closing of the purchase of the Term Loan included,
among others, requirements that (i) Danskin Investors (x) enter into an
intercreditor agreement with First Union providing for the subordination of the
Company's obligations to Danskin Investors under the Term Loan, the collateral
securing such obligations, and any new debt securities issued by the Company to
Danskin Investors, 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 (a) provide a release to First Union, and (b)
enter into an amendment to the First Union Loan Agreement as described below.
All deferred or accrued and unpaid interest, fees and expenses owed by the
Company to First Union in connection with the Term Loan were to be paid at the
closing of Danskin Investors'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 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 any 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 Danskin
Investors of 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.
The Capital Contribution
On August 28, 1997, the Company also agreed to the terms of a memorandum of
understanding (the "Memorandum of Understanding") with Danskin Investors
pursuant to which Danskin Investors would make the Capital Contribution. In
accordance with the terms and conditions of the Memorandum of Understanding,
Danskin Investors would (i) contribute in part to the capital of the Company and
cancel in part the Loan Amount and (ii) contribute an additional $4 million of
cash to the capital of the Company. In exchange for the Capital Contribution, it
was agreed that Danskin Investors would receive (a) $15 million face amount of
the Subordinated Debt, subordinated only to the Company's obligations to First
Union under the Revolving Credit Facility, and (b) Series C Preferred Stock of
the Company, having a liquidation preference of $500,000. The Memorandum of
Understanding further provided that
26
<PAGE>
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
and term loan to be provided by a new lender.
On September 22, 1997 (the "Contribution Closing Date"), the Company and
Danskin Investors entered into the Securities Purchase Agreement pursuant to
which the above investments by Danskin Investors were made. The Capital
Contribution was funded (i) through capital contributions made to Danskin
Investors by its members and (ii) $544,129 paid to the Company by BFG, a
stockholder of the Company, in exchange for a portion of the Securities.
In connection with the closing of the Capital Contribution, the Company
announced that (a) its Board of Directors had 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 (such
shares were retroactively applied in the accompanying financial statements for
the earnings per share calculation, however, the stock dividend was not effected
until the early part of the fourth quarter), (b) its Board of Directors had
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 stockholders the right to
purchase, pro rata, 10,000,000 shares of Common Stock, at a per share price of
$0.30.
In addition, in connection with the closing of the Capital Contribution,
the Board of Directors of the Company accepted the resignations of Ms. Patricia
Patterson, Mr. John Burden and Mr. Edwin Dean as directors of the Company and
elected Mr. Andrew Astrachan, Ms. Nina McLemore, Mr. Gabriel Brener and Mr.
James P. Jalil as directors. In connection with the closing of the Capital
Contribution, the Board of Directors approved amendments to both the Certificate
of Incorporation and the By-laws of the Company to effectuate agreements reached
between the Company and Danskin Investors, including, among other things,
increasing the number of authorized shares of Common Stock to 100,000,000 (the
"Certificate Amendments") and increasing the number of seats of the Board of
Directors from nine to ten. See "Management."
The Company recognized a gain on the transactions described above of $5.2
million, representing the difference between (a) the recorded value of the Term
Loan and (b) the fair value of the Subordinated Debt 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.
The Refinancing
CBCC Credit Facility
Effective October 8, 1997 (the "Refinancing Closing Date"), the Company
refinanced its obligations with First Union with a credit facility with CBCC
(the "CBCC Credit Facility"), which matures on October 8, 2002. Proceeds of the
CBCC Credit Facility were used to repay all of the Company's indebtedness to
First Union, the Company's former principal lender, and to establish working
capital lines of credit. In addition, the First Union Warrant was surrendered to
the Company without the payment of any additional consideration.
27
<PAGE>
Pursuant to and in accordance with its terms, the CBCC Credit Facility
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 "CBCC 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
customary affirmative and negative covenants, 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 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 CBCC Revolving Credit Facility was approximately $15 million.
Interest on the Company's obligations under the CBCC Credit Facility
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 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%). See "Management Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Exchange of Securities
In accordance with the terms of the Securities Purchase Agreement, upon the
Refinancing Closing Date, Series C 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) Series D
Preferred Stock, having a liquidation preference of $12 million, (b) the Warrant
to purchase 10 million shares of Common Stock at a per share price of $0.30, and
(c) $3 million aggregate principal amount of Remaining Subordinated Notes.
The 2,400 shares of Series D Preferred Stock held by Danskin Investors and
BFG are convertible into 40,000,000 shares of Common Stock (at an initial
conversion rate of 16,666.66 shares of Common Stock for each share of the Series
D Preferred Stock so converted). The Series D Preferred Stock is convertible at
the option of the holders and, in certain circumstances, mandatorily upon the
achievement of certain financial targets for any fiscal year beginning with the
fiscal year ended December 25, 1999, at a per share conversion price of $0.30,
which is subject to adjustment in certain circumstances. The terms of the Series
D Preferred Stock also provide that upon the seventh anniversary of the date of
its
28
<PAGE>
issuance, the Series D Preferred 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 Preferred Stock), plus (y) all accrued and unpaid dividends on such
shares of Series D Preferred Stock to the date of such redemption. Holders of
the Series D Preferred Stock are entitled to vote, together with the holders of
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 effect as the holders of the Common Stock. In
any such vote, the outstanding Series D Preferred Stock entitles the holders
thereof to cast 40,000,000 votes. Therefore, the exchange of the Series D
Preferred Stock for the Subordinated Notes was highly dilutive to existing
holders of Common Stock. Holders of the Series D Preferred Stock are also
entitled to designate a majority of the directors constituting the Board of
Directors of the Company. The Series D Preferred Stock has an 8% annual dividend
rate, which accrues but is not required to be paid during the period ended
December 31, 1999, and a seven year maturity. If the Company achieves certain
agreed upon financial targets for any of the fiscal years ended 1999, 2000, 2001
or 2002, then accrued but unpaid dividends for such fiscal year (or, in the case
of the fiscal year ended 1999, all preceding fiscal years) together with any
interest thereon will be forgiven, and the Series D Preferred Stock will
automatically convert into 40,000,000 shares of Common Stock at a conversion
price of $0.30 per share. The Remaining Subordinated Notes bear interest,
commencing on December 22, 1997, at the rate of 8% per annum.
Warrants and Stock Options
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 $0.30 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, 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 the Chu Warrant for the purchase of 795,900 shares of
Common Stock, subject to adjustment at an exercise price of $0.30 per share,
subject to adjustment. In consideration of the sale of the Chu Warrant, Mr. Chu
issued a promissory note to the Company for the purchase price of $14,815 which
has been paid in full. The Chu Warrant may be exercised, in whole at any time
and in part from time to time, prior to 5:00 p.m., Eastern Standard Time, on
September 22, 2004.
In connection with the Capital Contribution and with the amendment of their
respective employment agreements, options to purchase 1,020,000 shares of Common
Stock were granted to Ms. Domuracki, the former Chief Executive Officer who was
replaced on March 2, 1998, and options to purchase 680,000 shares of Common
Stock were granted to Ms. Eichel, all at an exercise price of $.30 per share. In
connection with the Capital Contribution, the Company granted options to
purchase 1,591,749 shares of Common Stock to Ms. McLemore, as a director of the
Company, at an exercise price of $0.30 per share. None of such options were
issued under the Stock Option Plan. The Company intends to file a Registration
Statement on Form S-8 to register the Common Stock underlying all such options.
See "Management--Stock Option Plan." In addition, effective October 1, 1997, a
total of
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<PAGE>
239,943 options were repriced with an exercise price of $0.625. All options
granted prior to that date that were originally granted at higher exercise
prices (ranging from $1.875 to $4) were repriced, with the exception of options
granted to certain executives and outside directors. Under the 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, became
fully vested.
On March 2, 1998, in connection with her employment as Chief Executive
Officer of the Company, Ms. Volker and the Company entered into a Stock Option
Agreement pursuant to which 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 $0.65 per
share. Each option is generally exercisable until January 31, 2008, unless
earlier terminated in accordance with the Stock Option Agreement.
Recent Stock Sale
In April 1998, the Company, Danskin Investors and BFG entered into the
Stock Sale Agreements pursuant to which Danskin Investors and BFG agreed to
purchase on the date one day after the Record Date, pro rata in proportion to
their respective holdings of Remaining Subordinated Notes, 7,868,111 shares of
Common Stock, in exchange for approximately $2.4 million aggregate principal
amount of Remaining Subordinated Notes.
30
<PAGE>
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 Registration Statement.
SUMMARY CONSLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Nine
Months Ended Twelve Fiscal Years Ended
Fiscal Years Ended March December Months Ended December
------------------------------ ----------------- ------------------------------
1993 1994 1995 1994 1995 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Revenues (1) $134,490 $131,497 $128,118 $95,967 $93,787 $125,938 $128,145 $121,986
-------- -------- -------- ------- ------- -------- -------- --------
Cost of goods sold (1) 87,500 86,004 87,346 65,409 62,181 84,118 83,610 81,822
Gross profit(1) 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
-------- -------- -------- ------- ------- -------- -------- --------
Total expenses (Loss) income before
extraordinary item 1,703 (6,941) (11,376) (5,809) (3,044) (86,616) (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 (5) $ 15,000 -- -- -- -- -- -- --
======== ======== ======== ======= ======= ======== ======== ========
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
Cummulative 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 oustanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942
======== ======== ======== ======= ======= ======== ======== ========
Net income (loss) per share
on a fully diluted basis:
Net income (loss) per share before $0.24 ($1.14) ($1.51) ($0.67) ($0.50) ($1.34) ($0.80) ($0.66)
extraordinary items (5,6)
Net income per share for extraordinary
items (4) -- -- -- -- -- -- -- 0.66
Cummulative 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
oustanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942
Balance Sheet Data:
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>
31
<PAGE>
(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, 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 to 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 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 $0.30 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.
32
<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 retroactively 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 Key Personnel 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 October 8, 1997, 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 to 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 in 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 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.
33
<PAGE>
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 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 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 pursuit of 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
34
<PAGE>
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.
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 34.8% 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
35
<PAGE>
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.
Extraordinary Gain From Early Retirement of Debt
The Company recognized a gain of $10.2 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 in the Notes
to Consolidated Financial Statements.
At March 29, 1997 (the end of the Company's last full taxable year for
which a return has been filed), 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 in the Notes to Consolidated
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.
36
<PAGE>
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, 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.
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
37
<PAGE>
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,
prespectively.
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.
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<PAGE>
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.
39
<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
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<PAGE>
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:
<TABLE>
<CAPTION>
For the fiscal quarters ended
March June September December
----- ---- --------- --------
(millions)
1997
<S> <C> <C> <C> <C>
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)
</TABLE>
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 disruptions 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.
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<PAGE>
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 October 8, 1997, the Company entered into the CBCC Credit Facility,
which provides loans to the Company maturing 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 the Term Loan Facility in the aggregate
principal amount of $10 million and 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 CBCC 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 Series C Preferred Stock, having a liquidation
preference of $500,000, and $15 million aggregate
42
<PAGE>
principal amount of the Subordinated Debt were, by their terms, automatically
exchanged Series D Preferred Stock of the Company, having liquidation preference
of $12 million (b) $3 million aggregate principal amount of the "Remaining
Subordinated Notes" and (c) the warrant to purchase 10 million shares of Common
Stock at a per share price of $0.30.
The 2,400 shares of Series D Preferred Stock held by Danskin Investors
and BFG, are convertible into Common Stock, 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 Series D
Preferred Stock is convertible at the option of the holder and, in certain
circumstances mandatorily, upon the achievement of certain financial targets for
any fiscal year beginning with the fiscal year ended December 25, 1999, at a per
share conversion price of $0.30, which is subject to adjustment in certain
circumstances. The terms of the Series D Stock also provide that, upon the
seventh anniversary of the date of its issuance, the Series D Preferred 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 Preferred Stock), plus (y)
all accrued and unpaid dividends on such shares of Series D Preferred Stock to
the date of such redemption. Holders of the Series D Preferred 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
cast 40,000,000 votes. Therefore, the exchange of the Series D Stock for the
Subordinated Notes were highly dilutive of existing holders of Common Stock.
Holders of the Series D Preferred Stock are also entitled to designate a
majority of the directors constituency to the Board of Directors of the Company.
The Series D Preferred Stock has an 8% annual dividend rate, which accrues but
is not required to be paid during the period ended 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 but unpaid dividends for such fiscal year (or in the case
of the fiscal year ended 1999, all preceding fiscal years) together with
interest thereon will be forgiven and the Series D Preferred Stock will
automatically convert into 40 million shares of Common Stock. The Remaining
Subordinated Notes bear interest, commencing on December 22, 1997, at the rate
of 8% per annum.
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 enhanced
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
43
<PAGE>
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 immediately above.
44
<PAGE>
BUSINESS
General
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 legwear, dancewear and activewear
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.
- --------
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.
45
<PAGE>
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:
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 (Danskin(R) Walking Gear). 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 the fiscal year ended December 28, 1996, and $6.3 million for the 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.
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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 also 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
select national expansion of its full price retail strategy. The Company
presently intends to selectively open full price retail stores over the next two
years.
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) socks 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, Burdine's, Nordstrom, Lord &
Taylor, 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 Kauffmans, Filenes, Hecht, Famous Barr, Robinson May, Foleys,
Meier and Frank and Lord & Taylor), Mercantile Stores, Dillards, Dayton Hudson -
Marshall Field's, Neiman Marcus, Nordstrom,
47
<PAGE>
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
womens and girls 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.
Legwear
Pennaco is one of the oldest manufacturers of hosiery in the United States
and is the second largest supplier of womens 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 Anne Klein(R) socks and tights, 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 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."
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<PAGE>
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,
sunglasses and jackets, 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 in new full price retail locations.
The Company's New York City and South Beach stores cover approximately
2,500 square feet each and the Santa Monica store covers approximately 1,100.
The Company presently anticipates that any full price stores to be opened in the
future will 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 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."
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
49
<PAGE>
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
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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.
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.
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<PAGE>
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.
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, 1998, 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,
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<PAGE>
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.
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.
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 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.
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Litigation
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, 97 Civ. 1709 (sas), an action brought by
the Company's former licensor of the Christian Dior(R) trademark for womens
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"). Management does not believe the
liability of the Company under the Settlement/Release Agreement is material to
its consolidated financial position, results of operations, liquidity or
business of the Company.
The Company is a party to a number of other legal proceedings in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have material adverse impact on
the financial condition, results of operations, liquidity or business of the
Company.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the
Company's directors and executive officers:
<TABLE>
<CAPTION>
Year Term as Director
Name Age Position Expires
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 Officer 1999
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
</TABLE>
- ------------------------------
(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.
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<PAGE>
Directors
Class II (Terms to Expire in 1997)
Directors continue to serve as directors until they are proposed for
reelection at the next annual meeting of stockholders or until their successors
are duly elected.
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.
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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 a Vice President of Hanes'
parent, the Sara Lee Corporation since 1996. Ms. Volker joined Hanes Hosiery as
the 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 Stock Option Plan.
57
<PAGE>
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, M. Catherine Volker, Nina
McLemore and Andrew J. Astrachan. The Executive Committee held one meeting
during 1997.
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.
58
<PAGE>
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 Agreements -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.
<TABLE>
<CAPTION>
Other All Other
Name and Principal Fiscal Salary Bonus Annual Stock Compensation
Position Year ($) ($) Compensation $ Options(#) ($)(7)
- ------------------ ------ ------ ----- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mary Ann Domuracki(1) 1997 350,000 37,500 0 1,020,000 4,436
Chief Executive 1996 353,865 60,000 0 0 5,072
Officer and NM 1995 202,500 0 0 15,000 1,298
President 1995 292,500 0 0 79,384(2) 5,075
Edwin W. Dean (3) 1997 150,000 0 0 0 591
Vice Chairman, General 1996 205,000 25,000 0 0 1,407
Counsel NM 1995 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 NM 1995 168,750 0 0 10,000 2,381
Chief Financial Officer 1995 243,750 0 0 71,359(6) 4,444
Margaret B. Pritchard (8) 1997 127,692 0 0 100,000 0
Vice President,
Secretary and
General Counsel
</TABLE>
- -----------------------
(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.
59
<PAGE>
(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.
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<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.
<TABLE>
<CAPTION>
Individual Grants Grant Date Value
-------------------------------------------- ----------------
Percent of Total Present
Number of Options Granted Value
Securities to Employees in Exercise Expiration at Grant
Name Underlying Fiscal Year Price Date Date
- ---- ---------- --------------- -------- ---------- --------
Options
Granted
<S> <C> <C> <C> <C> <C>
Mary Ann Domuracki 1,020,000(1) 24% $0.30 2004 $122,400
Edwin W. Dean -- -- -- -- --
Beverly Eichel 680,000(2) 16% $0.30 2004 $81,600
Margaret B. 100,000(3) 2% $0.625 2004 $4,000
Pritchard
</TABLE>
- ------------------------------
(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
$0.30, 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 $0.30, 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 $0.625. The
options vest over a three year period and are, under certain circumstances,
exercisable through October 1, 2004.
(4) The present values on the grant date are calculated under the Black-Scholes
valuation model. The Black- Scholes valuation model is a mathematical
formula used to value options, and considers historical stock price
volatility, the exercise period of the option and interest rates.
Historical stock price volatility has been measured from January 1, 1995 to
March 3, 1997. The Black-Scholes valuation model was chosen in accordance
with Securities and Exchange Commission rules; however, this model should
not be construed as an endorsement of its accuracy at valuing options. The
real value of the options in this table depends upon the actual performance
of the Common Stock during the applicable period.
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<PAGE>
Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table shows information for fiscal 1997 respecting stock
options for each named executive officer.
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options at In-The-Money
Shares Acquired Fiscal Year Options at Fiscal
Name on Exercise Value Realized End (1) Year End (2) ($)
- ----------------- --------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
- --------------------------
(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.
Employment Agreements
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.
On February 2, 1998, the Company entered into an employment agreement with
M. 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 therein), if the Company terminates her
employment without "cause" (as defined therein), or she resigns by reason of a
"change of control" (as defined therein), 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
62
<PAGE>
bonus.
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).
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).
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
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<PAGE>
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 the 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.
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.
64
<PAGE>
CERTAIN TRANSACTIONS
On September 22, 1997, in connection with the Capital Contribution, Donald
Schupak 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,
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.
65
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock (assuming completion of the Stock Sales) 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. At
the time of the Rights Offering, there will be outstanding 18,706,235 shares of
Common Stock (including 1,083 shares held by a subsidiary of the Company) and
2,400 shares of Series D Preferred Stock.
<TABLE>
<CAPTION>
Beneficial Ownership
----------------------------------------------------------
Percent of
Outstanding
Voting
Name and Address of Beneficial Owner Amount and Nature of Beneficial Owner Securities
- ------------------------------------ ------------------------------------- -----------
<S> <C> <C> <C>
Danskin Investors, L.L.C.(1) 55,739,708 Common Stock 81.56%
9595 Wilshire Boulevard 2,311.7 Series D Preferred Stock 96.3%
Beverly Hills, CA 90212
The Oppenheimer Bond Fund For Growth(1) 5,608,035 Common Stock 9.49%
350 Linden Oaks 88.3 Series D Preferred Stock 3.7%
Rochester, NY
14625
Donald Schupak(2) 5,392,315 Common Stock 8.42%
0 Series D Preferred Stock 0%
Nina McLemore(3) 795,899 Common Stock 1.3%
0 Series D Preferred Stock 0%
David Chu(4) 795,900 Common Stock 1.3%
0 Series D Preferred Stock 0%
M. Catherine Volker Common Stock 1.3%
750,000 Series D Preferred Stock 0%
Mary Ann Domuracki(5) 1.0%
736,803 Common Stock 0%
0 Series D Preferred Stock
Beverly Eichel(6) 501,576 Common Stock .8%
0 Series D Preferred Stock 0%
Margaret B. Pritchard 0 Common Stock 0%
0 Series D Preferred Stock 0%
Henry T. Mortimer, Jr.(7) 20,000 Common Stock .03%
0 Series D Preferred Stock 0%
Larry B. Shelton(7) 20,000 Common Stock .03%
0 Series D Preferred Stock 0%
Andrew J. Astrachan 0 Common Stock 0%
0 Series D Preferred Stock 0%
Gabriel Brener 0 Common Stock 0%
0 Series D Preferred Stock 0%
Michael Hsieh 0 Common Stock 0%
0 Series D Preferred Stock 0%
James P. Jalil 0 Common Stock 0%
0 Series D Preferred Stock 0%
All directors and executive officers 8,280,685 Common Stock 12%
as a group (12 persons)(8) 0 Series D Preferred Stock 0%
</TABLE>
66
<PAGE>
- ----------
* 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) 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.
(3) Includes 795,899 shares of Common Stock underlying presently exercisable
options.
(4) Includes 795,900 shares of Common Stock underlying a presently exercisable
warrant.
(5) 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.
(6) 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.
(7) Includes, 20,000 shares of Common Stock underlying presently exercisable
options.
(8) Includes 1,362,259 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 750,211 shares of Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Amended and Restated Certificate of Incorporation authorizes
the Company to issue up to 10,000 shares of Preferred Stock, $.01 par value per
share (the "Preferred Stock") and up to 100,000,000 shares of Common Stock, $.01
par value per share. On the Record Date, there were outstanding [ ]
shares of Common Stock and 2,400 shares of Series D Preferred Stock.
Common Stock
The holders of Common Stock will be entitled to one vote for each share on
all matters voted upon by stockholders, including the election of directors.
Cumulative voting for the election of directors is not permitted, enabling
holders of a majority of the outstanding Common Stock to elect all members of
the class of directors whose terms are then expiring. The Board of Directors is
classified into three classes as nearly equal in number as possible. No director
or class of directors may be removed from office by a vote of the stockholders
at any time except for cause.
The holders of Common Stock will have no preemptive rights to purchase
shares of stock of the Company. Shares of Common Stock will not be subject to
any redemption provisions and will not be convertible into any other securities
of the Company.
Subject to the rights of the Series D Preferred Stock and any then
outstanding shares of Serial Preferred Stock and any limitations imposed by the
Company's lending arrangements, the holders of the Common Stock will be entitled
to such dividends as may be declared in the discretion of the Board of Directors
out of funds legally available therefor. Holders of Common Stock will be
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of the Series D Preferred Stock and any then outstanding shares of
Preferred Stock.
Preferred Stock
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Amended and Restated Certificate of Incorporation and the limitations
prescribed by law, the Board of Directors will be expressly authorized by
adopting resolutions to issue the shares, fix the number of shares and change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (and whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption price
or prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the Preferred Stock, without any further
action or vote by the stockholders. The Company has no current plans to issue
any further shares of the Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender
68
<PAGE>
offer, proxy contest, merger or otherwise, and thereby to protect the continuity
of the Company's management. The issuance of shares of the Preferred Stock
pursuant to the Board of Directors' authority described above may adversely
affect the rights of the holders of Common Stock. For example, Preferred Stock
issued by the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock.
Series D Preferred Stock
The Series D Preferred Stock has a seven-year maturity (commencing with the
date of the first issuance of any such shares, which occurred on October 8, 1997
(the "Original Issue Date")) and bears a dividend of 8% (i.e. $400) per share
per annum. Dividends on the Series D Preferred Stock accrue at the rate of
$960,000 per annum; provided, however, that dividends on the Series D Preferred
Stock accrue but are not required to be paid during the period ending December
31, 1999. The Company is not permitted to declare or pay any dividends with
respect to outstanding shares of its Common Stock unless accrued dividends on
the Series D Preferred Stock have been paid in full. Notwithstanding the
foregoing, in the event that the Company achieves certain financial targets (the
"Financial Targets") for any of the fiscal years ended 1999, 2000, 2001 or 2002,
then all dividends accrued but unpaid in respect of such fiscal year (or, in the
case of the fiscal year ended 1999, all preceding fiscal years), together with
any interest thereon, shall be forgiven and the Company shall have no further
obligations with respect thereto.
The Series D Preferred Stock has a liquidation value of $5,000 per share.
In the event of the liquidation, dissolution or winding up of the Company, the
liquidation preference of the Series D Preferred Stock and all accrued but
unpaid dividends thereon must be paid before any payments or distributions are
made to holders of Common Stock.
The Series D Preferred Stock is subject to mandatory conversion upon the
earlier of (i) meeting the Financial Targets for any of the 1999, 2000, 2001 or
2002 fiscal years or (ii) the seventh anniversary of the Original Issue Date. In
the event of the mandatory redemption described in clause (ii) above, the
redemption price per share will be equal to the liquidation value per share of
$5,000 (as adjusted for any combinations, divisions or similar recapitalizations
affecting the shares of Series D Preferred Stock), together with all accrued but
unpaid dividends thereon to the date of such redemption.
The holders of Series D Preferred Stock are entitled to cast 40,000,000
votes, presently 66.6%, of the votes entitled to be cast by the holders of all
of the Company's voting securities. Each share of Series D Preferred Stock
entitles the holder thereof to one vote per share for each share of Common Stock
which would be issued upon conversion of a share of Series D Preferred Stock (at
an initial conversion rate of 16,666.66 shares of Common Stock per share of
Series D Preferred Stock). In addition, the holders of a majority in voting
power of the Series D Preferred Stock have the exclusive right to elect a
majority of the directors constituting the entire Board of Directors at any
given time.
Statutory Business Combination Provision
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of
69
<PAGE>
such person, who is an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3 % of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or By-laws by action of
its stockholders to exempt itself from coverage, provided that such bylaw or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Amended and Restated Certificate of Incorporation or By-laws.
Special Charter Provisions
The Amended and Restated Certificate of Incorporation provides that unless
a majority of the full Board of Directors of the Company votes to approve such
action, the affirmative vote of 66 2/3% of the then-outstanding shares of
capital stock of the Company, voting together as a single class, is required to
amend or repeal the provisions of the Amended and Restated Certificate of
Incorporation, which establish a staggered Board of Directors.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank, Shareholder Services Administration Group, NC 1153, 1525 West
WCT. Harris Blvd. - 363, Charlotte, NC 28288-1153.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Rights Offering, the Company will have 20,838,124
shares of Common Stock outstanding, assuming no exercise of warrants or options.
The shares of Common Stock sold in the Rights Offering will be freely
transferrable, to the extent not purchased by "affiliates" of the Company (in
general, persons who have control relationships with the Company). See
"Description of Capital Stock -- Common Stock." The Common Stock owned by
Danskin Investors and other affiliates of the Company may not be sold unless
registered under the Securities Act or sold pursuant to an applicable exemption
from registration, such as Rule 144 adopted under the Securities Act.
70
<PAGE>
The 2,400 shares of Series D Preferred Stock held by Danskin Investors and
BFG are convertible into approximately 40,000,000 shares of Common Stock (an
initial conversion rate of 16,666.66 shares of Common Stock for each share of
Series D Preferred Stock so converted), at the option of the holder and, in
certain circumstances, mandatorily, upon the achievement of certain financial
targets for any fiscal year beginning with the fiscal year ended December 25,
1999, and at a per share conversion price of $0.30, subject to adjustment in
certain circumstances. The Company also has outstanding (i) the Warrant,
representing the right to purchase 10,000,000 shares of Common Stock, subject to
adjustment, for an aggregate purchase price of $3,000,000, subject to
adjustment, (ii) the Schupak Warrant, representing the right to purchase up to
5,372,315 shares of Common Stock, subject to adjustment,for an aggregate
purchase price of $1,611,694.50, subject to adjustment, (iii) the Chu Warrant,
representing the right to purchase 795,900 shares of Common Stock, subject to
adjustment, for an aggregate purchase price of $238,770, subject to adjustment,
and (iv) options to purchase an aggregate of 6,519,618 shares of Common Stock,
including options to purchase an aggregate of 759,034 shares of Common Stock
issued pursuant to the Stock Option Plan.
In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
those shares were purchased) is entitled to sell in "brokers' transactions" or
to market makers, within any three-month period, a number of shares that does
not exceed the greater of (i) one percent of the number of shares of Common
Stock then outstanding (approximately 20,088,124 shares upon completion of this
Offering) or (ii) generally, the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
securities in accordance with the foregoing volume limitations and other
requirements but without regard to the one year holding period. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner other than an affiliate from whom the shares were purchased),
is entitled to sell the shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
As an alternative to sales under Rule 144, shares of Common Stock may be
sold without any volume limitations pursuant to an effective registration
statement filed with the Commission.
The Company has granted to Danskin Investors certain demand and "piggyback"
registration rights with respect to all shares of Common Stock purchased by it
in the Stock Sale and in respect of Rights not exercised by the stockholders
hereunder or acquired by it upon exercise or conversion of certain convertible
securities. The Company is obligated to pay all expenses associated with the
exercise of such registration rights other than underwriting discounts or
commissions and the fees and expenses of separate counsel, if any, of such
persons incurred in connection with such registration.
Following this Rights Offering, the Company intends to file a Registration
Statement on Form S-8 covering an aggregate of [ ] shares of Common Stock
(subject to outstanding options as of the date hereof), thus permitting the
resale of such shares in the public market without restriction under the
Securities Act.
71
<PAGE>
The Company is unable to predict the effect, if any, that the sale of
Common Stock or the availability of such shares for sale may have on market
prices of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock or the perception that such sales could occur, may have
an adverse effect on the market price thereof.
LEGAL MATTERS
The validity of the Common Stock to be issued upon the exercise of the
Rights will be passed upon by Morgan, Lewis & Bockius LLP, counsel for the
Company.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of the Company as of December 28, 1996 and for the fiscal year ended
December 28, 1996 and for the fiscal nine months ended December 30, 1995
included and incorporated in this prospectus by reference have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports which
are included and incorporated by reference herein and have been so included and
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements and schedule of the Company as of
December 27, 1997 included in this Registration Statement have been audited by
Arthur Andersen, independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
72
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). The Registration Statement, including
the exhibits and schedules thereto, as well as such reports and other
information filed by the Company with the Commission, may be inspected, without
charge, and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Seven World Trade Center, Suite 1300, New York, New York, 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and from its public reference facilities located in New York, New York
and Chicago, Illinois, at prescribed rates. The Commission also maintains a
website at: http:\www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement, exhibits
and schedules. Statements contained in the Prospectus as to the contents of any
contract or any other document are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
73
<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-27
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 sheets 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
principles. 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 and 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 and
except for Note 2 - Loss Per Common Share for which the date is March 6, 1998.]
F-3
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 28, December 27,
1996 1997
<S> <C> <C>
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 Preferred Stock,
Liquidation Value $12,000,000 and
2,400 shares
Stockholders' Equity -- 11,140,000
Preferred Stock, $.01 par value,
10,000 shares authorized: 1,000 shares
issued at December 28, 1996 10 --
Common Stock, $.01 par value, 20,000,000 shares
authorized, 6,047,255 shares issued at
December 28, 1996 and 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
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Nine Months Fiscal Year Fiscal Year
Ended December 30, Ended December 28, Ended December 27,
1995 1996 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
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 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
and share equivalents ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional
Preferred Stock Stock Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance, March 25, 1995 5,921,207 $59,212 $14,450,788
Net loss
Purchase and retirement of Common Stock (12,103) (121) (31,002)
Sale of Common Stock to Employee Savings Plan 12,271 123 30,000
Warrants granted to lender 164,000
Minimum pension liabililty adjustment
Balance, December 30, 1995 5,921,375 $59,214 $14,613,786
Net loss
Preferred stock dividend
Purchase and retirement of Common Stock (41,013) (410) (139,162)
Sales and contribution of Common Stock to Employee
Savings Plan 55,893 559 178,263
Common Stock option exercises 110,000 1,100 317,650
Issuance of Preferred Stock 1,000 10 4,694,990
Accumulated translation adjustment (15,000)
Minimum pension liabililty adjustment
------ --- ----------- ------- -----------
Balance, December 28, 1996 1,000 $10 6,046,255 $60,463 $19,650,527
Net income
Preferred stock dividend 56,689 567 124,433
Reversal of accrued preferred stock dividend - 1996
Common Stock dividend 511,171 5,111 147,889
Purchase and retirement of Common Stock (9,415) (94) (19,545)
Sales and contribution of Common Stock
to Employee Savings Plan 32,293 323 59,595
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
Series D preferred dividend
Warrants 358,993
Accumulated translation adjustment 15,000
Rights redemption (61,272)
Minimum pension liabililty adjustment
------ --- ----------- ------- -----------
Balance, December 27, 1997 0 $0 $10,073,207 $100,732 $20,366,268
<CAPTION>
Minimum
Pension
Accumulated Liability
Deficit Adjustment Total
------- ---------- -----
<S> <C> <C> <C>
Balance, March 25, 1995 ($7,932,000) ($1,383,000) $5,195,000
Net loss (3,222,000) (3,222,000)
Purchase and retirement of Common Stock (31,123)
Sale of Common Stock to Employee Savings Plan 30,123
Warrants granted to lender 164,000
Minimum pension liabililty adjustment (617,000) (617,000)
------------ ----------- ----------
Balance, December 30, 1995 ($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 (139,572)
Sales and contribution of Common Stock to Employee
Savings Plan 178,822
Common Stock option exercises 318,750
Issuance of Preferred Stock 4,695,000
Accumulated translation adjustment (15,000)
Minimum pension liabililty adjustment (565,000) (565,000)
------------ ----------- ----------
Balance, December 28, 1996 ($16,345,000) ($2,565,000) $801,000
Net income 412,000 412,000
Preferred stock dividend (125,000)
Reversal of accrued preferred stock dividend - 1996 41,000 41,000
Common Stock dividend (153,000)
Purchase and retirement of Common Stock (19,639)
Sales and contribution of Common Stock
to Employee Savings Plan 59,918
Exchange of 10% Cumulative Preferred Stock
for shares of Common Stock
Preferred stock dividend (125,000)
Series D preferred dividend (216,000) (216,000)
Warrants 358,993
Accumulated translation adjustment 15,000
Rights redemption (61,272)
Minimum pension liabililty adjustment 290,000 290,000
------------ ----------- ----------
Balance, December 27, 1997 ($16,511,000) ($2,275,000) $1,681,000
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Nine Months
Ended December Fiscal Year Ended Fiscal Year Ended
30, 1995 December 28, 1996 December 27, 1997
-------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income (loss) ($ 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 asset (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 Activites:
Capital expeditures (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 5,000,000 -- --
convertible debentures
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)
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.
</TABLE>
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:
<TABLE>
<CAPTION>
December 28, 1996 December 27, 1997
----------------- -----------------
<S> <C> <C>
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
----------- -----------
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Nine Months Fiscal Year Fiscal Year
Ended Ended Ended
December 30, 1995 December 28, 1996 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
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)
</TABLE>
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 ("SFAS 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:
<TABLE>
<CAPTION>
December 28, 1996 December 27, 1997
----------------- -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
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)
</TABLE>
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
- --------------------------------------------------------------------------------------------------
# of Weighted # of Weighted # of Weighted
Exercise Shares Average Shares Average Shares Average
Price Exercise Exercise Exercise
Range 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, $.625 - 755,328 $3.800 701,918 $3.594 759,034 $2.275
end of year $13.00
- --------------------------------------------------------------------------------------------------
</TABLE>
Options exercisable and shares available for future grant amounted to:
<TABLE>
<CAPTION>
December 28, 1996 December 27, 1997
----------------- -----------------
<S> <C> <C>
Options exercisable 664,087 628,978
Shares available for grant* 88,082 30,966
</TABLE>
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 interest 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 No.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 No.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:
<TABLE>
<CAPTION>
December 28, 1996 December 27, 1997
----------------- -----------------
<S> <C> <C>
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
=========== ===========
</TABLE>
7. Other Assets
Other assets consisted of:
<TABLE>
December 28, 1996 December 27, 1997
----------------- -----------------
<S> <C> <C>
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
=========== ===========
</TABLE>
8. Accrued Expenses
<TABLE>
Accrued expenses consisted of:
December 28, 1996 December 27, 1997
----------------- -----------------
<S> <C> <C>
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
=========== ===========
</TABLE>
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, December 27,
1996 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
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
F-18
<PAGE>
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 .
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Preferred Stock and Subordinated Convertible Debentures (continued)
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 was 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:
<TABLE>
<CAPTION>
Fiscal Nine Fiscal Year Fiscal Year
Months Ended Ended Ended
December 30, December 28, December 27,
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
F-22
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Income Taxes (continued)
The following represented the significant items comprising net deferred taxes as
of December 28, 1996 and as of December 27, 1997:
<TABLE>
<CAPTION>
December 28, 1996 December 27, 1997
----------------- -----------------
<S> <C> <C>
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 $ -- $ --
=========== ===========
</TABLE>
The difference between income tax expense and the tax computed by applying the
statutory income tax rate to income before taxes was as follows:
<TABLE>
<CAPTION>
Fiscal Nine Fiscal Year Fiscal Year
Months Ended Ended Ended
December 30, December 28, December 27,
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
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%
==== ==== ====
</TABLE>
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 and 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 of 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:
<TABLE>
<CAPTION>
Fiscal Years Ending: Amount
-------------------- -----------
<S> <C>
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
===========
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Nine Fiscal Year Fiscal Year
Months Ended Ended Ended
December 30, December 28, December 27,
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Royalty Expense Royalty Income
--------------- --------------
<S> <C> <C>
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
======== ========
</TABLE>
F-25
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Subsequent Events
On March 2, 1998, M. Catherine 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
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.
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-26
<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>
=================================================== ===========================
No dealer, salesperson or any other person has
been authorized to give any information or to make
any representations other than those contained in
this Prospectus and, if given or made, such
information or representations must not be relied
upon as having been authorized by the Company or
any of the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of
an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom
it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall,
under any DANSKIN, INC. circumstances, create any
implication that there has been no change in the
affairs of the Company since the date hereof or
that the information contained herein is correct
as of any time 2,131,889 Shares subsequent to
its date.
DANSKIN, INC.
TABLE OF CONTENTS 2,131,889 Shares
Common Stock
Page __________________
- ----
Prospectus Summary............................... 3
Risk Factors.....................................10 PROSPECTUS
The Rights Offering..............................16
Use of Proceeds..................................23 __________________
Dividend Policy..................................23
Price Range of Common Stock......................24
Capitalization...................................25
The Capital Contribution and the Refinancing.....26
Selected Consolidated Financial Data.............31
Management's Discussion and Analysis of
Financial Condition and
Results of Operations........................34 __________ , 1998
Business.........................................45
Management.......................................55
Certain Transactions.............................65
Security Ownership of Certain Beneficial
Owners and Management........................66
Description of Capital Stock.....................68
Shares Eligible for Future Sale..................70
Legal Matters....................................72
Experts..........................................72
Available Information............................73
Index to Consolidated Financial Statements......F-1
=================================================== ===========================
74
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be borne by the Company in
connection with the issuance and distribution of the securities being registered
hereby. All figures are estimates except the SEC registration fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee ................................ $ 179
Subscription Agent's fees and expenses .............. 2,500
Accounting fees and expenses ........................ 15,000
Legal fees and expenses ............................. 200,000
Blue sky fees and expenses
(including legal fees) ............................ 10,000
Cost of printing .................................... *
Miscellaneous ....................................... *
--------
Total ....................................... $*
--------
</TABLE>
* To be furnished by amendment.
Item 14. Indemnification of Directors and Officers
The Certificate of Incorporation of the Company provides that the Company
shall, to the full extent permitted by Section 145 of the General Corporation
Law of the State of Delaware, as amended from time to time, indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Certificate of
Incorporation eliminates personal liability of the Company's directors to the
fullest extent permitted by Section 102(b)(7) of the General Corporation Law of
the State of Delaware, as amended from time to time.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify its directors and officers against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties, if such directors or officers acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a derivative
action, i.e., one by or in the right of the corporation, indemnification may be
made only for expenses actually and reasonably incurred by directors and
officers in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they
II-1
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant officers or directors are reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Section 102(b)(7) of the General Corporation Law of the State of
Delaware provides that a corporation may eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability for a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Item 15. Recent Sales of Unregistered Securities
On September 22, 1997, the Company sold (i) $15 million aggregate principal
amount of subordinated notes (the "Subordinated Notes") and (ii) Series C
Cumulative Convertible preferred stock, par value $.01 per share (the "Series C
Preferred Stock") having a liquidation preference of $500,000 to Danskin
Investors, LLC in exchange for contributing in part to the capital of the
Company and canceling in part the approximately $21.3 million face amount of the
Company's term loan obligations to First Union National Bank and contributing $4
million in cash to the capital of the Company. The sale was made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act").
On October 8, 1997 the Series C Preferred Stock and the Subordinated Notes
were automatically exchanged in accordance with their terms for (i) Series D
Cumulative Convertible preferred stock, par value $.01 per share, having a
liquidation preference of $12 million, (ii) a seven-year warrant to purchase
10,000,000 shares of Common Stock at a per price share of $0.30, and (iii) $3
million aggregate principal amount of Subordinated Notes.
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 $0.30 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 a warrant for
the purchase of 795,900 shares of Common Stock, subject to adjustment (the "Chu
Warrant") at an exercise price of $0.30 per share, subject to adjustment. In
consideration of the
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sale of the Chu Warrant, Mr. Chu issued a promissory note to the Company for the
purchase price of $14,815. The Chu Warrant may be exercised, in whole at any
time and in part from time to time, commencing on the date of the 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, 2005. The sale was
made pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act.
In connection with the Capital Contribution and with the amendment of their
respective employment agreements, options to purchase 1,020,000 shares of Common
Stock were granted to Ms. Domuracki and options to purchase 680,000 shares of
Common Stock were granted to Ms. Eichel, at an exercise price of $0.30 per
share. In connection with the Capital Contribution, the Company granted options
to purchase 1,591,749 shares of Common Stock to Ms. McLemore, as a director of
the Company, at an exercise price of $0.30 per share.
On January 28, 1998, the Company sold (i) 7,692,727 shares of Common Stock
to Danskin Investors, LLC and (ii) 295,567 shares of Common Stock to the
Oppenheimer Bond Fund for Growth, in exchange for canceling approximately $2.4
million aggregate principal amount of Subordinated Notes, in proportion to their
respective holdings of Subordinated Notes. The sale was made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
The following exhibits are filed as part of this Registration Statement:
3.1.1. Amended and Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 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").)
3.1.3 Certificate of Amendment, dated the 27th day of January, 1998 to the
Amended and Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1.3 to Registrants Form 10-K
for the fiscal year ended December 27, 1997)
3.1.4 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
reference 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.)
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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 11 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.)
10.5.6 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.)
*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.)
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*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 MaryAnn Domuracki. (Incorporated by reference to
Exhibit 10.6.3E to Registrant's Form 10-K for the fiscal year ended
December 27, 1997)
*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. (Incorporated b reference to
Exhibit 10.6.4F to Registrant's Form 10-K for the fiscal year ended
December 27, 1997)
*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. (Incorporated by reference to Exhibit
10.6.4F to Registrant's Form 10-K for the fiscal year ended Decmber
27, 1997)
*10.6.5 Employment Agreement, dated February 2, 1998, between the Registrant
and Catherine Volker. (Incorporated by reference to Exhibit 10.6.5
to Registrant's Form 10-K for the fiscal year ended December 27,
1997)
*10.6.6 Stock Option Plan and Agreement, dated February 2, 1998, between the
Registrant and Catherine Volker. (Incorporated by reference to
Exhibit 10.6.6 to Registrant's Form 10-K for the fiscal year ended
December 27, 1997)
*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.)
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*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
Registant's Form 10Q 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
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<PAGE>
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).
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).
23.1## Consent of Arthur Andersen LLP.
23.2## Consent of Deloitte & Touche, LLP
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<PAGE>
99.1 Press release dated May 20, 1997. (Incorporated by reference to
Exhibit 99.1 to the Registant'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
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a) (1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
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<PAGE>
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the By-laws and other provisions
summarized in Item 15 above, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement 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 28 day of April, 1998.
DANSKIN, INC.
By /s/ M. Catherine Volker
-----------------------
M. Catherine Volker
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, as
amended, this Registration Statement 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 April 28, 1998
M. Catherine Volker
* /s/ Donald Schupak
- ------------------------------- Chairman of the Board April 28, 1998
Donald Schupak
* /s/ Nina McLemore
- ------------------------------- Vice Chairperson of the Board April 28, 1998
Nina McLemore
* /s/ Beverly Eichel Executive Vice President April 28, 1998
- ------------------------------ and Chief Financial Officer
Beverly Eichel
* /s/ Andrew J. Astrachan Director April 28, 1998
- ------------------------------
Andrew J. Astrachan
* /s/ Gabriel Brener Director April 28, 1998
- ------------------------------
Gabriel Brener
* /s/ David Chu Director April 28, 1998
- ------------------------------
David Chu
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<PAGE>
* /s/ Michael Hsieh Director April 28, 1998
- ------------------------------
Michael Hsieh
* /s/ James P. Jalil Director April 28, 1998
- ------------------------------
James P. Jalil
* /s/ Henry T. Mortimer, Jr. Director April 28, 1998
- ------------------------------
Henry T. Mortimer, Jr.
* /s/ Larry Shelton Director April 28, 1998
- ------------------------------
Larry Shelton
II-11
Exhibit 23.1
[Arthur Andersen Letterhead]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN
ARTHUR ANDERSEN
New York, NY
April 28, 1998
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the use in this Registration Statement of Danskin, Inc. on Form
S-1 of our report dated March 14, 1997 (except for Note 11 for which the date is
March 27, 1997 and except for Note 2 - Loss Per Common Share for which the date
is March 6, 1998), included in the Annual Report on Form 10-K of Danskin, Inc.
for the year ended December 27, 1997, and to the use of our report dated March
14, 1997 (except for Note 11 for which the date is March 27, 1997 and except for
Note 2 - Loss Per Common Share for which the date is March 6, 1998), appearing
in the Prospectus, which is part of this Registration Statement, and of our
report dated March 14, 1997 (except for Note 11 for which the date is March 27,
1997 and except for Note 2 - Loss Per Common Share for which the date is March
6, 1998) relating to the financial statement schedule appearing elsewhere in
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
April 28, 1998
