SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 of 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-20382
Danskin, Inc.
Exact name of registrant as specified in its charter)
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Delaware 62-1284179
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<S> <C>
(State or other jurisdiction of (I.R.S. Employer
Incorporation Or organization Identification No.)
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111 West 40th Street, New York, NY 10018
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(Address of principal executive offices)
(212) 764-4630
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of the issuer's Common Stock, $0.01 par value,
as of October 31, 1998, excluding 1,083 shares held by a subsidiary: 20,915,610
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
------------------------------
FORM 10-Q FOR THE FISCAL NINE MONTH PERIODS
ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 26, 1998
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets (Unaudited)
As of December 28, 1997 and September 26, 1998 3
Consolidated Condensed Statements of Operations
(Unaudited) For the Fiscal Three and Nine Month Periods
Ended September 27, 1997 and September 26, 1998 4
Consolidated Condensed Statements of Cash Flows
(Unaudited) For the Fiscal Nine Month Periods
Ended September 27, 1997 and September 26, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
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2
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<TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ASSETS
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
December 28, 1997 September 26, 1998
(unauditied)
----------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 808,000 $ 1,182,000
Accounts receivable, less allowance for doubtful accounts 14,935,000 17,169,000
of $848,000 at December 28, 1997 and $801,000 at
September 26, 1998
Inventories 28,714,000 35,116,000
Prepaid expenses and other current assets 1,926,000 2,071,000
----------------- ------------------
Total current assets 46,383,000 55,538,000
Property, plant and equipment - net of accumulated 7,591,000 7,969,000
depreciation and amortization of $8,671,000 at December
28, 1997 and $9,759,000 at September 26, 1998
Other assets 1,028,000 918,000
----------------- ------------------
Total Assets $ 55,002,000 $ 64,425,000
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan payable (Note 2) $ 8,539,000 $ 18,431,000
Current portion of long-term debt (Note 2) 333,000 1,833,000
Accounts payable 8,043,000 8,361,000
Accrued expenses 10,398,000 13,353,000
----------------- ------------------
Total current liabilities 27,313,000 41,978,000
----------------- ------------------
Long-term debt, net of current maturities (Note 2) 9,667,000 8,167,000
Subordinated Debt (Note 3) 3,000,000 -
Accrued dividends 216,000 936,000
Accrued retirement costs 1,985,000 1,985,000
----------------- ------------------
Total long-term liabilities 14,868,000 11,088,000
----------------- ------------------
Total Liabilities 42,181,000 53,066,000
----------------- ------------------
Commitments and contingencies
Series D Cumulative Convertible Preferred Stock, Liquidation Value $12,000,000 and 2,400 11,140,000 11,263,000
shares (Note 3) ----------------- ------------------
Stockholders' Equity
Common Stock, $.01 par value, 100,000,000 shares authorized, 10,074,290 shares issued at December
27, 1997 and 20,916,693 shares issued at September 26, 1998, less 1,083 shares held by subsidiary
at December 27, 1997 and September 26, 1998 100,732 209,000
Additional paid-in capital 20,366,268 23,454,000
Accumulated deficit (16,511,000) (21,292,000)
Accumlated other comprehensive loss (Note 13) (2,275,000) (2,275,000)
----------------- ------------------
Total Stockholders' Equity 1,681,000 96,000
----------------- ------------------
Total Liabilities and Stockholders' Equity $ 55,002,000 $ 64,425,000
================= ==================
These Statements should be read in conjunction with the accompanying Notes to Consolidated Condensed Financial Statements
</TABLE>
3
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Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
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<CAPTION>
Fiscal Three Months Ended Fiscal Three Months Ended
------------------------- -------------------------
September 27, 1997 September 26, 1998 September 27, 1997 September 26, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------ ------------------ ------------------
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Net revenues $ 32,699,000 $ 27,959,000 $ 92,953,000 $ 82,654,000
Cost of goods sold 21,068,000 17,146,000 61,184,000 51,093,000
------------ ------------ ------------ ------------
Gross profit 11,631,000 10,813,000 31,769,000 31,561,000
Selling, general and administrative expenses 10,200,000 11,487,000 30,236,000 32,075,000
Non-recurring charges (Note 9) 300,000 475,000 300,000 1,439,000
Interest expense 1,251,000 669,000 3,686,000 1,850,000
------------ ------------ ------------ ------------
Total Expenses 11,751,000 12,631,000 34,222,000 35,364,000
Loss before income tax provision (120,000) (1,818,000) (2,453,000) (3,803,000)
Provision for income taxes 194,000 44,000 292,000 135,000
------------ ------------ ------------ ------------
Net loss before extraordinary items (314,000) (1,862,000) (2,745,000) (3,938,000)
Extraordinary gain from early retirement of debt 5,245,000 - 5,245,000 -
------------ ------------ ------------ ------------
Net income (loss) 4,931,000 (1,862,000) 2,500,000 (3,938,000)
Preferred dividends 112,000 271,000 362,000 843,000
------------ ------------ ------------ ------------
Net income (loss) applicable to Common Stock $ 4,819,000 $ (2,133,000) $ 2,138,000 $ (4,781,000)
============ ============ ============ ============
Basic/Diluted net loss per share: (Note 12)
Net loss per share before extraordinary items ($0.04) ($0.11) ($0.40) ($0.33)
Net income per share for extraordinary items $0.54 $0.00 $0.68 $0.00
------------ ------------ ------------ ------------
Net income (loss) per share after extraordinary items $0.50 ($0.11) $0.28 ($0.33)
============ ============ ============ ============
Weighted average number of common shares 9,677,000 19,689,000 7,673,000 14,585,000
</TABLE>
These statements should be read in conjunction with
the accompanying Notes to Consolidated Condensed Financial Statements
4
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Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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FISCAL NINE MONTHS ENDED
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September 27, 1997 September 26, 1998
(unaudited) (unaudited)
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Cash Flows From Operating Activities:
Net Income (Loss) $ 2,500,000 $(3,938,000)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 2,003,000 1,372,000
Extraordinary gain on early retirement of debt (5,245,000) -
-----------
Provision for doubtful accounts receivable 361,000 244,000
Stock grants issued - 446,000
Changes in operating assets and liabilities:
Increase in accounts receivable (3,565,000) (2,478,000)
Decrease (increase) in inventories 3,114,000 (6,402,000)
Increase in prepaid expenses and other current assets (2,260,000) (145,000)
Increase (decrease) in accounts payable (1,706,000) 318,000
Increase in accrued expenses 416,000 2,958,000
----------- -----------
Net cash used in operating activities (4,382,000) (7,625,000)
----------- -----------
Cash Flows From Investing Activites:
Capital expeditures (161,000) (1,613,000)
----------- -----------
Net cash used in investing activities (161,000) (1,613,000)
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Cash Flows From Financing Activities:
Net receipts under revolving loan payable 2,743,000 9,892,000
Sale of Common Stock - 3,000,000
Proceeds from stock options exercised - 49,000
Payments of long-term debt (333,000) -
Purchase and retirement of Common Stock (20,000) -
Sale of Common Stock to Savings Plan 59,000 -
Expenses associated with issuance of rights - (299,000)
to purchase Common Stock
Proceeds from warrant notes - 15,000
Financing costs incurred (1,026,000) (45,000)
Proceeds from recapitalization 4,000,000 -
Payment of Subordinated Debt - (3,000,000)
----------- -----------
Net cash provided by financing activities 5,423,000 9,612,000
----------- -----------
Net increase in Cash and Cash Equivalents 880,000 374,000
Cash and Cash Equivalents, Beginning of Period 1,177,000 808,000
----------- -----------
Cash and Cash Equivalents, End of Period $ 2,057,000 $ 1,182,000
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 3,228,000 $ 1,647,000
Income taxes paid 118,000 50,000
Cash refunds received for income taxes 121,000 -
</TABLE>
These statements should be read in conjunction with
the accompanying notes to Consolidated Condensed Financial Statements.
5
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Item 1. Financial Statements (continued)
1. In the opinion of the management of Danskin Inc. and Subsidiaries (the
"Company"), the accompanying Consolidated Condensed Financial
Statements have been presented on a basis consistent with the Company's
fiscal year financial statements and contain all adjustments (all of
which were of a normal and recurring nature) necessary to present
fairly the financial position of the Company as of September 26, 1998
and December 27, 1998, as well as its results of operations for the
fiscal three and nine month periods ended September 26, 1998 and
September 27, 1997 and its cash flows for the fiscal nine month periods
ended September 26, 1998 and September 27, 1997. Certain information
and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. See the Annual Report of the
Company on Form 10-K for the Fiscal Year Ended December 27, 1997.
Operating results for interim periods may not be indicative of results
for the full fiscal year.
2. Effective October 8, 1997 (the "Refinancing Closing Date"), the Company
replaced its former financing arrangements with First Union National
Bank ("First Union") with a new loan and security agreement (the "Loan
and Security Agreement") with Century Business Credit Corporation
("CBCC" or the "Lender") which matures on October 8, 2002. Proceeds of
the Loan and Security Agreement were used to pay all of the Company's
indebtedness to First Union, and to establish working capital lines of
credit.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement provides the Company with a term loan facility in the aggregate
principal amount of $10 million (the "Term Loan Facility") and a revolving
credit facility, including a provision for the issuance of letters of
credit (the "Revolving Credit Facility") generally in an amount not to
exceed the lesser of (a) $45 million less the aggregate outstanding
principal balance under the Term Loan Facility, or (b) a formula amount
based upon the Company's available inventory and accounts receivable
levels, minus certain discretionary reserves. The Company's obligations to
CBCC under the Loan and Security Agreement are generally secured by a
first priority security interest in all present and future assets of the
Company. The Loan and Security Agreement contains certain affirmative and
negative covenants including maintenance of tangible net worth and a
limitation on capital expenditures, respectively. The tangible net worth
covenant is calculated by subtracting from total assets all intangible
assets and total liabilities. The covenant stipulates that the Company
must maintain a minimum tangible net worth of $2 million. At September 26,
1998, the Company's tangible net worth under the Loan and Security
Agreement was equal to approximately $10.5 million. Availability under the
Loan and Security Agreement at September 26, 1998 was equal to
approximately $11.5 million.
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 which commenced on November 1, 1998. 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.
Interest on the Company's obligations under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of the
Prime Rate plus one half of one percent (1/2%) and is payable monthly.
Interest may also accrue at a rate per annum equal to the sum of the
Eurodollar Rate, as defined in the Loan and Security Agreement, plus two
and three quarters percent (2 3/4%).
3. In accordance with the terms of a certain Securities Purchase Agreement
dated September 22, 1997 (the "Securities Purchase Agreement") entered
into by the Company and Danskin Investors, LLC. (the "Investor"), the
Investor and certain other persons contributed to the Company in the
aggregate (a) $21.256 million face amount of certain notes executed by
the Company and payable to First Union, and (b) $ 4 million in cash
(together the "Capital Contribution") in exchange for (i) $15 million
face amount of debt (the "Subordinated Debt"), and (ii) convertible
preferred stock of the Company having a liquidation preference of
$500,000 (the "Investor Preferred Stock") (together with the
Subordinated Debt, the "Securities") of the Company.
In accordance with the terms of the Securities Purchase Agreement, upon
the Refinancing Closing Date, the Investor Preferred Stock and the
Subordinated Debt were, by their terms, automatically exchanged for (a)
$12 million stated value of Series D Redeemable Cumulative Convertible
Preferred Stock (the "Series D Stock") of the Company, (b) a seven year
warrant to purchase 10 million shares of Common Stock at a per share price
of $0.30 (the "Warrant"), and (c) a $3 million aggregate principal amount
subordinated note of the Company (the "Remaining Subordinated Debt").
6
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The Series D Stock has an 8% annual dividend rate, payment of which is
deferred through December 31, 1999, and a seven year maturity. 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. If, for any fiscal year beginning with the fiscal year
ending December 31, 1999, the Company meets certain agreed upon financial
targets, all accrued dividends for such fiscal year will be forgiven and
the Series D Stock will automatically convert into 40 million shares of
Common Stock. The terms of the Series D Stock also provide that, upon the
seventh anniversary of the date its issuance, if the Series D Stock has
not previously converted to Common Stock in accordance with its terms, the
Series D Stock shall be redeemed by the Company for an amount equal to the
sum of (x) $5,000 per share (as adjusted for any combinations, divisions,
or similar recapitalizations affecting the shares of Series D Stock), plus
(y) all accrued and unpaid dividends on such shares of Series D Stock to
the date of such redemption. Holders of the Series D Stock are entitled to
vote, together with the holders of the Common Stock and any other class or
series of stock then entitled to vote, as one class on all matters
submitted to a vote of stockholders of the Company, in the same manner and
with the same effect as the holders of the Common Stock. In any such vote,
each share of issued and outstanding Series D Stock shall entitle the
holder thereof to one vote per share for each share of Common Stock that
would be obtained upon conversion of all of the outstanding shares of
Series D Stock held by such holder, rounded up to the next one-tenth of a
share. Therefore, the exchange of the Series D Stock for the Subordinated
Debt was highly dilutive of existing holders of Common Stock. Holders of
the Series D Stock are also entitled to designate a majority of the
directors to the Board of Directors of the Company. The Remaining
Subordinated Debt bears interest at the rate of 8% per annum.
4. The Company's Common Stock was traded over the counter on the NASDAQ
National Market under the symbol "DANS" until August 8, 1996, at which
time it was moved to The NASDAQ SmallCap (TM) Market under the same
symbol. Effective June 27, 1997, the Company's Common Stock was
delisted due to the Company's noncompliance with NASDAQ's minimum
capital and surplus requirements. Bid quotations for the Company's
Common Stock may be obtained from the "pink sheets" published by the
National Quotation Bureau and the Common Stock is traded in the
over-the-counter market.
5. Inventories are stated at the lower cost or market on a first-in,
first-out basis. Inventories consisted of the following:
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<CAPTION>
December 27, 1997 September 26, 1998
(Unaudited)
----------------- ------------------
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Finished goods $17,557,000 $20,567,000
Raw Materials 4,708,000 6,878,000
Work-in-Process 5,749,000 6,870,000
Packaging Materials 700,000 801,000
----------------- ------------------
$28,714,000 $35,116,000
</TABLE>
6. Effective February 2, 1998, the Board of Directors voted to amend the
Company's Stock Option Plan to increase the formula grant provided to
non-management Directors thereunder from 20,000 to 50,000 shares. All
shares granted to Directors under the Stock Option Plan vest in equal
amounts on the first, second and third anniversary of such individual's
appointment to the Board of Directors, and are exercisable at the fair
value of the Company's Common Stock on the date of grant.
Effective May 18, 1998, the Executive Committee of the Board of Directors
of the Company amended the 1992 Stock Option Plan to increase the number
of options available for grant thereunder by 2.5 million shares. In
addition, the Executive Committee granted options to purchase 1.63 million
shares to certain executives and key employees of the Company at an
exercise price of $1.625 and provided for grants to new senior level
executives of the Company hired during fiscal 1998.
7. The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a
material adverse impact on the financial condition, results of operations,
liquidity or business of the Company.
7
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8. The Company has been selected for audit by certain State tax authorities,
the resolution of which cannot be determined at this time. Management
believes that any possible ultimate liability resulting from these audits
will not materially affect the consolidated financial position or results
of operations of the Company.
9. Non-recurring charges of $1.4 million in the first nine months of 1998
consisted of certain executive employee severance costs primarily relating
to the replacement of the former Chief Executive Officer and the
resignation of the Chief Financial Officer of the Company.
10. On February 2, 1998, the Company entered into an employment agreement
with Cathy Volker, employing her as Chief Executive Officer of the
Company from March 2, 1998 until February 28, 2003, subject to earlier
termination for death, resignation or removal. Ms. Volker's annual base
salary is $375,000. She is entitled to receive an annual performance
bonus of up to 100% of her base salary as determined by the Board of
Directors, in its sole discretion, based upon such quantitative and
qualitative factors as identified by the Board upon consultation with
Ms. Volker and upon approval of the budget for the respective fiscal
year. The performance bonus for fiscal year ended December 26, 1998
shall be not less than $187,500. Under Ms. Volker's agreement, if she
resigns her employment for "good reason" (as defined), if the Company
terminates her employment "without cause" (as defined), or she resigns
by reason of a "change of control" (as defined), the Company will be
obligated to continue her base salary payments for a period of one
year, and she will be entitled to a performance bonus in an amount
equal to, depending upon the circumstances of her resignation or
termination, fifty percent (50%) to one-hundred percent (100%) of the
previous year's performance bonus. In connection with the execution of
such agreements, Ms. Volker received a signing bonus of $150,000 and a
grant of 750,000 shares of Common Stock of the Company. See note 11
below for a discussion of one-time charges associated with such
agreements.
The Company entered into a Stock Option Agreement, dated February 2, 1998,
with Ms. Volker. Pursuant to the agreement, the Company granted Ms. Volker
six options, each representing the right to purchase 425,000 shares of
Common Stock. The purchase price of the shares of Common Stock covered by
each option shall be $.65 per share. Each option is generally exercisable
until January 31, 2008, unless earlier terminated in accordance with the
Stock Option Agreement.
11. Included in Selling, General and Administrative Expenses ("SG&A") for the
fiscal nine months ended September 26, 1998 were approximately $0.8
million of one time charges as discussed in Note 10 above. Excluding these
charges, SG&A for the nine months ended September 1998 was $31.3 million
compared to $30.2 million for the nine months ended September 27, 1997, an
increase of $1.1 million. Excluding these one time charges, operating
income would have been $0.3 million for the nine months ended September
26, 1998 compared to $1.5 million for the same prior year period.
12. For the fiscal nine months ended September 1998 and September 1997, basic
and diluted net loss per share is computed based on weighted average
common and common equivalent shares outstanding of 14,585,000 and
7,673,000, respectively. Common Stock equivalents are excluded from basic
and diluted net loss per share calculation for both fiscal periods because
the effect would be antidilutive.
At September 26, 1998, the Company had the following common shares and
common share equivalents outstanding:
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Common Shares 20,917,000
Preferred Stock 40,000,000
Warrants/Options 21,880,000
----------
Total Shares and Share Equivalents Outstanding 82,797,000
==========
</TABLE>
13. Effective December 28, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which modifies the financial statement presentation
of comprehensive income and its components.
Comprehensive loss for all periods presented, representing all changes in
stockholders' equity during the period other than changes resulting from
the Company's stock and dividends, was equal to net losses as presented,
as the minimum pension liability adjustment has not changed in the
respective periods. As such, adoption of this standard had no effect of
the Company's financial position or operating results during the periods
presented.
8
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14. In furtherance of the terms of the Securities Purchase Agreement
entered into by the Company and the Investor, (see Note 3 above), on
April 28, 1998, the Company filed a Registration Statement on Form S-1
in connection with the registration under the Securities Act of 1933,
as amended, of (i) an aggregate of 10,838,124 rights to purchase shares
of the Company's Common Stock, and (ii) 2,131,889 shares of Common
Stock issuable upon exercise of such rights. The Board of Directors
established May 8, 1998 as the date of record for holders of Common
Stock to participate in such offering. Holders of Common Stock held of
record as of the close of business on the record date had the right to
purchase, pro rata, 2,131,889 shares of Common Stock at a per share
price of $0.30 (the "Rights Offering"). The Rights Offering commenced
on July 6, 1998 and expired on August 6, 1998. Approximately 8.4
million rights were subscribed for, and approximately 1.6 million
shares were issued in respect of such rights. In accordance with the
terms of the Securities Purchase Agreement, the Investor purchased
the rights not subscribed for on primary subscription, totaling 488,289
shares, at $.30 per share. The Company realized aggregate gross
proceeds of approximately $640,000.
In addition, on May 27, 1998, the Company, the Investor and BFG entered
into separate stock sale agreements pursuant to which the Investor and BFG
purchased, pro rata in proportion to their respective holdings of
Remaining Subordinated Notes, 7,864,366 shares of Common Stock, in
exchange for approximately $2.4 million aggregate principal amount of
Remaining Subordinated Notes (the "Stock Sale"). As a result of the Rights
Offering and the Stock Sale, the Company issued 10,000,000 shares of
Common Stock at $0.30 per share as contemplated by the Securities Purchase
Agreement. In addition, the outstanding principal amount of Remaining
Subordinated Notes was satisfied in full.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statements
---------------------
Certain statements contained in the discussion below, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking"
statements within the meaning of the Private Securities Litigation 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 to be materially different from any future
results, performance or achievements expressed or implied by such forward
looking statements. Such factors include, among others, the following: the
effects of future events on the Company's financial performance; the risk
that the Company may not be able to finance its planned growth; risks
related to the retail industry in which the Company competes, including
potential adverse impact of external factors such as inflation, consumer
confidence, unemployment rates and consumer tastes and preferences; and
the risk of potential increase in market interest rates from current
rates. Given these uncertainties, current and prospective investors are
cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
The following discussion and analysis should be read in conjunction with
the Consolidated Condensed Financial statements, related notes and other
information included in this quarterly report on Form 10-Q (operating data
includes operating data for the Company's retail activities) and with the
Annual Report on Form 10-K for the fiscal year ended December 27, 1997.
Results of Operations
---------------------
Comparison of the fiscal three and nine month periods ended September 26,
1998 with the fiscal three and nine month periods ended September 27,
1997.
Net Revenues:
-------------
Net revenues amounted to $28.0 million for the three months ended
September 1998; a decrease of $4.7 million, or 14.4%, from the prior year
three months ended September 1997. Net revenues for the nine months ended
September 1998 amounted to $82.7 million, a decrease of $10.3 million, or
11.1%, from $93.0 million the same prior year period. Wholesale revenues
for the Company decreased $4.8 million for the three-month period, and
declined $10.5 million for the nine-month period. Retail volume increased
$0.1 million for the three-month period and increased $0.2 million for the
nine-month period.
Danskin activewear net revenues, which include the Company's retail
operations, amounted to $19.4 million for the three months ended September
1998, a decrease of $3.1 million, or 13.8%, from $22.5 million in the
prior year three months ended September 1997. Activewear revenues
decreased $7.1 million, to $56.7 million, or 11.1%, for the nine month
period ended September 1998 over the same prior year period. The major
decreases in net revenues for the three - and nine-month periods were
principally attributable to a decline in the Company's private label
businesses, the discontinuance of the licensed SHAPE activewear product
line, and lower revenues in Dance France. The Company's 45 retail store's
sales were $6.2 million for the three-month period ending September 1998
compared to $6.1 million for the same prior year period, and generated
sales of $15.3 million for the nine month period ending September 1998
compared to $15.1 million for the same prior period. Comparable retail
store sales increased 8.2% for the three months ended September 1998 and
increased 4.4% for the nine months ended September 1998. During the
nine-month period ended September 1998, the Company closed six stores and
opened two additional stores.
Pennaco legwear net revenues amounted to $8.6 million for the three months
ended September 1998, a decline of $1.6 million, or 15.7%, from the three
month period ended September 1997. Revenues declined $3.2 million, or
11.0%, to $26.0 million for the nine months ending September 1998 compared
to the same prior year period. The decline in legwear revenues reflects
targeted sku reductions, designed to eliminate low margin and slow turning
styles, and, to a lesser extent, a decline in the Company's private label
business and the termination of the Anne Klein(R) legwear license.
10
<PAGE>
Gross Profit:
-------------
Gross profit decreased by $0.8 million, or 7.0% to $10.8 million in the
three months ended September 1998 from $11.6 million for the three months
ended September 1997 and decreased $0.2 million to $31.6 million for the
nine months ended September 1998 compared to $31.8 million for the nine
months ended September 1997. Gross profit, as a percentage of net
revenues, increased to 38.2% in the nine-month period ending September
1998 from 34.2% in the same prior year period.
Activewear gross profit increased to 41.2% for the three months ended
September 1998 from 38.7% for the three months ended September 1997, and
40.7% for the nine months ended September 1998 versus 37.8% for the same
prior year period. The three and nine month increases were primarily
attributable to improved mix of sales of Danskin branded product versus
lower margin private label merchandise, selective price increases, and
lower manufacturing costs.
Legwear gross profit increased to 32.6% in the three months ending
September 1998 from 28.4% in the prior period, and improved to 32.7% for
the nine month period ended September 1998 versus 26.4% for the same prior
year period. The improvement in margins for the three and nine month
periods was primarily due to cost reductions at the Company's
manufacturing facility, selected price increases, and the elimination of
certain lower margin programs.
Selling, General and Administrative Expenses:
---------------------------------------------
Selling, general and administrative expenses, which include retail store
operating costs, increased $1.3 million, or 12.7%, to $11.5 million, or
41.1% of net revenues, in the three months ended September 1998, from
$10.2 million, or 31.2% of net revenues, for the three month period ending
September 1997. For the nine-month period ending September 1998, selling,
general and administrative expenses increased $1.9 million, or 6.3%, to
$32.1 million, or 38.8% of net revenues compared to $30.2 million, or
32.5% of net revenues for the nine month period ended September 1997.
Selling, general and administrative expenses, excluding retail store
operating costs, increased $2.4 million, or 11.2%, to $23.8 million, or
35.3% of net revenues, in the nine months ended September 1998, from $21.4
million, or 27.5% of net revenues in the same prior year period. The
increase in the nine-month period ending September 1998, excluding retail
store operating costs, was primarily a result of increased advertising for
brand Danskin and the new Packables business, higher compensation expense,
including one-time charges of $0.8 million relating to changes in senior
management (see note 10 to the Consolidated Condensed Financial
Statements) and professional services, offset, in part, by reduced selling
and marketing expenses.
Operating Income/Loss:
----------------------
Operating loss before interest expense, non-recurring charges and income
taxes amounted to $0.7 million for the three months ended September 1998,
a decline of $2.1 million from operating income of $1.4 million for the
three months ended September 1997. For the nine months ended September
1998, the Company generated an operating loss of $0.5 million compared to
operating income of $1.5 million for the same prior year period.
Included in Selling, General and Administrative Expenses ("SG&A") for the
nine-month period ended September 1998 was approximately $0.8 million of
one time charges relating to the hiring of the new Chief Executive Officer
as discussed in Note 11 to the Consolidated Condensed Financial
Statements. Excluding these one-time charges, SG&A for the nine month
period ended September 1998 was $31.3 million compared to $30.2 million
for the nine months ended September 1997, an increase of $1.6 million.
Excluding these charges, operating income would have been $0.3 million for
the nine months ended September 1998 compared to income of $1.5 million
for the same prior period.
Interest Expense:
-----------------
Interest expense amounted to $0.7 million for the three months ended
September 1998 and $1.3 million for the three months ended September 1997.
For the nine-month period ending September 1998, interest expense amounted
to $1.9 million compared to $3.7 million for the same prior year period.
The Company's effective interest rate was 9.7% and 11.0% for the three
months ended September 1998 and 1997, respectively, and 9.9% and 11.0% for
the nine months ended September 1998 and 1997, respectively. The effective
interest rate decrease over the prior year is principally due to lower
deferred financing costs and
11
<PAGE>
lower interest rates associated with the refinancing of the Company's
credit facilities with Century Business Credit Corporation. (See Note 2 to
the Consolidated Condensed Financial Statements.)
Non-recurring Charges:
----------------------
Non-recurring charges were $0.5 million for the three months ended
September 1998 compared to $0.3 million for the three months ended
September 1997. These charges consisted of executive employee severance
costs primarily relating to the resignation of the former Chief Financial
Officer of the Company. Non-recurring charges were $1.4 million for the
nine months ended September 1998 compared to $0.3 million for the nine
months ended September 1997. The charges for the nine months ended
September 1998 consisted of the aforementioned employee expenses related
to the resignation of the Chief Financial Officer and certain executive
employee severance costs relating to the replacement of the former Chief
Executive Officer and other senior managers of the Company.
Extraordinary Gain From Early Retirement of Debt
------------------------------------------------
For the three and nine months ended September 1997, the Company recognized
a gain of $10.0 million, offset by the write-off of deferred financing
fees associated with the First Union Loan and Security Agreement, of $2.6
million and direct costs of the transaction of $2.2 million. The
extraordinary gain is attributable to the discount associated with the
early retirement of the First Union Term Loan of $21.3 million per the
Letter of Agreement dated August 28, 1997. This gain will be applied
against the Company's net operating loss carryforward which is fully
reserved.
Income Tax Provision (Benefit):
-------------------------------
The Company's income tax provision (benefit) rates differed from the
Federal statutory rates due to the utilization of net operating losses,
the effect of the Alternative Minimum Tax and the effect of state taxes
for the three and nine months ended September 1998 and September 1997. The
Company's net deferred tax balance was $0 at both September 1998 and
December 1997.
Net Loss:
---------
The net loss was $1.9 million for the three months ended September 1998,
compared to net income of $4.9 million for the three months ended
September 1997. For the nine months ended September 1998, the net loss was
$3.9 million versus net income of $2.5 million for the nine months ended
September 1997. Excluding the extraordinary gain of $5.2 million in the
nine month period ended September 1997, the net loss for the nine months
ended September 1998 was $3.9 million compared to a net loss of $2.7
million for the prior year period. Excluding the one-time ($0.8 million)
and non-recurring charges ($1.4 million) taken by the Company in the
fiscal 1998 nine-month period, the net loss for such period was $1.7
million versus a net loss of $2.4 million for the prior year fiscal
period, excluding extraordinary gains ($5.2 million) and non-recurring
charges ($300,000) taken in such period.
Liquidity and Capital Resources
-------------------------------
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. Although there can
be no assurances, the Company does not presently anticipate that the cost
to modify its information technology infrastructure to be Year 2000
compliant will be material to both its financial condition and its results
of operations during fiscal 1998 and 1999. Although there can be no
assurances, the Company does not presently anticipate any material
disruption in its operations as a result of any failure by the Company to
be in compliance. The Company does not currently have any information
concerning the Year 2000 compliance status of its suppliers and customers.
In the event that the Company's significant suppliers or customers do not
successfully and timely achieve Year 2000 compliance, the Company's
business or operations could be adversely affected.
The Company's primary liquidity and capital requirements relate to the
funding of working capital needs, primarily inventory, accounts
receivable, capital investments in operating facilities, machinery and
equipment, and principal and interest payments on indebtedness. The
Company's primary sources of liquidity have been from bank financing,
issuance of convertible securities, vendor credit terms and internally
generated funds.
Net cash flow used in operations increased by $3.2 million to $7.6 million
for the nine months ended September 1998, from a use of cash in operations
of $4.4 million in the nine months ended September 1997, principally
attributable to increases in accounts payable and accrued expenses offset
by an increase in accounts receivable and inventories. Cash increased $0.4
million to $1.2 million during the nine months ended September 1998, after
$9.6 million in net financing increases and $1.6 million in capital
expenditures.
12
<PAGE>
Working capital decreased $5.5 million to $13.6 million at September 1998
from $19.1 million at December 1997. Accounts receivable increased by $2.2
million, inventories increased $6.4 million offset by increases in the
revolving loan balance of $9.9 million, the current portion of long-term
debt of $1.5 million and accrued expenses of $3.0 million.
The Company increased its capital expenditures during fiscal nine-month
period ended September 1998 by $1.5 million from the prior year period, of
which $0.8 million related to costs incurred in connection with the
Company's computer systems. The balance of the expenditures addressed
improvements at the Company's manufacturing facilities.
In furtherance of the terms of the Securities Purchase Agreement entered
into by the Company and Danskin Investors, LCC ("Danskin Investors") (see
note 3 to the Consolidated Condensed Financial Statements), on April 28,
1998, the Company filed a Registration Statement on Form S-1 in connection
with the registration under the Securities Act of 1933, as amended, of (i)
an aggregate of 10,838,124 rights to purchase shares of the Company's
Common Stock, and (ii) 2,131,889 shares of Common Stock offered in
connection with such rights offering. The Board of Directors established
May 8, 1998 as the date of record for holders of Common Stock to
participate in such offering. Holders of Common Stock held of record as of
the close of business on the record date had the right to purchase, pro
rata, 2,131,889 shares of Common Stock at a per share price of $0.30 (the
"Rights Offering").
The Rights Offering commenced on July 6, 1998 and expired on August 6,
1998. Approximately 8.4 million rights were subscribed for and
approximately 1.6 million shares were issued in respect of such rights.
The Investor purchased the rights not subscribed for on primary
subscription, totaling 488,289 shares, for $.30 per share. The Company
realized aggregate gross proceeds of approximately $640,000.
In addition, on May 27, 1998, the Company, the Investor and BFG entered
into separate stock sale agreements pursuant to which the Investor and BFG
purchased, after the record date, pro rata in proportion to their
respective holdings of Remaining Subordinated Notes, approximately
7,864,366 shares of Common Stock, in exchange for approximately $2.4
million aggregate principal amount of Remaining Subordinated Notes (the
"Stock Sale"). As a result of the Rights Offering and the Stock Sale, the
Company issued 10,000,000 shares of Common Stock at $0.30 per share as
contemplated by the Securities Purchase Agreement. In addition, the
outstanding principal amount of Remaining Subordinated Notes has been
satisfied in full.
Strategic Outlook
-----------------
The Company and its new senior management team is reestablishing
Danskin(R) as a modern, contemporary brand. The Company's business
strategy is to capitalize on the consumer recognition of the Danskin(R)
brand and to develop new and innovative products that reflect a woman's
active lifestyle. The Company's "Clothes for Living" print advertising
campaign reinforces the lifestyle positioning of the brand and creates a
tone and manner that will flow into all of the Company's consumer
communications.
Building on consumer awareness of the Danskin(R) brand, the Company has
redesigned a significant portion of its activewear line, and is offering
new and more contemporary products that relate to a woman's active
lifestyle. The Company believes that its new line will enable it to expand
its presence at retail, including both the sporting goods and department
store classes of trade. The Company is seeking to strengthen its position
as a primary resource for its current accounts and is aggressively
pursuing strategic alliances with certain key retailers.
Moreover, in the department store class of trade, the Company launched its
Danskin Packables line in October 1998. Danskin Packables is offered
primarily in the hosiery departments of department and better specialty
stores and features an accessible product (offered primarily on main
floor), an innovative design (superior styling coupled with an exclusive
technical fabric that resists wrinkles), and a unique concept (a mix and
match ensemble that is "Good to Go"). The Danskin Packables line is
supported by a comprehensive advertising program that extends from print
advertising in key fashion magazines, to a retail direct mail campaign, to
exclusive in store fixturing. The Company believes that Danskin Packables
is representative of the kinds of products and innovation that will
advance its "Primary Resource" strategy and broaden the positioning of the
Danskin(R) brand to the consumer beyond `activewear,' to one of `active
lifestyle.'
13
<PAGE>
Recognizing that the Company's retail stores provide a platform for
capitalizing on the strong brand awareness enjoyed by Danskin, provide an
additional channel of distribution and act as a laboratory for product
innovation, the Company continually challenges the performance of its
retail operations. In fiscal 1998, the Company has closed six
non-performing locations, while taking the steps necessary for improved
performance in its remaining stores, including installing point-of-sale
systems to provide critical inventory and sales information and
implementing visual merchandising programs to achieve a consistent and
identifiable retail impression and presence. The Company also intends to
open additional full-price Danskin(R) stores in select metropolitan areas.
With respect to its international sales, the Company is reviewing its
international strategy with a view toward increasing volume and enhancing
profitability.
The Company is also seeking to increase revenues by exploring licensing
opportunities of the Danskin(R) name in various product categories, as
well as evaluating other available designer brands for selective licensing
opportunities in both activewear and legwear, to take advantage of the
Company's design expertise and manufacturing capabilities. The licensing
opportunities available to the Company compliment its efforts in the
development of premium, higher margin products.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative disclosures called for by this Item 3 and by Rule 305 of
Regulation S-K are inapplicable to the Company at this time.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 7 in the Notes to Consolidated Condensed Financial
Statements in Part I - Financial Information of this Quarterly
Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANSKIN, INC.
November 10, 1998 By: /s/ M. Catherine Volker
--------------------------
M. Catherine Volker
Chief Executive Officer
November 10, 1998 By: /s/ Jeff Sentz
-------------------------
Jeff Sentz
Principal Financial Officer
14
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