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 June 27, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 of 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-20382
Danskin, Inc.
-------------
Exact name of registrant as specified in its charter)
Delaware 62-1284179
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation Or organization Identification No.)
111 West 40th Street, New York, NY 10018
----------------------------------------
(Address of principal executive offices)
(212) 764-4630
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of the issuer's Common Stock, $0.01 par value,
as of July 31, 1998, excluding 1,083 shares held by a subsidiary: 18,731,361
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
------------------------------
FORM 10-Q FOR THE FISCAL THREE MONTH PERIODS
ENDED JUNE 28, 1997 AND JUNE 27, 1998
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets (Unaudited)
As of December 28, 1997 and June 27, 1998 3
Consolidated Condensed Statements of Operations
(Unaudited) For the Fiscal Six Month Periods
Ended June 28, 1997 and June 27, 1998 4
Consolidated Condensed Statements of Cash Flows
(Unaudited) For the Fiscal Six Month Periods
Ended June 28, 1997 and June 27, 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 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 27, June 27,
1997 1998
(unaudited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 808,000 $ 920,000
Accounts receivable, less allowance for
doubtful accounts of $848,000 at
December 27, 1997 and $813,000 at
June 27, 1998 14,935,000 15,956,000
Inventories 28,714,000 33,198,000
Prepaid expenses and other current assets 1,926,000 2,262,000
----------- -----------
Total current assets 46,383,000 52,336,000
Property, plant and equipment - net of
accumulated depreciation and amortization
of $8,671,000 at December 27,1997 and
$9,377,000 at June 27, 1998 7,591,000 7,908,000
Other assets 1,028,000 1,088,000
----------- -----------
Total Assets $55,002,000 $61,332,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving loan payable (Note 2) $ 8,539,000 $ 13,184,000
Current portion of long-term debt (Note 2) 333,000 1,333,000
Accounts payable 8,043,000 10,051,000
Accrued expenses 10,398,000 11,679,000
------------ ------------
Total current liabilities 27,313,000 36,247,000
------------ ------------
Long-term debt, net of current
maturities (Note 2) 9,667,000 8,667,000
Subordinated Debt (Note 3) 3,000,000 641,000
Accrued dividends 216,000 696,000
Accrued retirement costs 1,985,000 1,985,000
------------ ------------
Total long-term liabilities 14,868,000 11,989,000
------------ ------------
Total Liabilities 42,181,000 48,236,000
------------ ------------
Commitments and contingencies
Series D Cumulative Convertible Preferred
Stock, Liquidation Value $12,000,000 and
2,400 shares (Note 3) 11,140,000 11,232,000
------------ ------------
Stockholders' Equity
Common Stock, $.01 par value, 100,000,000
shares authorized, 10,074,290 shares issued
at December 27, 1997 and 18,732,444 shares
issued at June 27, 1998, less 1,083 shares
held by subsidiary at December 27, 1997 and
June 27, 1998 100,732 187,314
Additional paid-in capital 20,366,268 23,110,686
Accumulated deficit (16,511,000) (19,159,000)
Accumulated other comprehensive loss (Note 13) (2,275,000) (2,275,000)
------------ ------------
Total Stockholders' Equity 1,681,000 1,864,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 55,002,000 $ 61,332,000
============ ============
</TABLE>
These Statements should be read in conjunction
with the accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Six Months Ended
----------------------------- -----------------------------
June 28, 1997 June 27, 1998 June 28, 1997 June 27, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues $29,469,000 $26,444,000 $60,254,000 $54,695,000
Cost of goods sold 20,161,000 16,169,000 40,116,000 33,947,000
----------- ----------- ----------- -----------
Gross profit 9,308,000 10,275,000 20,138,000 20,748,000
Selling, general and administrative expenses 9,596,000 9,941,000 20,036,000 20,588,000
Non-recurring charges (Note 9) -- -- -- 964,000
Interest expense 1,250,000 607,000 2,435,000 1,181,000
----------- ----------- ----------- -----------
Total Expenses 10,846,000 10,548,000 22,471,000 22,733,000
Loss before income tax provision (1,538,000) (273,000) (2,333,000) (1,985,000)
Provision for income taxes 49,000 46,000 98,000 91,000
----------- ----------- ----------- -----------
Net loss (1,587,000) (319,000) (2,431,000) (2,076,000)
Preferred dividends 125,000 267,000 250,000 572,000
----------- ----------- ----------- -----------
Net loss applicable to Common Stock $(1,712,000) $ (586,000) $(2,681,000) $(2,648,000)
=========== =========== =========== ===========
Basic/Diluted net loss per share: (Note 12)
- -------------------------------------------
Net loss per share $(0.25) (0.04) (0.40) $ (0.22)
=========== =========== =========== ===========
Weighted average number of common shares 6,812,000 13,538,000 6,691,000 12,033,000
=========== =========== =========== ===========
</TABLE>
These statements should be read in conjunction with
the accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
----------------------------
June 28, 1997 June 27, 1998
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(2,431,000) $(2,075,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,309,000 946,000
Provision for doubtful accounts receivable 175,000 162,000
Stock grants issued -- 446,000
Changes in operating assets and liabilities:
Increase in accounts receivable (2,263,000) (1,183,000)
Decrease (increase) in inventories 1,983,000 (4,484,000)
Increase in prepaid expenses and other
current assets (608,000) (336,000)
Increase (decrease) in accounts payable (123,000) 2,008,000
Increase (decrease) in accrued expenses (2,061,000) 1,276,000
----------- -----------
Net cash used in operating activities (4,019,000) (3,240,000)
----------- -----------
Cash Flows From Investing Activites:
Capital expeditures (104,000) (1,168,000)
----------- -----------
Net cash used in investing activities (104,000) (1,168,000)
----------- -----------
Cash Flows From Financing Activities:
Net receipts under revolving loan payable 5,560,000 4,645,000
Sale of Common Stock -- 2,359,000
Payments of long-term debt (333,000) --
Proceeds from stock options exercised -- 26,000
Purchase and retirement of Common Stock (20,000)
Sale of Common Stock to Savings Plan 59,000 --
Expenses associated with issuance of
rights to purchase Common Stock -- (121,000)
Proceeds from warrant notes -- 15,000
Financing costs incurred (380,000) (45,000)
Payment of Subordinated Debt -- (2,359,000)
----------- -----------
Net cash provided by financing activities 4,886,000 4,520,000
----------- -----------
Net increase in Cash and Cash Equivalents 763,000 112,000
Cash and Cash Equivalents, Beginning of Period 1,177,000 808,000
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,940,000 $ 920,000
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 2,136,000 $ 1,009,000
Income taxes paid 103,000 27,000
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
<PAGE>
Item 1. Financial Statements (continued)
1. In the opinion of the management of Danskin Inc. and Subsidiaries (the
"Company"), the accompanying Consolidated Condensed Financial Statements
have been presented on a basis consistent with the Company's fiscal year
financial statements and contain all adjustments (all of which were of a
normal and recurring nature) necessary to present fairly the financial
position of the Company as of June 27, 1998, as well as its results of
operations for the fiscal three and six month periods ended June 27, 1998
and June 28, 1997 and its cash flows for the fiscal six month periods
ended June 27, 1998 and June 28, 1997. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. See the Annual Report of the Company on Form 10-K
for the Fiscal Year Ended December 27, 1997. Operating results for interim
periods may not be indicative of results for the full fiscal year.
2. Effective October 8, 1997 (the "Refinancing Closing Date"), the Company
replaced its former financing arrangements with First Union National Bank
("First Union") with a new loan and security agreement (the "Loan and
Security Agreement") with Century Business Credit Corporation ("CBCC" or
the "Lender") which matures on October 8, 2002. Proceeds of the Loan and
Security Agreement were used to pay all of the Company's indebtedness to
First Union, and to establish working capital lines of credit. On the
Refinancing Closing Date, certain warrants issued to First Union in
connection with a prior restructuring were surrendered to the Company,
without the payment of any additional consideration.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement provides the Company with a term loan facility in the aggregate
principal amount of $10 million (the "Term Loan Facility") and a revolving
credit facility, including a provision for the issuance of letters of
credit (the "Revolving Credit Facility") generally in an amount not to
exceed the lesser of (a) $45 million less the aggregate outstanding
principal balance under the Term Loan Facility, or (b) a formula amount
based upon the Company's available inventory and accounts receivable
levels, minus certain discretionary reserves. The Company's obligations to
CBCC under the Loan and Security Agreement are generally secured by a
first priority security interest in all present and future assets of the
Company. The Loan and Security Agreement contains certain affirmative and
negative covenants including maintenance of tangible net worth and a
limitation on capital expenditures, respectively. The tangible net worth
covenant is calculated by subtracting from total assets all intangible
assets and total liabilities. The covenant stipulates that the Company
must maintain a minimum tangible net worth of $2 million dollars. In
connection with the closing on the Loan and Security Agreement, the
Company paid CBCC a facility fee equal to $300,000.
On the Refinancing Closing Date, two term loans were advanced to the
Company in accordance with the terms of the Term Loan Facility. A term
loan in the original principal amount of $5 million was advanced to the
Company and is, with respect to principal, payable in thirty (30)
consecutive monthly installments commencing on the first day of the first
month following the first anniversary of the Closing Date. A second term
loan, in the original principal amount of $5 million was advanced to the
Company and is, with respect to principal, payable in eighteen (18)
consecutive monthly installments commencing on the first day of the
forty-third (43) month following the Closing Date. At the Refinancing
Closing Date, and after the satisfaction in full of the Company's
obligations to First Union, availability under the Revolving Credit
Facility was approximately $15 million. Availability at June 27, 1998 was
approximately $15 million.
Interest on the Company's obligations under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of the
Prime Rate plus one half of one percent (1/2%) and is payable monthly.
Interest may also accrue at a rate per annum equal to the sum of the
Eurodollar Rate, as defined in the Loan and Security Agreement, plus two
and three quarters percent (2 3/4%).
3. In accordance with the terms of a certain Securities Purchase Agreement
dated September 22, 1997 (the "Securities Purchase Agreement") entered
into by the Company and Danskin Investors, LLC. (the "Investor"), the
Investor and certain other persons contributed to the Company in the
aggregate (a) $21.256 million face amount of certain notes executed by the
Company and payable to First Union, and (b) $ 4 million in cash (together
the "Capital Contribution") in exchange for (i) $15 million face amount of
debt (the "Subordinated Debt"), and (ii) convertible preferred stock of
the Company having a liquidation preference of $500,000 (the "Investor
Preferred Stock") (together with the Subordinated Debt, the "Securities")
of the Company. The Investor funded the Capital Contribution through
capital contributions made to it by its members and $544,129 paid by the
Oppenheimer Convertible Securities Fund ("BFG") to the Company in exchange
for a portion of the Securities.
In accordance with the terms of the Securities Purchase Agreement, upon
the Refinancing Closing Date, the Investor Preferred Stock and the
Subordinated Debt were, by their terms, automatically exchanged for (a)
$12 million stated value of Series D Redeemable Cumulative Convertible
Preferred Stock (the "Series D Stock") of the Company, (b) a seven year
warrant to purchase 10 million shares of Common Stock at a per share price
of $0.30 (the "Warrant"), and (c) a $3 million aggregate principal amount
subordinated note of the Company (the "Remaining Subordinated Debt").
The 2,400 shares of Series D Stock are convertible into Common Stock, at
the option of the holder and, in certain circumstances, mandatorily, at an
initial conversion rate of 16,666.66 shares of Common Stock for each share
of the Series D Stock so converted, subject to adjustment in certain
circumstances. The terms of the Series D Stock also provide that, upon the
seventh anniversary of the date its issuance, the Series D Stock shall be
redeemed by the Company for an amount equal to the sum of (x) $5,000 per
share (as adjusted for any combinations, divisions, or similar
recapitalizations affecting the shares of Series D Stock), plus (y) all
accrued and unpaid dividends on such shares of Series D Stock to the date
of such redemption. Holders of the Series D Stock are entitled to vote,
together with the holders of the Common Stock and any other class or
series of stock then entitled to vote, as one class on all matters
submitted to a vote of stockholders of the Company, in the same manner and
with the same
6
<PAGE>
effect as the holders of the Common Stock. In any such vote, each share of
issued and outstanding Series D Stock shall entitle the holder thereof to
one vote per share for each share of Common Stock that would be obtained
upon conversion of all of the outstanding shares of Series D Stock held by
such holder, rounded up to the next one-tenth of a share. Therefore, the
exchange of the Series D Stock for the Subordinated Debt was highly
dilutive of existing holders of Common Stock. Holders of the Series D
Stock are also entitled to designate a majority of the directors to the
Board of Directors of the Company. The Series D Stock has an 8% annual
dividend rate, payment of which is deferred through December 31, 1999, and
a seven year maturity. If, for any fiscal year beginning with the fiscal
year ending December 31, 1999, the Company meets certain agreed upon
financial targets, all accrued dividends for such fiscal year will be
forgiven and the Series D Stock will automatically convert into 40 million
shares of Common Stock. The Remaining Subordinated Debt bears interest at
the rate of 8% per annum.
4. 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:
<TABLE>
<CAPTION>
December 27, June 27,
1997 1998
(Unaudited)
----------- -----------
<S> <C> <C>
Finished goods $17,557,000 $19,409,000
Raw Materials 4,708,000 6,739,000
Work-in-Process 5,749,000 6,442,000
Packaging Materials 700,000 608,000
----------- -----------
$28,714,000 $33,198,000
</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.
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.
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 $1.0 million in the first six months of 1998
consisted of certain executive employee severance costs primarily relating
to the termination of the former Chief Executive 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.
7
<PAGE>
11. Included in Selling, General and Administrative Expenses ("SG&A") for the
fiscal six months ended June 27, 1998 were approximately $0.8 million of
one time charges relating to the hiring of the new Chief Executive Officer
as discussed in Note 10 above. Excluding these charges, SG&A for the six
months ended June 1998 was $19.8 million compared to $20.0 million for the
six months ended June 28, 1997, a reduction of $0.2 million. Excluding
these charges and the non-recurring charges disclosed in Note 9 above,
operating income would have been $1.0 million for the six months ended
June 1998 compared to $0.1 million for the same prior period.
12. For the fiscal six months ended June 1998 and June 1997, basic and diluted
net loss per share is computed based on weighted average common and common
equivalent shares outstanding of 12,033,000 and 6,691,000, 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 June 27, 1998, the Company had the following common shares and common
share equivalents outstanding:
<TABLE>
<S> <C>
Common Shares 18,732,000
Preferred Stock 40,000,000
Warrants/Options 21,768,000
----------
Total Shares and Share Equivalents Outstanding 80,500,000
==========
</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.
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. Preliminary results of the Rights Offering indicate that
approximately 7.6 million rights were subscribed for, and approximately
1.5 million shares are issuable in respect of such rights. In accordance
with the terms of the Securities Purchase Agreement, as soon as
practicable following completion of the Rights Offering, the Investor
shall purchase any rights not subscribed for on primary subscription,
presently estimated at 3.2 million, for $.30 per share. The Company will
realize 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 will have issued 10,000,000
shares of Common Stock at $0.30 per share as contemplated by the
Securities Purchase Agreement. In addition, the outstanding principal
amount of Remaining Subordinated Notes will have been satisfied in full.
The following Unaudited Pro Froma Consolidated Balance Sheet as of June
27, 1998 of the Company is based on the Consolidated Balance Sheet of the
Company included elsewhere in this quarterly report on Form 10Q, adjusted
to give effect to the Rights Offering described above as if it were
completed at June 27, 1998.
8
<PAGE>
DANSKIN, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 27, 1998
PROFORMA
(000's)
<TABLE>
<CAPTION>
PROFORMA
HISTORICAL ADJUSTMENTS PROFORMA
---------- ----------- --------
ASSETS
<S> <C> <C> <C>
CASH 920 920
ACCOUNTS RECEIVABLE 15,956 15,956
INVENTORY 33,198 33,198
OTHER CURRENT ASSETS 2,262 2,262
------ ------
TOTAL CURRENT ASSETS 52,336 52,336
------ ------
NET FIXED ASSETS 7,908 7,908
OTHER ASSETS 1,088 1,088
------ ------
TOTAL ASSETS 61,332 61,332
------ ------
LIABILITIES & EQUITY
ACCOUNTS PAYABLE 10,051 10,051
ACCRUED EXPENSES 11,679 11,679
REVOLVING LOAN PAYABLE 13,184 13,184
CURRENT PORTION OF LT DEBT 1,333 1,333
------ ------
TOTAL CURRENT LIABILITIES 36,247 36,247
------ ------
SUBORDINATED DEBT 641 (641) 0
LONG TERM DEBT 8,667 8,667
ACCRUED DIVIDENDS 696 696
RETIREMENT BENEFIT OBLIGATIONS 1,985 1,985
------ ------
TOTAL LONG TERM LIABILITIES 11,989 11,348
------ ------
TOTAL LIABILITIES 48,236 47,595
------ ------
SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK 11,232 11,232
TOTAL EQUITY 1,864 641 2,505
------ ------
TOTAL LIABILITIES AND EQUITY 61,332 641 61,332
------ --- ------
</TABLE>
(1) The Pro Forma adjustment reflects the sale of Common Stock offered in the
July 6, 1998 Rights Offering and the application of the gross proceeds
therefrom to reduce in full the remaining Subordinated Notes. The expenses
of the Rights Offering were paid out of working capital.
15. Effective July 1, 1998, the Company entered into a new ten-year lease for
showroom, design and corporate office space to be located at 530 Seventh
Avenue, New York, New York. The Company presently anticipates that it will
incur a nonrecurring charge relating to its current leasehold obligations
at 111 West 40th Street, New York, New York of approximately $1.5 million,
including the non-cash write-off of unamortized leasehold improvements.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statements
---------------------
Certain statements contained in the discussion below, including,
without limitation, statements containing the words "believes,"
"anticipates," "expects," and words of similar import, constitute
"forward-looking" statements within the meaning of the Private
Securities 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 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 six month periods ended June 1998
with the fiscal three and six month periods ended June 1998.
Net Revenues:
Net revenues amounted to $26.4 million for the three months ended June
1998; a decrease of $3.0 million, or 10.3%, from the prior year three
months ended June 1997. Net revenues for the six months ended June 1998
amounted to $54.7 million, a decrease of $5.6 million, or 9.2%, from
$60.3 million the same prior year period. Wholesale revenues for the
Company decreased $3.1 million for the three-month period, and declined
$5.7 million for the six-month period. Retail volume remained the same
for the three-month period and increased $0.1 million for the six-month
period.
Danskin activewear net revenues, which include the Company's retail
operations, amounted to $17.4 million for the three months ended June
1998, a decrease of $2.6 million, or 13%, from $20.0 million in the
prior three month ended June 1997. Activewear revenues decreased $4.0
million, to $37.3 million, or 9.7%, for the six month period ended June
1998 over the same prior year period. The major decreases in net
revenues for the three and six-month periods are 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 48 retail stores sales
were $4.6 million for the three-month period ending June 1998 compared
to $4.6 million for the same prior year period and generated sales of
$9.1 million for the six month period ending June 1998 compared to $8.9
million for the same prior period. Comparable retail store sales
remained the same for the three months ended June 1998 and increased
1.5% for the six months ended June 1998. During the six-month period
ending June 1998, the Company closed three stores and opened two
temporary locations.
Pennaco legwear net revenues amounted to $9.0 million for the three
months ended June 1998, a decline of $0.5 million, or 5.9%, from the
three month period ended June 1997. Revenues declined $1.6 million, or
8.2%, to $17.4 million for the six months ending June 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.
Gross Profit:
Gross profit increased by $1.0 million, or 10.4% to $10.3 million in
the three months ended June 1998 from $9.3 million for the three months
ended June 1997 and increased $0.7 million to $20.8 million for the six
months ended June 1998 compared to $20.1 million for the six months
ended June 1997. Gross profit, as a percentage of net revenues,
increased to 37.9% in the six-month period ending June 1998 from 33.4%
in the same prior year period.
Activewear gross profit increased to 41.5% for the three months ended
June 1998 from 35.9% for the three months ended June 1997, and 40.3%
for the six months ended June 1998 versus 37.2% for the same prior year
period. The three and six 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 33.8% in the three months ending June
1998 from 22.7% in the prior period, and improved to 33.0% for the six
month period ended June 1998 versus 25.1% for the same prior year
period. The
10
<PAGE>
improvement in margins for the three and six month periods is 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 $0.3 million, or 3.6%, to $9.9
million, or 37.6% of net revenues, in the three months ended June 1998,
from $9.6 million, or 32.5% of net revenues, for the three month period
ending June 1997. For the six-month period ending June 1998, selling,
general and administrative expenses increased $0.6 million, or 2.8%, to
$20.6 million, or 37.6% of net revenues compared to $20.0 million, or
33.2% of net revenues for the six month period ended June 1998.
Selling, general and administrative expenses, excluding retail store
operating costs, increased $0.7 million, or 4.9%, to $15.1 million, or
33.0% of net revenues, in the six months ended June 1998, from $14.4
million, or 28.0% of net revenues in the same prior year period. The
increase in the six-month period ending June 1998, excluding retail
store operating costs, was primarily a result of higher compensation
expense, including one-time charges of $.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:
Income/loss before interest expense, non-recurring charges and income
taxes amounted to $0.3 million for the three months ended June 1998, an
improvement of $0.6 million from the loss of $0.3 million for the three
months ended June 1997. For the six months ending June 1998, the
Company generated operating income of $0.2 million compared to $0.1
million for the same prior year period.
Included in Selling, General and Administrative Expenses ("SG&A") for
the six-month period ending June 1998 were approximately $0.8 million
of one time charges relating to the hiring of the new Chief Executive
Officer as discussed in Note 11 to the Consolidated Condensed Financial
Statements. Excluding these charges, SG&A for the six month period
ending June 1998 was $19.8 million compared to $20.0 million for the
six months ended June 1997, a reduction of $0.2 million. Excluding
these charges, operating income would have been $1.0 million for the
six months ended June 1998 compared to income of $0.1 million for the
same prior period.
Interest Expense:
Interest expense amounted to $0.6 million for the three months ended
June 1998 and $1.2 million for the three months ended June 1997. For
the six-month period ending June 1998, interest expense amounted to
$1.2 million compared to $2.4 million for the same prior year period.
The Company's effective interest rate was 9.9% and 11.1% for the three
months ended June 1998 and 1997, respectively, and 10.0% and 11.0% for
the six months ended June 1998 and 1997, respectively. The effective
interest rate decrease over the prior year is principally due to lower
deferred financing costs and lower interest rates associated with the
refinancing with Century Business Credit Corporation.
Non-recurring Charges:
Non-recurring charges were $1.0 million for the six months ending June
1998. These charges consisted of certain executive employee severance
costs primarily relating to the termination of the former Chief
Executive Officer of the Company.
Income Tax Provision (Benefit):
The Company's income tax provision (benefit) rates differed from the
Federal statutory rates due to the utilization of net operating losses,
the effect of the Alternative Minimum Tax and the effect of state taxes
for the three and six months ended June 1998 and June 1997. The
Company's net deferred tax balance was $0 at both June 1998 and
December 1997.
Net Loss:
The net loss was $0.3 million for the three months ending June 1998,
an improvement of $1.3 million compared to the net loss of $1.6 million
for the three months ending June 1997. For the six months ended June
1998, the net loss was $2.1 million versus a net loss of $2.4 million
for the six months ended June 1997.
Liquidity and Capital Resources
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. Although there
can be no assurances, the Company does not presently anticipate that
the cost to modify its information technology infrastructure to be Year
2000 compliant will be material to both its financial condition and its
results of operations during fiscal 1998 and 1999. Although there can
be no assurances, the Company does not presently anticipate any
material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company does not currently have any
information concerning the Year 2000 compliance status of its suppliers
and customers. In the event that the Company's significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance,
the Company's business or operations could be adversely affected.
The Company's primary liquidity and capital requirements relate to the
funding of working capital needs, primarily inventory, accounts
receivable, capital investments in operating facilities, machinery and
equipment, and principal and
11
<PAGE>
interest payments on indebtedness. The Company's primary sources of
liquidity have been from bank financing, issuance of convertible
securities, vendor credit terms and internally generated funds.
Net cash flow used in operations improved by $0.8 million to $3.2
million for the six months ended June 1998, from a use of cash in
operations of $4.0 million in the six months ended June 1997,
principally attributable to increases in accounts payable and accrued
expenses offset by an increase in accounts receivable and inventories.
Cash decreased $1.0 million to $0.9 million during the six months ended
June 1998, after $4.5 million in net financing increases and $1.2
million in capital expenditures.
Working capital decreased $3.0 million to $16.1 million at June 1998
from $19.1 million at December 1997. Accounts receivable increased by
$1.0 million, inventories increased $4.5 million offset by increases in
the revolving loan balance of $4.6 million, accounts payable of $2.0
million and accrued expenses of $1.3 million.
The Company increased its capital expenditures during fiscal six-month
period by $1.1 million from the prior year period, of which $650,000
related to costs incurred in upgrading the Company's computer systems.
The balance of the expenditures addressed improvement 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. Preliminary results of the Rights Offering indicate that
approximately 7.6 million shares were subscribed for and approximately
1.5 million shares are issuable in respect of such rights. Danskin
Investors shall purchase any rights not subscribed for on primary
subscription, presently estimated at 3.2 million. The Company will
realize 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 will have issued 10,000,000 shares of Common Stock at $0.30
per share as contemplated by the Securities Purchase Agreement. In
addition, the outstanding principal amount of Remaining Subordinated
Notes will have been satisfied in full.
12
<PAGE>
Strategic Outlook
The Company 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 is
launching its Danskin Packables line in October 1998. Danskin Packables
will be offered primarily in the hosiery departments of department and
better specialty stores and will feature an accessible product (to be
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 launch is being 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.'
Recognizing that the Company owned 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 intends to open a limited number of
additional full price Danskin(R) stores in select metropolitan areas.
The Company is also seeking to increase revenues by pursuing growth in
international sales, selectively licensing the Danskin(R) name for
additional product categories, and evaluating other available designer
brands for selective licensing opportunities.
With the addition of Cathy Volker and her considerable experience in
legwear innovation, the Company is well positioned to capitalize on its
manufacturing expertise both as a private label resource and branded
product manufacturer. The Company has made significant progress in
achieving a more focused sales effort toward higher margin product and
consumer interest in casual legwear and in reducing its manufacturing
costs. In addition, the Company is pursuing selective designer legwear
licensing opportunities. Together, these initiatives reflect the
Company's objective to redirect its efforts to areas where it
recognizes a competitive advantage.
There can be no assurances that the Company will be able to implement
the strategies set forth above, or, that if implemented, these
strategies will be successful.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative disclosures called for by this Item 3 and by Rule 305 of
Regulation S-K are inapplicable to the Company at this time.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 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
Financial Data Schedule.
(b) Reports on Form 8-K
None.
13
<PAGE>
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.
August 12, 1998 By: /s/ M. Catherine Volker
----------------------------
M. Catherine Volker
Chief Executive Officer
August 12, 1998 By: /s/ Beverly Eichel
----------------------------
Beverly Eichel
Chief Financial Officer
(Principal Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889299
<NAME> Danskin, Inc.
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> JUN-27-1998
<EXCHANGE-RATE> 1.0
<CASH> 920,000
<SECURITIES> 0
<RECEIVABLES> 15,956,000
<ALLOWANCES> 813,000
<INVENTORY> 33,198,000
<CURRENT-ASSETS> 52,336,000
<PP&E> 7,908,000
<DEPRECIATION> 9,377,000
<TOTAL-ASSETS> 61,332,000
<CURRENT-LIABILITIES> 36,247,000
<BONDS> 0
0
11,232,000
<COMMON> 187,314
<OTHER-SE> 1,676,686
<TOTAL-LIABILITY-AND-EQUITY> 61,332,000
<SALES> 54,695,000
<TOTAL-REVENUES> 54,695,000
<CGS> 33,947,000
<TOTAL-COSTS> 33,947,000
<OTHER-EXPENSES> 21,552,000
<LOSS-PROVISION> (804,000)
<INTEREST-EXPENSE> 1,181,000
<INCOME-PRETAX> (1,985,000)
<INCOME-TAX> 91,000
<INCOME-CONTINUING> (2,076,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,648,000)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
