SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 26, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 0-20382
DANSKIN, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1284179
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
530 Seventh Avenue, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 764-4630
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share, and associated rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this Form 10-K [ ].
As of March 1, 1999, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $7,252,952. Such aggregate market value was
computed by reference to the closing price of the Common Stock as quoted by the
National Quotation Bureau on such date.
As of March 1, 1999, there were 21,018,795 shares of the registrant's Common
Stock outstanding, excluding 1,083 shares held by a subsidiary.
Unless the context indicates otherwise, the term "Company" refers to Danskin,
Inc. and, where appropriate, one or more of its subsidiaries.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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DANSKIN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of
the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
SIGNATURES
CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
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PART I
Statements contained herein and in the future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases, and in oral
statements made by or with the approval of authorized personnel that relate to
the Company's future performance, including, without limitation, statements with
respect to the Company's anticipated results of operations or level of business
for 1999 or any other future period, shall be deemed forward-looking statements
within the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, as a number of factors affecting the Company's business and
operations could cause actual results to differ materially from those
contemplated by the forward-looking statements. Such statements are based on
current expectations and involve known and unknown risks and uncertainties and
certain assumptions, referred to below, and are indicated by words or phrases
such as "anticipate," "estimate," "project," "management expects," "the Company
believes," "is or remains optimistic" or "currently envisions" and similar words
or phrases. These factors include, among other, changes in regional, and global
economic conditions; risks associated with changes in the competitive
marketplace, including the level of consumer confidence and spending, and the
financial condition of the apparel industry and the retail industry, as well as
adverse changes in retailer or consumer acceptance of the Company's products as
a result of fashion trends or otherwise and the introduction of new products or
pricing changes by the Company's competitors; risks associated with the
Company's dependence on sales to a limited number of large department store and
sporting goods store customers, including risks related to customer
requirements for vendor margin support, and those related to extending credit to
customers; risks associated with consolidations, restructurings and other
ownership changes in the retail industry; uncertainties relating to the
Company's ability to implement its growth strategies; risks associated with the
ability of the Company and third party customers and suppliers to timely and
adequately remediate any Year 2000 issues; and risks associated with changes in
social, political, economic and other conditions affecting foreign sourcing.
ITEM 1. BUSINESS
The Company designs, manufactures and markets several leading brands of women's
activewear, dancewear and legwear. Danskin(R), and Round-the-Clock(R) are the
Company's principal proprietary brands. The Company also manufactures the
Givenchy(R) women's legwear brand pursuant to a license agreement. The Company
recently acquired the rights to manufacture and market luxury sheer hosiery
under the Ralph Lauren(R), Lauren/Ralph Lauren(R), and Ralph/Ralph Lauren(R)
trademarks. In addition to its branded merchandise, the Company manufactures and
markets private label merchandise, principally legwear, for many major
retailers, including most full line department stores. The Company currently
operates as two divisions: Danskin Division for activewear and Pennaco for
legwear.
Danskin(R) is a leading brand of women's activewear, legwear, and dancewear in
the United States, enjoying a brand awareness factor of over 71% among American
women. The Company manufactures and sells activewear, dancewear and legwear to
girls and women under the Danskin(R) label and to large-size women under the
Danskin Plus(R) label. Although known for its design of seasonal fashion
offerings and its wide range of colors, currently approximately 70% of the
Danskin Division's net revenues are attributable to basic styles, with black
being the most popular color. The Company currently licenses the Danskin(R)
brand to manufacturers of women's underwear, children's socks and cycling wear.
The Danskin Division produces over 80% of its activewear products at its plant
in York, Pennsylvania and is one of the only major suppliers of branded women's
activewear with substantial domestic manufacturing capacity. The Company
believes that its domestic manufacturing facility allows it to respond to
customer orders quickly and also allows its designers to respond quickly to
market trends.
The Company's Danskin Division operates three full-priced stores and 43 outlet
stores in 21 different states. The Company's outlet stores, in addition to
offering in-line merchandise, provide a distribution channel for irregular and
excess inventory. The Company is presently contemplating closing certain
unprofitable outlet stores, downsizing certain locations, and selectively
opening full price stores during the next two years.
Pennaco hosiery is widely recognized for its quality, fit and innovation.
Pennaco is one of the oldest manufacturers of hosiery in the United States and
the second largest supplier of sheer hosiery to domestic, full line department
stores and apparel specialty stores, as well as being a leading supplier of
private label hosiery to these stores. The Company markets Round-the-Clock(R),
which has been in the market since 1919, as well as two licensed brands of
hosiery: Ralph Lauren(R) and Givenchy(R).
STRATEGY
The Company's market includes products intended for activewear, dancewear and
legwear. The Company has developed a diversified portfolio of quality branded
and private label products that can be offered to consumers at varying price
points through its channels of distribution. The Company's objectives are (i) to
expand its portfolio of products in order to become a complete activewear and
legwear resource by capitalizing on the strong name recognition of its
proprietary and licensed brands and (ii) to expand its distribution channels for
activewear through department stores and through international channels of
distribution. Key elements of the Company's strategy include the following:
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Danskin(R), Danskin Plus(R), Dance France(R) and Round-the-Clock(R) are
registered trademarks of Danskin, Inc. Givenchy(R) is a registered
trademark of Givenchy S.A., Ralph Lauren(R), Lauren/Ralph Lauren (R) and
Ralph/Ralph Lauren(R) are registered trademarks of PRL USA, Inc. and the
Polo/Lauren Company, L.P. Lycra(R) is a registered trademark of E.I.
DuPont de Nemours & Co., Inc.
<PAGE>
Expansion of Danskin(R) Product Lines
The Company introduced a variety of new activewear products in 1998. This
expansion included Dry Zone(TM) and the Company's Danskin Packables(TM) line.
Dry Zone is a revolutionary new moisture management fabric designed to regulate
body temperature. This fabric combines technical innovation with comfort and
style, offering the Danskin customer an alternative performance fabric.
The Packables(TM) line was designed to be offered primarily in the hosiery
departments of department and better specialty stores and features an accessible
product (initially offered 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
Packables(TM) line afforded the Company the opportunity to speak to retailers
and consumers about Danskin(R) as addressing the needs of today's active
consumer beyond the gym.
To continue to move Brand Danskin beyond its traditional stretch bodywear
platform, the Company intends to introduce Zen Sport from Danskin in Fall 1999.
The Zen Sport line collection strikes a balance between active and casual wear
with apparel made from environmentally safe materials, such as organically grown
cotton and vegetable-based dyes. Zen Sport from Danskin responds to a woman's
need for clothing that is suited to low impact activities such as yoga,
meditation and stretching exercises.
The Company believes that its new product offerings, such as Dry Zone(TM),
Danskin Packables(TM), and Zen Sport from Danskin(TM), which complement its
traditional strength in stretch bodywear and legwear, are representative of the
kinds of products and innovation that will advance its "Primary Resource"
strategy and broaden the positioning of the Danskin brand to the consumer beyond
`activewear' to one of `active lifestyle.' Also, with the addition of these
offerings, the Company believes that it will be successful in expanding the
visibility of Brand Danskin not only in the department store class of trade
(Brand Danskin offered for sale in many more departments) but also beyond its
traditional channels of distribution to alternative channels such as the
Internet (through various retailer web sites), retailer catalog direct mail
distribution, and home shopping television channels.
International Sales Expansion
The Company believes that the Danskin(R) brand enjoys recognition in many
foreign markets. Accordingly, the Company has targeted international markets as
a potential source of growth. It is exploring distribution in foreign countries.
Export net sales over the past three full fiscal years were $6.7 million for
fiscal 1996, $6.3 million for fiscal 1997, and $5.9 million for fiscal 1998.
Licensing of Danskin(R) Name
The Company currently licenses the Danskin(R) brand to manufacturers of women's
and girl's underwear, children's socks and cycling wear. The Company believes
that there is an opportunity to license the Danskin(R) name for additional
product categories, such as children's sportswear, swimwear, sunglasses,
watches, personal care products and outerwear. The Company believes that
selective licensing enhances the value of its brands, by expanding the
opportunities for retail purchases of its brands, affording cross-marketing and
merchandising opportunities and providing additional product categories for sale
in Company-owned stores.
Store Strategy
Recognizing that the Company's retail stores provide a platform for capitalizing
on the strong brand awareness enjoyed by Danskin, provide a channel of
distribution where the Company can showcase its product, and act as a laboratory
for product innovation, the Company is taking steps to revitalize its retail
operations, including closing under-performing locations, downsizing certain
locations, re-merchandising the stores, installing a point-of-sale system in all
locations to provide critical inventory and sales information and implementing
visual merchandising programs in all locations to achieve a consistent and
identifiable retail impression and presence.
Outlet Stores - The Company continues to evaluate the performance of its outlet
locations, renegotiating the leases on or closing certain under-performing
stores, and limiting the number of new outlet stores it opens each year. In
addition, in order to improve the operating performance of its outlet stores,
the Company has adjusted the stores' merchandise mix and ordering practices,
providing for the automatic replenishment of product as determined by model
stock levels.
Full Price Retail Stores - Since 1991, the Company has operated a full price
retail store in Santa Monica, California, originally under the Dance France(R)
name and presently under the Danskin(R) name. In November 1995, the Company
opened a full price retail store under the Danskin(R) name on Columbus Avenue in
New York City, followed in February 1996 by a second store in Miami's South
Beach. The Company recently signed a lease for a full price retail store in the
SoHo section of New York City. It presently anticipates operating in this
location by the first quarter of 2000. The Company believes that the Danskin(R)
name recognition of over
<PAGE>
71% among American women and the brand's reputation for fit, comfort and
durability provide the Company with an opportunity to successfully open
additional full price Danskin(R) stores in freestanding metropolitan and upscale
mall locations. These stores offer the Company's consumers a wider assortment of
Danskin(R) merchandise by carrying an inventory of approximately 1,500 SKU's
(stock keeping units), contrasted with only approximately 150 SKU's maintained
at any one time by even the largest retailer of Danskin(R) products. In addition
to expanding a channel of distribution for the Company's products, the Company
believes these stores are an effective form of consumer advertising and help
"showcase" the full assortment of its activewear merchandise. The Company
believes there are ample opportunities for selective national expansion of its
full price retail strategy.
E-Commerce - The Company is in the process of exploring its alternatives for the
marketing and distribution of its activewear and legwear products over the
internet. The Company believes that the internet will provide it with a
distribution channel that would allow it to offer the full complement of its
product lines while reaching a broader audience than is presently available to
it in any existing channel of distribution.
Establishment of the Company as a Complete Legwear Resource
Pennaco is the number two sheer hosiery resource (behind Sara Lee Corporation)
in most domestic, full line department stores, and enjoys a reputation for the
fit and sheer quality of its products, private label offerings, reliable
shipping performance and brand diversity. The Company is also a major supplier
of private label sheer hosiery sold by these department stores. The Company has
developed initiatives for each of its legwear brands to penetrate new market
niches. These include the introduction of new, supersheer products, value
oriented multipacks and expanded plus size offerings. In addition, recognizing
the trend towards more casual dressing, the Company has placed a focus on
increasing its casual business, including socks, trouser socks and tights.
PRODUCTS
Activewear
The Company designs, manufactures and markets women's and girl's activewear
(including bodywear, cover-ups and outerwear) and dancewear under the Danskin(R)
label.
Danskin realizes approximately 70% of activewear revenues from basic styles,
with black being the single most popular color. Activewear products are
generally designed in four seasonal fashion groupings, with a monthly
introduction of new styles or colors. In an effort to improve margins and
minimize operating complexity, the Company continually reviews and eliminates
low-volume SKU's from its product offerings. The total number of SKU's for
activewear is approximately 4,700.
Danskin(R) activewear products sell at retail prices ranging from $4.50 to
$64.00.
Legwear
Pennaco is one of the oldest manufacturers of hosiery in the United States and
is the second largest supplier of women's sheer hosiery and legwear to domestic,
full line department stores and apparel specialty stores and a major supplier of
private label hosiery to these stores. Approximately 36% of the Company's annual
legwear revenues consist of sales of its private label merchandise. Pennaco
hosiery is widely recognized for its quality, fit and innovation. Through its
proprietary brand, Round-the-Clock(R), the Company was the first manufacturer to
introduce multiple sizes and colors in pantyhose, and was a pioneer in the
application of spandex (Lycra(R)) yarns to hosiery.
Recognizing the trend towards more casual dressing, the Company has increased
its product offerings for the casual legwear market. It has designed a
collection of socks, trouser socks and tights to fill a void in the products
the Pennaco Division historically offered. The Company anticipates that its
casual program will be a source of additional growth within the division.
During fiscal 1998, the Company manufactured and sold two licensed brands of
hosiery: Givenchy(R) and Anne Klein(R), which represented approximately 27% and
5% of legwear revenues, respectively for the fiscal year ended December 26,
1998. Pennaco introduced Givenchy Hosiery in 1979. Effective January 1, 1999 the
Company renewed the Givenchy(R) license agreement for an additional three (3)
years, subject to renewal under certain circumstances. The Givenchy(R) license
agreement covers the United States, Canada and Mexico and expires on December
31, 2001. Anne Klein(R) legwear was initially launched by Pennaco Hosiery in
1991. The license with Anne Klein & Company expired on December 31, 1998. The
Company determined not to renew the Anne Klein(R) license.
Givenchy(R) sheer hosiery retails in a price range of $3.50 to $13.00 and
Round-the-Clock(R) Girdle at the Top(TM) retails in a price range of $11.50 to
$12.50 with the Take Two Value Pack, retailing at $3.95 to $8.95.
As of December 1, 1998, the Company signed a licensing agreement with PRL USA,
Inc. and the Polo/Lauren Company L.P. for the manufacture and distribution of
luxury sheer hosiery. The Ralph Lauren Agreement covers the United States of
America, its territories and possessions, Canada and Mexico and extends, under
certain circumstances, through 2007, if the Company were to meet certain agreed
upon minimum net sales levels.
Although the Company is required to maintain a high number of legwear SKU's
because of the complex packaging requirements of its private label customers, it
knits only 160 styles. Product is held in an undyed state and is dyed, finished
and packaged in accordance with forecasted demand. Over the past year, the
Company has aggressively reduced both the number of legwear styles and SKU's it
produces, which has contributed to improved gross margins.
MARKET SEGMENTATION
Activewear
The Company sells its activewear products to approximately 3,290 accounts,
representing over 5,380 stores. These products are targeted towards different
segments of the wholesale market. Danskin(R) and Danskin Plus(R) (activewear for
the large-sized woman) products are marketed to major sporting goods stores,
such as The Sports Authority, Lady Footlocker and Oshman's Sporting Goods, full
line department stores, including Dillard's, Nordstrom, Lord & Taylor, Federated
Department Stores (including Burdine's and Macy's) and Belk Stores, and many
smaller sporting goods and specialty stores. The Company continues to
re-evaluate its product offerings to gain additional penetration in the
activewear market in department stores.
Legwear
The Company sells its legwear products to approximately 915 accounts,
representing over 2,450 stores. The customer base for its legwear consists
primarily of full line department stores and apparel specialty stores, including
Federated Department Stores (including Macy's and Bloomingdale's), May Co.
stores (including Kaufmans, Filenes, Hecht, Famous Barr, Robinson May, Foleys,
Meier and Frank and Lord & Taylor), Dillards, Dayton Hudson - Marshall Field's,
Neiman Marcus, Nordstrom, Saks Fifth Avenue, Carson Pirie Scott and Talbot's
(including its catalog).
The Company provides a diversity of legwear products to its customer base at
each price/quality level, and seeks market niches for product expansion. Within
the legwear market, the market is divided principally by retail price points,
with designer brands, such as Ralph Lauren(R), occupying the upper price point
positions with generally higher gross margins, brands such as Lauren/Ralph
Lauren(R) and Givenchy(R) occupying the upper middle price point position, and
brands such as Round-the-Clock(R) occupying the middle price point positions and
private label products at varied price points, depending upon the retailer's
brand image.
In the third quarter of fiscal 1998, the Company introduced its
Round-the-Clock(R) Take Two value pack, which packages two pairs of hosiery in a
single package at a suggested retail lower than two pairs purchased
individually. Currently available in department stores, the value pack strategy
is the outgrowth of the Company's realization that the department store consumer
has become desensitized by repetitive price promotion, combined with the
acknowledgement that the Company needed to address the overall decline in the
sheer category and such declines effects on sales of the Round-the-Clock(R)
brand. Take Two offers the department store consumer the fit, quality and style
of the Round-the-Clock(R) brand at a value oriented price point.
<PAGE>
STORE OPERATIONS
Full Price Retail
Since 1991, the Company has also operated a full price retail store in Santa
Monica, California, originally under the Dance France(R) name and presently
under the Danskin(R) name. In November 1995, the Company opened a full price
retail store under the Danskin(R) name on Columbus Avenue in New York City,
followed in February 1996 by a second store in Miami's South Beach. These stores
are designed exclusively for women and offer a wide assortment of Danskin(R)
products. The Company believes that the full price store concept will be
applicable in other major metropolitan areas and in selected upscale mall
locations in the United States, and it presently intends to further test that
concept by selectively opening new full price retail locations in the next two
years.
The Company recently signed a lease for a full price retail store in the SoHo
section of New York City. It presently anticipates operating in the location by
the first quarter of fiscal year 2000.
In light of disappointing revenue and profitability levels, the Company has
determined to close its retail operation at its current South Beach location.
The Company is reviewing its options for maintaining a retail presence within
the South Beach market.
The Company's New York City store covers approximately 2,500 square feet, the
Santa Monica store covers approximately 1,100 square feet and the South Beach
store covers approximately 6,000 square feet. The Company presently anticipates
that any full price stores opened in the future would range in size from
approximately 1,500 to 2,000 square feet each. The Company estimates that
capital expenditures for each store of this size range will average
approximately $400,000, and that each such store will require approximately
$150,000 of inventory.
<PAGE>
Outlets
The Company currently operates 43 outlet stores located in 21 different states,
situated in areas where the Company believes they generally do not compete with
the Company's principal channels of distribution. They range in size from
approximately 1,800 to 12,000 square feet, with the average being approximately
4,900 square feet. These stores historically provided a channel of distribution
for closeout merchandise. The Company has, however, taken steps which have
improved inventory turns and margins for its outlet stores. See "--Strategy --
Store Strategy -- Outlet Stores."
OPERATIONS
Activewear
The Company manufactures over 80% of its activewear products at its 275,000
square foot plant in York, Pennsylvania and is one of the only major suppliers
of branded women's activewear with substantial domestic manufacturing capacity.
The Company believes that manufacturing domestically allows it to respond to
customer orders quickly and also allows its designers to respond quickly to
market trends, thus enabling the Company to defer authorization of fabric
cutting until product samples have been seen by buyers. In order to complement
the York plant, the Company operates a sewing facility in Mexico, under NAFTA,
that currently produces activewear products with lower costs on a contract
basis. This facility provides the activewear plant with expansion opportunities,
while retaining the quick response and flexibility afforded by being a domestic
manufacturer. In addition, as the Company progresses in its strategy of
diversification of its activewear product offerings, it expects to source an
increasing proportion of total production through offshore contractors.
Specifically, the Company has an agreement with Li & Fung (Trading) Limited ("Li
& Fung"), pursuant to which Li & Fung has agreed to act as a non-exclusive
buying agent of the Company to assist the Company in purchasing merchandise in
certain foreign countries.
The York plant has a dyeing facility, which enables the Company to hold basic
garments in an undyed state and then to dye them when customer orders are
received, thereby minimizing inventory risk and inventory levels. The Company is
also able to do its own screen printing at this facility. Distribution of
activewear is made from the Company's distribution center in York, Pennsylvania.
Legwear
The Company manufactures its hosiery in its 281,000 square foot facility in
Grenada, Mississippi. The facility's current capacity is approximately 50,000
dozen pairs per week, and the Company is currently producing approximately
25,000 dozen pairs per week. Actual production varies according to seasonal
requirements. The plant operates over 412 high-speed knitting machines and has a
state-of-the-art dyeing facility that has helped make Pennaco a recognized
leader in the industry for its fashion and color offerings. Legwear distribution
facilities are also located in Grenada, Mississippi. In addition, the Company
recently acquired 42 state-of-the-art knitting machines, which enable it to
remain a market leader in innovation and quality.
The Company continues to process a substantial and increasing portion of its
customer orders through EDI programs, which permit the electronic receipt of
purchase orders and, in some cases, the electronic transmission of invoices. In
addition, the Company has established a "New Quick Response Program" for certain
high volume styles, which has enhanced its EDI replenishment capabilities and
has enabled it to ship products within five days of receiving an order.
SALES
The Company's domestic sales force presently consists of approximately 31 sales
people; 19 of whom are responsible for the Company's activewear product lines
and 12 of whom are responsible for the Company's legwear product lines to
department stores, apparel specialty stores, sporting goods retailers and
smaller specialty stores.
The Company periodically reviews the structure of its sales force and makes
adjustments based on the Company's needs. Recognizing the unique opportunities
available to each of Danskin Division and Pennaco, as well as the challenges
faced by each division, the Company determined, during fiscal 1998, to appoint a
President of each division with responsibility for the sales efforts of the
division. Denise Landman, formerly SVP Sales for Danskin, Inc. was appointed
President of the Pennaco Division and Gene Gsell, formerly with The Timberland
Company, was appointed President of the Danskin Division. The Company then
restructured its activewear sales force to address the multiple channels of
trade in which Danskin product is sold. Specifically, each of the department
store, sporting goods store and specialty store class of trade has a dedicated
activewear sales force. The Company believes that a channel dedicated sales
force, led by a divisionally focused executive, will enable it to successfully
segment its activewear line, properly position its product extensions, and reach
the ultimate consumer where she shops.
Export sales are generally made to international distributors, with the
exception of Canada, where the Company utilizes independent sales
representatives to market Danskin(R) activewear directly. The Company
continually explores further opportunities in export sales.
<PAGE>
The Company emphasizes its commitment to customer service through a staff of
area representatives, located throughout the country, whose principal
responsibility is field merchandising of legwear products in department stores.
These representatives are present in the stores during peak consumer traffic
periods; they merchandise the selling fixtures, instruct store personnel about
effective selling techniques, conduct seminars, interact directly with consumers
and are available to support in-store events and promotions, all with the goal
of maximizing sales of the Company's products. To a lesser extent, they also
merchandise the Company's activewear products in department stores and certain
sporting goods stores.
The Company also maintains an `inside sales' force who partner with the sales
associates. This enables the Company to be available to its customers even
within the largest, most geographically diverse territories.
MARKETING
For both legwear and activewear, the Company continues to promote and market its
products through unique promotions and point-of-sale materials keyed to the
Company's visions of either a complete legwear resource or as an active
lifestyle brand, including product demonstrations, fashion shows, giveaways, and
clinics.
One of the Company's principal promotional vehicles for activewear continues to
be its title sponsorship and ownership of the Danskin(R) Women's Triathlon
Series, an annual series of triathlon competitions for women. The Company uses
the Series as a promotional event for both retailers and consumers, offering
seminars at retail stores for participants prior to the race event in each
location. The Company further evidences its support of women's programs by
donating all of the triathlon entry fees to the Susan G. Komen Breast Cancer
Foundation.
Historically, the Company sponsored "Team Danskin," a group of world class women
athletes from a variety of sports to allow the Company to direct its marketing
efforts toward women who actually participate in specific sporting activities.
The Company has determined not to continue to retain the services of the team
members, but to target specific marketing needs with specific individuals
representative of the focused sporting activity and to compensate such
individuals for their participation.
Legwear marketing programs consist primarily of in-store promotions,
co-operative advertising and in-store legwear seminars, which are designed to
teach the stores' sales personnel how to sell the Company's products.
SUPPLIERS
The Company's raw materials consist principally of piece goods and yarn that are
purchased by the Company from a number of domestic and foreign textile mills and
converters. The Company obtains Lycra(R) from DuPont. Although from time to time
there have been shortages of Lycra(R), such shortages have not adversely
affected the Company. The Company does not have long-term formal arrangements
with any of its suppliers. However, the Company, to date, has been able to
satisfy its raw material requirements and considers its sources of supply
adequate.
TRADEMARKS
The Company owns and utilizes a variety of trademarks, the principal ones being
Danskin(R) and Round-the-Clock(R). The Danskin(R) trademark is owned by the
Company worldwide, except in Japan, and is registered with the United States
Patent and Trademark Office and in most other major jurisdictions of the world.
In Japan, the trademark is owned by the Company's former licensee, Goldwin,
Inc., with whom the Company has a long-term cooperation agreement.
Certain of the Company's other trademarks are registered with the United States
Patent and Trademark Office and in some foreign jurisdictions as well. The
Company regards its trademarks and other proprietary rights as valuable assets
and believes that they have significant value in the marketing of its products.
The Company actively protects its trademarks against infringement.
REGULATION
The Company is subject to various federal, state and local environmental laws
and regulations limiting the discharge, storage, handling and disposal of a
variety of substances, particularly the federal Water Pollution Control Act, the
Clean Air Act of 1970 (as amended in 1990), the Resource Conservation and
Recovery Act (including amendments relating to underground tanks) and the
federal "Superfund" program. The Company cannot with certainty assess at this
time the impact upon its operations or capital expenditure requirements of
future emission standards and enforcement practices under the 1990 amendments to
the Clean Air Act.
In connection with the refinancing of its bank loan agreement in the fourth
quarter of fiscal year ended December 27, 1997, the Company engaged an
independent environmental consulting firm to conduct assessments of
environmental conditions at the Company's manufacturing and distribution
facilities in York, Pennsylvania and Grenada, Mississippi. No material
environmental
<PAGE>
problems were discovered in these assessments.
The Company also is subject to federal, state and local laws and regulations
relating to workplace safety and worker health, including those promulgated
under the Occupational Safety and Health Act ("OSHA"). As part of its OSHA
compliance efforts, the Company requires all personnel working in high noise
areas and those working in certain areas with high concentrations of dust to
wear protective equipment.
The Company believes that it currently is in compliance in all material respects
with existing OSHA standards and environmental laws and regulations. The Company
does not believe that there is a substantial likelihood that further OSHA or
environmental compliance will require substantial expenditures or materially
affect its operations or competitive position.
EMPLOYEES
As of March 1, 1999, the Company employed approximately 1,463 persons, of whom
996 were employed out of Danskin's York, PA facility, 441 were employed out of
the Pennaco facility in Grenada, MS and the remainder were employed at the
Company's executive offices. At such date, 1,175 of the Company's employees were
paid on an hourly basis, and the remainder were salaried employees. Although
there have been attempts to organize certain of its employees in the past, none
are currently represented by a union, and employee relations are generally
considered to be good.
COMPETITION
The apparel industry is highly competitive. Many of the Company's competitors
are larger and have greater financial, distribution, marketing and other
resources, and better established brand names, than the Company. The Danskin(R)
brand competes with products sold by an array of smaller and larger companies,
including Nike, Reebok, Adidas, Fila, Champion, AuthenticFitness and Weekend
Exercise Company. Legwear products compete with products sold by a number of
other established manufacturers and marketers, the largest of which is the Hanes
division of Sara Lee Corporation, while other significant competitors include
Jockey International, Inc., Kayser-Roth Corp. and Ithaca Industries, Inc. The
Company does not market its legwear either in the mass market channel of
distribution or in food or drug stores.
ITEM 2. PROPERTIES
The Company leases its principal executive offices and showroom located at 530
Seventh Avenue in New York City. Such lease provides for an average annual base
rent of approximately $736,000 and expires in December 2008. The Company remains
liable on its lease obligation for its former executive offices and showroom
located at 111 West 40th Street in New York City. Such lease provides for annual
base rent of $748,000 and expires in December 2001. However, the Company
receives income from subtenants aggregating approximately $664,546 on an annual
basis. The subleases are co-terminous with the Company's lease obligation, which
expires in December 2001.
The Danskin Division plant is located in York, Pennsylvania and contains office
space, inventory storage space and a shop area where substantially all of the
Company's activewear products are manufactured. This facility is owned by the
Company. Danskin also leases a distribution facility in York, Pennsylvania. Such
lease provides for annual rent of $424,000 and expires in September 1999. The
Company is reviewing its options with respect to its distribution facility; it
believes, however, that it will be able to extend the term of its current lease
if it determines that that is the best course of action.
The Pennaco mill is located in Grenada, Mississippi and contains office space
and inventory storage space where substantially all the hosiery products
manufactured by the Company are produced. The Company leases this facility from
the city of Grenada for a nominal rent through the year 2065. The distribution
center is also leased from the city of Grenada for annual rent of $333,000,
under a lease that expires in December 2008.
The Company also has committed to lease space for 46 retail stores at annual
rents ranging from $17,000 to $300,000 under leases expiring during the fiscal
year ending 1999 through 2015. Two outlet store leases expire in 1999. The
Company continually reviews the operations and profitability of its retail
locations and will make lease renewal determinations based upon such review. The
Company may also, as a result of such review, attempt to negotiate additional
lease terminations.
Dissatisfied with the revenue and profitability levels of its owned-retail
location in Reading, Pennsylvania, the Company sold such property in the fourth
quarter of 1998 for gross proceeds totaling $1 million.
The Company believes that its facilities provide adequate levels of capacity for
current levels of production as well as for reasonable levels of additional
growth. None of the Company's properties is leased from any affiliated entity.
<PAGE>
Substantially all of the Company's properties and other assets are pledged to
Century Business Credit Corporation (CBCC) to secure the Company's obligations
under the Loan and Security Agreement with CBCC. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources" and Note 11 in the Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
On November 25, 1996, the Company commenced suit against Herman Gruenwald,
former President, Director and Principal shareholder of Siebruck Hosiery Ltd.
("Siebruck") for damages in the amount of $1,450,000 in the Superior Court,
Montreal. The claim relates to unreported sales in excess of $1.5 million
arising under a license agreement entered into by and between the Company and
Siebruck, which expired on December 31, 1995. Siebruck was placed under the
provision of the Canadian Bankruptcy and Insolvency Act. Mr. Gruenwald's
statement of defense included a cross-demand against the Company wherein he is
claiming damages to his reputation in the amount of Cdn. $3.0 million. A
reasonable evaluation of the claim against the Company cannot be made at this
time. However, the Company does not presently anticipate that the ultimate
resolution of such claim will have a material adverse impact on the financial
condition, results of operations, liquidity, or business of the Company.
The Company is a party to a number of other legal proceedings arising in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations, liquidity or business of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded over-the-counter on the NASDAQ National
Market under the symbol "DANS" until August 8, 1996, at which time it was moved
to The NASDAQ SmallCap(TM) Market under the same symbol. Effective June 27,
1997, the Company's Common Stock was delisted due to the Company's
non-compliance with NASDAQ's minimum capital and surplus requirement. Bid
quotations for the Company's Common Stock may be obtained from the "pink sheets"
published by the National Quotation Bureau, and the Common Stock is traded in
the over-the-counter market. The following table presents the quarterly high and
low bid quotations during the last two fiscal years, including for each of the
three months ended March 29, 1997 and June 27, 1997, during which time the
Common Stock was listed on the NASDAQ SmallCap Market(TM) and for each of the
quarters thereafter, during which time the Common Stock was no longer traded on
the NASDAQ Small Cap Market(TM). These quotations reflect the inter-dealer
prices, without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions.
The Company does not presently intend to apply for listing of the Common Stock
on the NASDAQ National Market or the NASDAQ Small Cap Market(TM) in the
immediate future.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended December 27, 1997
Three-month period ended March $2.750 $2.000
Three-month period ended June 2.375 0.500
Three-month period ended September(1) 1.500 0.563
Three-month period ended December 1.188 0.500
Fiscal Year Ended December 26, 1998
Three-month period ended March $2.250 $0.480
Three-month period ended June 2.750 1.375
Three-month period ended September 2.125 1.000
Three-month period ended December 1.687 0.687
</TABLE>
As of December 26, 1998, the number of stockholders of record of the
Company's Common Stock was approximately 162.
- -------------------------
(1) Since June 27, 1997, the Common Stock has traded solely in the
over-the-counter market. Accordingly, bid quotations for the Common Stock
for periods after June 27, 1997 were available only from the "pink sheets"
published by the National Quotation Bureau. Such bid quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.
The Company has not declared any cash dividends with respect to the Common
Stock subsequent to the effective date of its initial public offering,
August 19, 1992. The Company's Loan and Security Agreement with CBCC
prohibits the payment of dividends without the lender's consent.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Commencing with the nine months ended December 30, 1995, the Company changed its
fiscal year end to the last Saturday in December. The following selected
consolidated operating data for each of the two years in the fiscal year ended
March 1994 and March 1995, the two fiscal nine months ended December 24, 1994
and December 30, 1995, and the four fiscal twelve months ended December 30,
1995, December 28, 1996, December 27, 1997 and December 26, 1998, and the
financial position for each of the periods then ended, have been derived from
the consolidated financial statements of the Company. The twelve month period
ended December 30, 1995 is herein referred to as the "Twelve Months 1995"; the
nine-month period ended December 30, 1995 is referred to as "Nine Months 1995";
and the nine-month period ended December 24, 1994 is referred to as the "Nine
Months 1994." The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements, including the Notes
thereto, of the Company, appearing elsewhere in this Annual Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Fiscal Nine Months
Ended March Ended December
(in thousands, except per share amounts)
1994 1995 1994 1995
----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C>
Net revenues
Danskin $71,814 $74,608 $55,003 $56,732
Pennaco 59,683 53,510 40,964 37,055
----------- ----------- ----------- -----------
Total 131,497 128,118 95,967 93,787
Cost of goods sold
Danskin 42,797 45,979 33,769 35,028
Pennaco 43,207 41,367 31,640 27,153
----------- ----------- ----------- -----------
Total 86,004 87,346 65,409 62,181
Gross profit
Danskin 29,017 28,629 21,234 21,704
Pennaco 16,476 12,143 9,324 9,902
----------- ----------- ----------- -----------
Total 45,493 40,772 30,558 31,606
Selling, general and administrative expenses 43,847 44,077 32,038 29,851
Non-recurring charges (1) 6,244 4,143 1,645 1,100
Interest expense 2,343 3,928 2,684 3,699
----------- ----------- ----------- -----------
(Loss) before provision for (benefit from) income
taxes, cumulative effect of a change in accounting method
and extraordinary item (6,941) (11,376) (5,809) (3,044)
Provision for (benefit from) income taxes (2) 370 (1,719) (1,524) 178
----------- ----------- ----------- -----------
(Loss) before cumulative effect of a change in
accounting method and extraordinary item (7,311) (9,657) (4,285) (3,222)
Cumulative effect of a change in accounting method 250 --- --- ---
Extraordinary item (3) --- --- --- ---
----------- ----------- ----------- -----------
Net (loss) income (7,061) (9,657) (4,285) (3,222)
Preferred Stock dividend --- --- --- ---
----------- ----------- ----------- -----------
(Loss) applicable to Common Stock ($7,061) ($9,657) ($4,285) ($3,222)
=========== =========== =========== ===========
Basic and diluted net (loss) per share
- --------------------------------------
Net (loss) per share before extraordinary item (4) ($1.14) ($1.51) ($0.67) ($0.50)
Net income per share for extraordinary item (3) --- --- --- ---
Cumulative effect of a change in accounting method 0.04 --- --- ---
----------- ----------- ----------- -----------
Net (loss) per share after extraordinary item ($1.10) ($1.51) ($0.67) ($0.50)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 6,408 6,396 6,392 6,415
=========== =========== =========== ===========
Working capital $17,066 $17,618 $19,585 $25,656
Total assets 74,481 77,741 81,601 67,742
Long-term debt (excludes current obligations) 13,850 24,399 22,743 36,666
Total debt (5) 38,371 45,725 44,083 41,101
Total stockholders' equity 13,408 5,195 9,233 1,519
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Twelve Fiscal Years
Months Ended Ended December
(in thousands, except per share amounts)
1995 1996 1997 1998
------------ ----------- ----------- -------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C>
Net revenues
Danskin $76,337 $80,608 $81,158 $73,468
Pennaco 49,601 47,537 40,828 35,273
------------ ----------- ----------- -------------
Total 125,938 128,145 121,986 108,741
Cost of goods sold
Danskin 47,244 49,056 52,314 44,805
Pennaco 36,874 34,554 29,508 23,623
------------ ----------- ----------- -------------
Total 84,118 83,610 81,822 68,428
Gross profit
Danskin 29,093 31,552 28,844 28,663
Pennaco 12,727 12,983 11,320 11,650
------------ ----------- ----------- -------------
Total 41,820 44,535 40,164 40,313
Selling, general and administrative expenses 41,895 42,026 40,174 42,112
Non-recurring charges (1) 3,598 -- 300 2,419
Interest expense 4,943 4,721 4,278 2,513
------------ ----------- ----------- -------------
(Loss) before provision for (benefit from) income
taxes, cumulative effect of a change in accounting method
and extraordinary item (8,616) (2,212) (4,588) (6,731)
Provision for (benefit from) income taxes (2) (20) 2,777 245 190
------------ ----------- ----------- -------------
(Loss) before cumulative effect of a change in
accounting method and extraordinary item (8,596) (4,989) (4,833) (6,921)
Cumulative effect of a change in accounting method --- --- --- ---
Extraordinary item (3) --- --- 5,245 ---
------------ ----------- ----------- -------------
Net (loss) income (8,596) (4,989) 412 (6,921)
Preferred Stock dividend --- 202 425 1,114
------------ ----------- ----------- -------------
(Loss) applicable to Common Stock ($8,596) ($5,191) ($13) ($8,035)
============ =========== =========== =============
Basic and diluted net (loss) per share
- --------------------------------------
Net (loss) per share before extraordinary item (4) ($1.34) ($0.80) ($0.66) ($0.50)
Net income per share for extraordinary item (3) --- --- $0.66 ---
Cumulative effect of a change in accounting method --- --- --- ---
------------ ----------- ----------- -------------
Net (loss) per share after extraordinary item ($1.34) ($0.80) ($0.00) ($0.50)
============ =========== =========== =============
Weighted average number of common shares outstanding 6,415 6,513 7,942 16,168
============ =========== =========== =============
Working capital $25,656 $24,559 $19,070 $6,545
Total assets 67,742 66,940 55,022 57,706
Long-term debt (excludes current obligations) 36,666 31,589 9,667 6,674
Total debt (5) 41,101 41,558 21,539 24,703
Total stockholders' equity 1,519 801 1,681 (3,900)
</TABLE>
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (continued)
(1) Non-recurring charges of $2.4 million for the fiscal year ended
December 26, 1998 consisted of costs related to certain executive employee
severance costs, provision established for the remaining net lease obligation
for the former corporate office on 111 W. 40th Street in New York City and
write-offs of non-operating assets, offset by the recognition of the Sea & Ski
Receivable and the gain on the sale of the Reading, PA outlet store.
Non-recurring charges of $300,000 for the fiscal year ended December 27, 1997,
consisted of certain executive employee severance costs. Non-recurring charges
were $1.1 million for the nine months ended December 30, 1995 and consisted of
losses on certain license arrangements and certain executive employee severance
costs. Non-recurring charges were $4.1 million (net of $0.7 million in related
party interest income) for the fiscal year ended March 25, 1995. The
non-recurring charges included costs associated with the potential acquisition
of affiliated entities, a reserve for additional amounts due from Esmark, Inc.
("Esmark"), the Company's former parent, an accrual for certain executive
compensation costs and costs associated with certain litigation, and the
write-off of certain non-operating long-term assets. Non-recurring charges were
$6.2 million for the fiscal year ended March 26, 1994. Fiscal nine months ended
December 24, 1994 included $2.1 million (net of $0.5 million in related party
interest income) related to the costs associated with the potential acquisition
of affiliated entities, additional amounts due from affiliates, an accrual for
certain executive compensation costs and certain costs associated with ongoing
litigation. Such reserve was considered necessary principally due to the
diminution in the market value of one of Esmark's principal assets, its
2,010,000 shares of Common Stock of the Company.
(2) Fiscal year ended December 28, 1996 included a $4.5 million increase in
the deferred tax valuation allowance, which reduced the net deferred tax asset
to zero.
(3) The recognized gain of $5.2 million represents the difference between (a)
the recorded value of the Term Loan and (b) the fair value of the Subordinated
Notes and the Series C Preferred Stock, less the write-off of deferred finance
charges relating to the First Union Loan Agreement and the costs incurred in
connection with the Capital Contribution and the Refinancing. This gain was
applied against the Company's net operating loss carry forward, which is fully
reserved. Any remaining net operating loss carry forward available after offset
may be subject to limitation under the change of control provisions of the
Internal Revenue Code. See "Risk Factors -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Notes 11 and 17
in the Notes to Consolidated Financial Statements.
<PAGE>
(4) In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share",
which requires presentation of basic earnings per share (EPS) and diluted
earnings per share and requires the restatement of EPS for all prior periods
reported. The Company has adopted this statement as of December 27, 1997.
In connection with the closing of the Capital Contribution, (i) the Board of
Directors declared a stock dividend on the Common Stock equal to one share of
Common Stock for each 11.99 shares of Common Stock held of record as of the
close of business on September 22, 1997 (these shares were retroactively applied
in the accompanying financial statements for the earnings per share calculation)
and (ii) the Board of Directors redeemed the rights issued pursuant to the
Rights Agreement, dated as of June 5, 1996, between the Company and First Union,
as rights agent, for $.01 per right in cash to holders of Common Stock held of
record as of the close of business on September 22, 1997. Also in connection
with the closing of the Capital Contributions, 1,630,000 Stock Options were
granted to certain key personnel, 1,050,000 of which were exercisable
immediately.
(5) Effective the Refinancing Closing Date, the Company entered into the Loan
and Security Agreement with CBCC, which provides for loans to the Company
maturing on October 8, 2002, thereby refinancing all amounts owing First Union.
Proceeds of the Loan and Security Agreement were used to pay all of the
Company's indebtedness to First Union and to establish working capital lines of
credit. In connection with the closing of the Loan and Security Agreement, the
Company paid CBCC a facility fee equal to $300,000. On the Refinancing Closing
Date, two term loans were advanced to the Company in accordance with the terms
of the Term Loan Facility in the aggregate principal amount of $10 million. See
Note 11 in the Notes to Consolidated Financial Statements.
In connection with an amendment to the First Union Loan Agreement in November
1994, $6.1 million in term loan refinancing was obtained, directly reducing
revolving credit obligations. Bank debt obligations totaled $45.7 million as of
March 25, 1995, with revolving credit obligations totaling $31.3 million and
term obligations totaling $14.4 million. Effective June 22, 1995, the Company
amended the First Union Loan Agreement, pursuant to which an additional $8.0
million in term loan refinancing was obtained, reducing revolving credit
obligations to a balance of $22.0 million and increasing term loan obligations
to $22.0 million. In addition, the maturity date of all obligations to First
Union was extended from August 1996 to March 2002. Total First Union debt
obligations as of December 28, 1996 and December 30, 1995 amounted to $41.6
million and $36.1 million, respectively, including revolving credit balances of
$20.0 million and $14.1 million, respectively, and term loan obligations of
$21.6 million and $22.0 million, respectively. Total debt obligations as of
December 28, 1996 included $5 million of convertible subordinated debentures.
Total revolving credit availability in excess of utilization under the terms of
the First Union Loan Agreement amounted to $3.5 million and $8.5 million as of
December 28, 1996 and December 30, 1995, respectively, and $2.0 million at March
25, 1995. See Note 11 in the Notes to Consolidated Financial Statements.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in the discussion below, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking" statements
within the meaning of the Private Securities 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 of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the effects of future events on the Company's financial performance; the risk
that the Company may not be able to finance its planned growth; risks related to
the retail industry in which the Company competes, including potential adverse
impact of external factors such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences; and the risk of potential increase in
market interest rates from current rates. Given these uncertainties, current and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
The following discussion and analysis should be read in conjunction with the
Selected Consolidated Financial Data and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
Background
In 1986, the Company was acquired by Esmark, Inc. ("Esmark") from Beatrice
Companies, Inc. (the corporate parent of Playtex International) in a leveraged
buyout transaction. From 1986 to 1992, the Company generated positive earnings
and cash flow, which were used to grow the legwear and activewear businesses. In
August 1992, the Company completed the Initial Public Offering, resulting in net
proceeds of approximately $34.6 million. The Company received approximately
$14.0 million of the net proceeds from the initial public offering, which were
used to reduce indebtedness.
During the fiscal year ended March 26, 1994, the Company began to experience
decreased sheer hosiery sales as overall market demand declined due to a trend
toward casual clothing. As a result of sheer hosiery sales declines, a $6.2
million non-recurring charge, principally for a write-off of an advance to
Esmark, and continued legal costs associated with certain litigation, the
Company incurred a $7.1 million net loss in the fiscal year ended March 26,
1994. During the fiscal year ended March 25, 1995, the Company suffered a $9.7
million net loss principally due to a $4.1 non-recurring charge associated with
continued decreases in sheer hosiery sales, the loss of a large private label
hosiery customer and continued legal costs associated with lawsuits. These
losses constrained the Company's cash flow, resulting in increased bank
borrowings. Reduced cash flow caused the Company's legwear operations in certain
instances to operate with insufficient inventory and to ship incomplete orders.
The cash flow shortfall also hampered the Company in pursuing certain strategic
opportunities in the Danskin Division, including opening full price retail
stores, expanding the Company's international operations and broadening the
Company's product line to capitalize on Danskin's strong consumer brand
recognition. The Company has undertaken a number of steps to improve its
operating results. These steps have included: (i) the appointment of a new chief
executive officer; (ii) the appointment of new members to the Board of
Directors; (iii) a capital contribution; (iv) the Refinancing; (v) improved
efficiencies at both of the Company's manufacturing facilities; and (vi) the
development of new channels of distribution for the Company's activewear
products.
Fiscal Year End
The Company's fiscal year ends on the last Saturday in December.
<PAGE>
RESULTS OF OPERATIONS
(Comparison of the fiscal year ended December 26, 1998 with the fiscal year
ended December 27, 1997)
NET REVENUES
Net revenues for the fiscal year ended 1998 amounted to $108.7 million, a
decrease of $13.3 million, or 10.9%, from $122.0 million for the fiscal year
ended 1997.
Danskin activewear net revenues, which includes the Company's retail operations,
decreased $7.7 million, to $73.5 million, or 9.5%, in fiscal 1998 from $81.2
million in fiscal 1997. The Company's wholesale business decreased $8.0 million
or 13.1% over fiscal 1997. The major decreases for net revenues were principally
attributable to a decline in the Company's Private Label business, the
discontinuance of the licensed SHAPE(R) activewear product line, and the
elimination of the Dance France(R) business. Comparable retail store sales
increased 4.6%. In its retail stores, the Company continued its efforts to
improve store product offerings, renegotiate existing leases and streamline
store operations. Marketing of activewear wholesale products continues to
address the trends towards casual wear, and to emphasize fashion and dancewear
product offerings.
Pennaco legwear net revenues declined $5.6 million, or 13.6%, to $35.2 million
for fiscal 1998 from $40.8 million for fiscal 1997. The decline in legwear
revenues reflects a confirmed weak sheer hosiery market in the department store
class of trade, 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 $0.1 million, or 0.4%, to $40.3 million for the twelve
months ended December 26, 1998 from the same prior year period. Gross profit as
a percentage of net revenues increased to 37.1% for the twelve months ended
December 26, 1998 from 33.0% for the same prior year period.
Gross margins for activewear were 39.0% for fiscal 1998 as compared to 35.6% for
the same prior year period. This increase was primarily attributable to improved
mix of sales of Danskin branded product versus lower margin private label
merchandise, selective price increases, lower manufacturing costs and an
improved mix of product in the Company's outlet stores.
Pennaco legwear gross profit improved to 33.0% for fiscal 1998 as compared to
27.7% for the same prior year period. This increase of 5.3% was mainly due to
realization of selected price increases, reduction of costs in the manufacturing
facility and the elimination of certain lower margin programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal 1998, selling, general and administrative expenses, which include
retail store operating costs, increased $1.9 million, or 4.8%, to $42.1 million,
or 38.7% of net revenues, compared to $40.2 million, or 33.0% of net revenues
for fiscal 1997. Selling, general and administrative expenses, excluding retail
store operating costs, increased $2.8 million, or 10.1%, to $31.1 million, or
35.1% of net revenues, for fiscal 1998, from $28.3 million, or 27.6% of net
revenues, for the same prior year period. The increase for fiscal 1998 was
principally a result of increased advertising for the Danskin brand and the
new Packables business, higher compensation expense, including one-time charges
of $1.0 million relating to changes in senior management, and professional
services, offset, in part, by reduced selling and marketing expenses.
INTEREST EXPENSE
Interest expense amounted to $2.5 million for fiscal 1998 and $4.3 million for
fiscal 1997, due primarily to a lower effective interest rate and lower levels
of debt. The Company's effective interest rate was 9.8% and 11.1% for 1998 and
fiscal 1997, respectively. The effective interest rate decrease over the prior
year is primarily due to lower amortization of deferred financing costs and
lower interest rates associated with the refinancing with Century Business
Credit Corporation.
NON-RECURRING CHARGES
Non-recurring charges were $2.4 million for the fiscal year ended December 26,
1998. These charges consisted of severance costs related to the resignation and
termination of former executives of the Company, a provision established for the
remaining net lease obligation for the former corporate office at 111 W. 40th
Street in New York City and write-offs of non-operating assets, offset by the
recognition of the outstanding amount owed the Company for the sale of the Sea &
Ski trademark, and the gain on the sale of the Reading, PA outlet store.
<PAGE>
INCOME TAX PROVISION (BENEFIT)
The Company's income tax provision (benefit) rates differed from the Federal
statutory rates due to the utilization of net operating losses and the effect of
state taxes for both fiscal 1998 and fiscal 1997. Fiscal 1997 was also effected
by the Alternative Minimum Tax. The Company's net deferred tax balance was $0 at
both December 26, 1998 and December 27, 1997.
NET (LOSS)
As a result of the foregoing, and as a result of the extraordinary gain in
fiscal 1997 discussed below, the net loss was $6.9 million for fiscal 1998, a
decline of $7.3 million from the $0.4 million net income for fiscal 1997.
(Comparison of the fiscal year ended December 27, 1997 with the fiscal year
ended December 28, 1996)
NET REVENUES
Net revenues for the fiscal year ended 1997 amounted to $122.0 million, a
decrease of $6.1 million, or 4.8%, from $128.1 million for the fiscal year ended
1996. Wholesale revenues for the Company declined $5.3 million and retail volume
decreased $0.8 million for fiscal 1997.
Danskin activewear net revenues, which includes the Company's retail operations,
increased $0.6 million, to $81.2 million, or 0.7%, in fiscal 1997 from $80.6
million in fiscal 1996. The Company's wholesale business increased $1.4 million
or 2.3% over fiscal 1996, while comparable retail store sales declined 7.7%
during fiscal 1997. The Company continues its efforts to improve store product
offerings, renegotiate existing leases and streamline store operations.
Marketing of activewear wholesale products continues to address the trends
towards casual wear, and to emphasize fashion and dancewear product offerings.
Pennaco legwear net revenues declined $6.7 million, or 14.1%, to $40.8 million
for fiscal 1997 from $47.5 million for fiscal 1996. This decline is indicative
of a continued weak sheer hosiery market in the department store class of trade.
GROSS PROFIT
Gross profit declined $4.3 million, or 9.7%, to $40.2 million for the twelve
months ended December 27, 1997 from the same prior year period. Gross profit as
a percentage of net revenues decreased to 33.0% for the twelve months ended
December 27, 1997 from 34.7% for the same prior year period.
Gross margins for activewear were 35.6% for fiscal 1997 as compared to 39.1% for
the same prior year period. This decrease was primarily attributable to closeout
sales, customer markdown allowance from prior seasons, incremental private label
programs and additional inventory markdowns taken to improve turns in the outlet
stores.
Legwear gross profit improved to 27.7% for fiscal 1997 as compared to 27.3% for
the same prior year period. This increase of 0.4% was mainly due to realization
of selected price increases and reduction of costs in the manufacturing
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal 1997, selling, general and administrative expenses, which include
retail store operating costs, decreased $1.8 million, or 4.3%, to $40.2 million,
or 33.0% of net revenues, compared to $42.0 million, or 32.8% of net revenues
for fiscal 1996. Selling, general and administrative expenses, excluding retail
store operating costs, decreased $2.4 million, or 7.8%, to $28.3 million, or
23.2% of net revenues, for fiscal 1997, from $30.7 million, or 28.6% of net
revenues, for the same prior year period. The decrease for fiscal 1997 was
principally a result of a reduction in print advertising costs, lower
compensation expenses and a reduction in distribution costs.
INTEREST EXPENSE
Interest expense amounted to $4.3 million for fiscal 1997 and $4.7 million for
fiscal 1996. The Company's effective interest rate was 11.1% and 10.5% for 1997
and fiscal 1996, respectively. The increase of the effective interest rate over
the same prior year period was principally due to the conversion of the
Company's 8% subordinated convertible debentures to 10% Cumulative Preferred
Stock.
NON-RECURRING CHARGES
Non-recurring charges were $0.3 million for fiscal 1997. These charges consisted
of certain executive employee severance costs.
<PAGE>
EXTRAORDINARY GAIN FROM EARLY RETIREMENT OF DEBT
The Company recognized a gain of $10.0 million, offset by the write-off of
deferred financing fees associated with the First Union Loan Agreement of $2.6
million and direct costs of the transaction of $2.2 million, for fiscal 1997.
The extraordinary gain is attributable to the difference between (a) the
recorded value of the Term Loan and (b) the fair value of the Subordinated Notes
and Series C Preferred Stock, less the write-off of deferred finance charges
relating to the First Union Loan Agreement and the costs incurred in connection
with such transactions. This gain was applied against the Company's net
operating loss carry forward, which is fully reserved. (See Note 11 to the Notes
to Consolidated Financial Statements).
At March 29, 1997 (the end of the Company's last full taxable year), based on
its tax returns as filed, the Company had approximately $12.3 million of net
operating loss carry forwards for federal income tax purposes. The Company
believes that, after taking into account (i) the use of net operating losses to
shelter income arising in respect of certain of the transactions described in
"The Capital Contribution and the Refinancing" and (ii) the operating loss of
the Company for the 1997 taxable year, the Company will retain approximately
$7.0 million to $9.9 million in net operating loss carry forwards. However, as
discussed immediately below, the use of these carry forwards by the Company will
be limited by the "ownership change" rules of Section 382.
Under Section 382, if a corporation with losses undergoes an "ownership change,"
then the amount of pre-ownership-change net operating loss carry forwards that
such corporation may use to offset income in any post-ownership-change taxable
year is limited to an amount (the "annual Section 382 limitation") that is
determined, in general, by multiplying the fair market value of such
corporation's outstanding capital stock immediately prior to the ownership
change by the "long-term tax-exempt rate" which is published monthly by the
Internal Revenue Service. The Company had an ownership change in 1997 as a
result of the Capital Contribution. (See Note 11 to the Notes to Consolidated
Financial Statements). The Company believes that its annual Section 382
limitation resulting from that ownership change limits its ability to use its
pre-ownership-change net operating loss carry forwards to shelter future income.
INCOME TAX PROVISION (BENEFIT)
The Company's income tax provision (benefit) rates differed from the Federal
statutory rates due to the utilization of net operating losses, the effect of
the Alternative Minimum Tax and the effect of state taxes for fiscal 1997 and
fiscal 1996, respectively. The Company's net deferred tax balance was $0 at both
December 27, 1997 and December 28, 1996.
NET INCOME (LOSS)
As a result of the foregoing, the net income was $0.4 million for fiscal 1997,
an improvement of $5.4 million from the $5.0 million loss for fiscal 1996.
SEASONALITY
In the fiscal years ended December 1998 and 1997, the Spring and Fall season,
shipped in the first and third quarter, respectively, continued to represent the
best volume period for activewear and legwear.
The following table summarizes the net revenues, operating (loss) income before
non-recurring charges, interest and taxes and net (loss) income of the Company
before preferred stock dividends, for each of the fiscal March, June, September
and December quarters in the last two fiscal years:
<PAGE>
For the fiscal quarters ended
(millions)
March June September December
----- ---- --------- --------
1998
Net revenues $ 28.3 $ 26.4 $ 28.0 $ 26.0
Operating (loss) income before non-
recurring charges, interest and taxes (0.1) 0.3 (0.7) (1.3)
Net (loss) (1.8) (0.3) (1.9) (2.9)
1997
Net revenues 30.8 29.5 32.7 29.0
Operating income (loss) before non-
recurring charges, interest and taxes 0.4 (0.3) 1.4 (1.5)
Net (loss) income (0.8) (1.6) 4.9 (2.1)
INFLATION
The Company does not believe that the relatively moderate levels of inflation
which have been experienced in the United States, Canada and Western Europe in
recent years have had a significant effect on its net revenues or its
profitability.
YEAR 2000 Readiness Disclosure
The Company commenced a comprehensive program to replace its core management
information systems in fiscal 1997. The program involves comprehensive changes
to the Company's present hardware and software. In addition to providing certain
competitive benefits, completion of the project will result in the Company's
information systems being year 2000 compliant. The planning stage of this
project has been completed, as well as the systems development phase. Simulated
implementation of certain of the key systems is currently in progress. At this
time, management does not expect that the replacement of such systems will be
fully implemented prior to year 2000. Therefore, the Company has assessed and
remediated such systems for year 2000 compliance and is conducting comprehensive
testing to ascertain whether such remediation was successful. It expects to
complete such testing by June 30, 1999. There can be no assurance, however, that
the Company's systems will be rendered year 2000 compliant in a timely manner,
either through replacement or remediation, or that the Company will not incur
significant unforeseen additional expenses to assure such compliance. Failure to
successfully complete and implement the replacement project on a timely basis,
or to successfully remediate legacy systems, could have a material adverse
impact on the Company's operations.
The Company is also evaluating and remediating its non-information systems for
year 2000 compliance. It is seeking to obtain year 2000 compliance certification
letters from key non-information systems vendors and anticipates commencing
test simulations in the near term. The Company presently anticipates that such
testing will be completed by June 30, 1999. Although there can be no assurance,
the Company does not presently anticipate that year 2000 issues will pose
significant operational problems.
The Company does not presently anticipate that the cost to modify its
information and non-information systems technology will be material to both its
financial condition and its results of operations during fiscal 1999. The
Company `s information technologies staff is currently evaluating and
remediating the year 2000 issues within existing systems. Therefore, the cost to
evaluate and remediate such systems is principally the related payroll costs for
its information systems group. The Company does not have a project tracking
system that tracks the cost and time that its own internal employees spend on
year 2000 projects.
The Company presently has incomplete information concerning the year 2000
compliance status of its suppliers and customers. It is in the process of
identifying and contacting its key customers and suppliers to determine if any
such supplier or customer has any year 2000 issues which the Company believes
would have a material adverse effect on the Company. There can be no assurance,
however, that the systems of other companies on which the Company relies will be
timely converted, or that a failure to successfully convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material impact on the Company's operations.
The Company is in the process of developing a contingency plan, which it
presently anticipates will include, among other steps, indentifying alternative
suppliers in the event any of its key suppliers can not offer year 2000
compliance assurance in a timely fashion, and securing alternative manufacturing
sources in the event the Company can not remediate any year 2000 issues it
discovers in the course of its systems assessment which can reasonably be
expected to materially impact its manufacturing ability. The Company anticipates
that its contingency planning will be completed by June 30, 1999. The Company's
contingency plan will evolve as additional information becomes available.
The Company does not believe that it can identify its most reasonable likely
worst case year 2000 scenario at this time. However, a reasonable worst case
scenario would be a failure of a key customer or supplier to successfully
address its year 2000 issues for a prolonged period. Without an effective
contingency plan, any failure by the Company to timely remediate any year 2000
issues relating to any of its material operating or manufacturing systems would
likely have a material adverse effect on the Company's results of operations,
although the extent of such effect cannot be reasonably estimated at this time.
This document contains Year 2000 Readiness Disclosures as defined in Year 2000
Information and Readiness Disclosure Act, P.L. 105-271 (Oct 19, 1998).
Accordingly, this disclosure, in whole or in part, is not, to the extent
provided in the act, admissible in any state or federal civil action to prove
the accuracy or truth of any Year 2000 statements contained herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity and capital requirements relate to the funding
of working capital needs, primarily inventory and 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 bank financing, convertible securities, vendor credit terms and
internally generated funds.
Net cash flow used in operations increased by $0.4 million to $1.5 million for
the fiscal year ended December 26, 1998, from a use of cash from operations of
$1.1 million for the fiscal year ended December 27, 1997, principally
attributable to increases in inventories and prepaid expenses offset by a
decrease in accounts receivable and increases in accounts payable and accrued
expenses. After $4.7 million invested in capital expenditures, payments of term
debt and revolver loan receipts, the Company's cash position decreased by $0.3
million to $0.5 million for the fiscal year ended December 26, 1998.
Working capital was $6.5 million at December 26, 1998 compared to $19.0 million
at December 27, 1997. The change in working capital is primarily attributable to
a $7.5 million increase in the revolving line of credit due to the investment of
$4.7 million for capital expenditures and the launch of the Danskin Packables
line. In addition, the current portion of long term debt increased $1.7 million
and accrued expenses increased $3.3 million primarily relating to severance pay
and relocation of the corporate offices and showroom.
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) approximately
$21.256 million face amount (the "Loan Amount") of notes executed by the Company
and payable to First Union National Bank ("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"), subordinated only to the Company's
obligations to First Union under a certain revolving credit facility, 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"). The Investor funded the Capital Contribution through capital
contributions made to it by its members and $544,129 paid by Oppenheimer Bond
Fund for Growth ("BFG") to the Company in exchange for a portion of the
Securities.
<PAGE>
Effective October 8, 1997, (the "Refinancing Closing Date"), the Company
replaced its former finance arrangements with First Union with a new loan and
security agreement (the "Loan and Security Agreement") with Century Business
Credit Corporation ("CBCC" or the "Lender") which matures on October 8, 2002.
Proceeds of the Loan and Security Agreement were used to repay all of the
Company's indebtedness to First Union, and to establish working capital lines of
credit.
Pursuant to and in accordance with its terms, the Loan and Security Agreement
provides the Company with a term loan Facility in the aggregate principal amount
of $10 million (the "Term Loan Facility") and a revolving credit facility, (the
"CBCC Revolving Credit Facility"), including a provision for the issuance of
letters of credit, generally in an amount not to exceed the lesser of (a) $45
million less the aggregate outstanding principal balance under the Term Loan
Facility, or (b) a formula amount based upon the Company's available inventory
and accounts receivable levels, minus certain discretionary reserves. The
Company's obligations to CBCC under the Loan and Security Agreement are
generally secured by a first priority security interest in all present and
future assets of the Company. The Loan and Security Agreement contains certain
customary affirmative and negative covenants, including maintenance of tangible
net worth and a limitation on capital expenditures, respectively. In connection
with the closing under the Loan and Security Agreement, the Company paid CBCC a
facility fee equal to $300,000.
On the Refinancing Closing Date, two term loans were advanced to the Company in
accordance with the terms of the Term Loan Facility. A term loan in the original
principal amount of $5 million was advanced to the Company and is, with respect
to principal, payable in thirty (30) consecutive monthly installments 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 May 1, 2001. Availability at December 26, 1998 was approximately $9.0
million.
Interest on the Company's obligations under the Loan and Security Agreement
generally accrues at a rate per annum equal to the sum of the Prime Rate, as
defined in the Loan and Security Agreement, plus one half of one (1/2%) percent
and is payable monthly. Interest may also accrue at a rate per annum equal to
the sum of the Eurodollar Rate, as defined in the Loan and Security Agreement,
plus two and three quarters percent (2-3/4%).
In accordance with the terms of the Securities Purchase Agreement, upon the
Refinancing Closing Date, the Securities 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, bearing an interest rate of 8% per annum (the
"Remaining Subordinated Debt").
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 Investor has agreed
that, for the period beginning on the date of issuance of the Series D Stock and
ending on December 31, 1999, all dividends accrued on the Series D Stock may be
paid, at the option of the Company, in cash or in additional Common Stock,
legally available for such purpose. The issuance of such Common Stock to the
Investor shall, in accordance with the agreement, constitute full payment of
such dividend. 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 Series D Stock so converted, subject to adjustment in certain circumstances.
If, for any fiscal year beginning with the fiscal year ending December 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 of its issuance, if
the Series D Stock has not previously been 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), 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.
In furtherance of the terms of the Securities Purchase Agreement, on April 28,
1998, the Company filed a Registration Statement on Form S-1 in connection with
the registration under the Securities Act of 1933, as amended, of (i) an
aggregate of 10,838,124 rights to purchase shares of 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 of Common Stock, at $0.30 per share. The Company realized
aggregate gross proceeds of approximately $640,000.
In addition, on May 27, 1998, the Company, the Investor, and BFG purchased, pro
rata in proportion to their respective holdings of Remaining Subordinated Notes,
7,864,336 shares of Common Stock, in exchange for approximately $2.4 million
aggregate principal
<PAGE>
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.
The Company's anticipated capital expenditures for 1999 approximate $2.6
million. These expenditures consist primarily of the cost to replace the
Company's core technology information systems, the purchase of state of the art
knitting machines, the opening of two additional retail stores and selective
equipment at the manufacturing plants to improve efficiencies. With the
exception of the knitting machines, which will be financed through a term loan
with Century Business Credit Corporation, the capital expenditures are
anticipated to be financed through available capital. In addition to the capital
expenditures for 1999, the Company will have debt service payments of $2.0
million to be paid in equal monthly installments.
The Company has incurred losses for each of the periods presented. The Company
expects that short-term funding requirements will continue to be provided
principally by the Company's banking and vendor arrangements.
Management believes that with its current financing in place (which was
completed in October 1997 with CBCC) the Company will have sufficient working
capital to sustain its operations. The Company may need additional financing,
however, for the acquisition or development of any new business or programs.
Strategic Outlook
The Company's business strategy is to capitalize on and enhance the consumer
recognition of the Danskin brand and products by continuing to develop new and
innovative activewear and legwear products that reflect a woman's active
lifestyle, and to offer those products to the consumer in traditional and
non-traditional channels of distribution.
The Company continues to pursue its `Primary Resource Strategy,' moving Brand
Danskin beyond its traditional stretch bodywear platform. The Company intends to
continue to offer new and innovative products that blend technical innovation
with comfort and style, broadening the position of Brand Danskin to the consumer
beyond `activewear' to one of `active lifestyle.' The Company continues to
expand the visibility of Brand Danskin beyond its traditional channels of
distribution to alternative channels such as the internet (select retailer
sites), direct mail (through retail partners), and home shopping television
channels.
The Company's Pennaco hosiery division has developed a diversified portfolio of
products under proprietary, licensed and private label brands. These products
include sheer and supersheer products, value oriented multipacks, plus size
offerings, socks, trouser socks and tights. The Company's business strategy with
respect to the Pennaco division is to exploit its significant manufacturing
expertise, and the diversity of its product offerings, to achieve strategic
alliances with its key retail partners to enable it to maintain its industry
position in a contracting sheer hosiery market.
The Company recognizes that an integral aspect of its business strategy is to
achieve greater distribution of its products. Recognizing that the Company's own
retail stores allow the Company to showcase its products, provide an additional
channel of distribution, and act as a laboratory for product innovation and
introduction, the Company continues to explore opportunities for selective
national expansion of its full price retail strategy. The Company is also in the
process of exploring its alternatives for the marketing and distribution of its
activewear and legwear products over the internet. The Company believes that the
internet will provide it with an alternative and expanded distribution channel
that would allow it to offer the full complement of its product lines to a
significantly broader audience than is presently available to it in any existing
channel of distribution.
In addition to the foregoing, the Company is seeking to increase its presence at
retail by exploring various licensing opportunities of Brand Danskin as well as
seeking to increase its presence in various international markets.
There can be no assurances that the Company will be able to implement these
strategies, or that if implemented, that such strategies will be successful. In
addition, there can be no assurance that the Company would not be adversely
affected by adverse changes in general economic conditions, the financial
condition of the apparel industry or retail industry, or adverse changes in
retailer or consumer acceptance of the Company's products as a result of fashion
trends or otherwise. Moreover, the retail environment remains intensely
competitive and highly promotional and there can be no assurance that the
Company would not be adversely affected by pricing changes of the Company's
competitors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not trade in derivative financial instruments. The Company's
revolving line of credit bears interest at a variable rate (prime plus 1/2%)
and, therefore, the Company is subject to market-risk in the form of interest
rate fluctuation.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required pursuant to this
Item 8 begin on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The following table sets forth certain information regarding the Company's
directors and executive officers:
<TABLE>
<CAPTION>
Year Term
as Director
Name Age Position Expires
---- --- -------- -----------
<S> <C> <C> <C>
Donald Schupak (1)(3)(4)............. 55 Chairman of the Board 1998
Nina McLemore(1)(4).................. 53 Vice Chairperson of the Board 1999
M. Catherine Volker (1).............. 44 President, Chief Executive 1999
Officer and Director
Debbie Hobbs......................... 42 SVP Marketing
Denise Landman....................... 45 President, Pennaco Division
Margaret B. Pritchard................ 36 Secretary, General Counsel and
Senior Vice President, Business
Development
Andrew J. Astrachan(1)(4)............ 39 Director 1997
Gabriel Brener(3).................... 39 Director 1997
David Chu............................ 44 Director 1999
Michael Hsieh(2)(3).................. 41 Director 1998
James P. Jalil(2).................... 50 Director 1997
Henry T. Mortimer, Jr.(2)............ 56 Director 1997
Larry B. Shelton(2).................. 64 Director 1998
</TABLE>
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Member of the Nominating Committee.
The business experience, principal occupations and employment, as well as the
periods of service, of each of the directors and executive officers of the
Company during at least the last five years, are set forth below.
<PAGE>
Directors
Class II (Terms to Expire in 1997)
Directors in Class II will continue to serve as directors until they are
proposed for reelection at the next annual meeting of stockholders.
Andrew J. Astrachan, age 39, has been a director of the Company since
September 1997. He is the President and founder of Onyx Partners, Inc., an
investment bank. From 1985 to 1990, Mr. Astrachan was employed at Drexel,
Burnham & Lambert. Prior to that, he was a Vice President at Salomon
Brothers Inc. from 1981 to 1985.
Gabriel Brener, age 39, has been a director of the Company since September
1997. He is President and CEO of Brener International Group, LLC., an
investment and management firm headquartered in Los Angeles, California.
Mr. Brener serves as an advisory board member of each of New Colt Holding
Company and First National Bank. He has previously served as Chairman of
the Board for Valassis de Mexico, S.A. de C.V. and has held board
positions for several other companies.
James P. Jalil, age 50, has been a director of the Company since September
1997. He has been a senior corporate partner with the law firm of Shustak
Jalil & Heller since 1992. Prior to that, Mr. Jalil was a corporate
partner at Lane & Mittendorf from 1982 to 1992.
Henry T. Mortimer, Jr., age 56, has been a director of the Company since
August 1992. He is a Managing Director of Financial Security Assurance
Inc., a financial guarantee insurance company. Previously, he was a Senior
Vice President of E.F. Hutton & Co., Inc. in its investment banking
department. In addition, he is currently a Director of Tipiak, S.A., a
French food manufacturing company, and a Director of Financial Security
Assurance (UK) Limited.
Class III (Terms to Expire in 1998)
Donald Schupak, age 55, has been a director of the Company since October
16, 1996 and became the Chairman of the Board of Directors on March 27,
1997. He is also the Chairman of the Board of Directors of 7th Level,
Inc., (d/b/a 7th Street.com), a public internet company that develops and
markets web-based training and impact communications solutions. He is also
the Chief Executive Officer of the Schupak Group, an organization that
provides strategic planning, management consulting and corporate finance
services to a variety of clients. Mr. Schupak founded the Schupak Group in
1980. From September 1988 through September 1990, he served as Chairman,
Chief Executive Officer and President of Horn & Hardart Company. From 1971
through 1980, Mr. Schupak was actively engaged in the practice of law with
Schupak, Rosenfeld & Fischbein, a New York City law firm founded by Mr.
Schupak.
Larry B. Shelton, age 64, has been a director of the Company since October
1994. He is the President of Shelton & Associates, a management consulting
firm specializing in the apparel industry. In 1991, he retired as
President and Chief Operating Officer of Genesco, Inc., an apparel
manufacturing company, having served in that organization for over 35
years in various management capacities. He has long been active in the
apparel industry, having served as Chairman of the Board of The American
Apparel Manufacturing Association and as a board member of The Clothing
Manufacturers Association.
Michael Hsieh, age 41, has been the President of LF International, Inc., a
venture capital company, since 1986 and a director of Li & Fung (BVI) Ltd.
since 1992. He was previously with R.H. Chapell Co., a San Francisco
venture capital firm, and with Merrill Lynch Capital Markets Group.
<PAGE>
Class I (Terms to Expire in 1999)
M. Catherine Volker, age 44, became the Chief Executive Officer of the
Company on March 2, 1998. Prior to joining the Company, Ms. Volker served
as President of Hanes Hosiery since 1993 and served as Vice President of
Hanes' parent, the Sara Lee Corporation since 1996. Ms. Volker joined
Hanes Hosiery as Vice President of Merchandising in 1986 and was appointed
Vice President and General Manager of Hanes Hosiery in 1992.
David Chu, age 44, is the President, Chief Executive Officer and chief
designer of Nautica International, Inc., an apparel licensed product
company he founded in 1983. He is a member of the Counsel of Fashion
Designers of America (CFDA) and a director of the Educational Foundation
for the Fashion Industries (an advisory body to the Fashion Institute of
Technology). In addition, Mr. Chu is a trustee of The Asia Society and The
China Institute.
Nina McLemore, age 53, has been a director of the Company since September
1997 and became the Vice Chairperson of the Board on December 10, 1997.
She is a Senior Managing Partner of Regent Capital Partners, L.P., a
private investment firm. She previously served as a member of the
Executive Committee of Liz Claiborne, Inc. from 1989 to 1993 and was
responsible for acquisitions, start-ups and new business opportunities in
1993. Prior to that, Ms. McLemore was President of Liz Claiborne
Accessories from 1980 to 1992. She serves as a Director for Santa Monica
Amusements, Inc., Talton Holdings, Inc. and Evercom, Inc.
Officers
Debbie Hobbs has been the Senior Vice President, Marketing since April
1998. Prior to joining Danskin, Ms. Hobbs was Vice President, General
Manager Designer Brands at Hanes Hosiery, a division of Sara Lee
Corporation.
Denise Landman has been the President of the Pennaco division since
October 1998. Ms. Landman previously served as the Company's Senior Vice
President, Sales after joining the Company in June 1998. Prior to joining
Danskin, Ms. Landman was Vice President, General Manager Specialty Brands
at Kayser Roth Corp.
Margaret B. Pritchard has been the Senior Vice President, Business
Development of the Company since June 1, 1997. Ms. Pritchard has been the
General Counsel of the Company since October 1, 1997, having previously
served as the Company's Assistant General Counsel since June 1, 1997. She
was appointed Secretary of the Company by the Board of Directors on
December 10, 1997. Prior to joining the Company, Ms. Pritchard was an
associate with the law firm of Fried, Frank, Harris, Shriver & Jacobson in
New York.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities and Exchange Act of 1934, the
Company's directors, executive officers and holders of more than 10% of
the Common Stock are required to report their initial ownership of the
Company's equity securities and any subsequent changes in that ownership
to the Securities and Exchange Commission. Specific due dates for these
reports have been established, and the Company is required to disclose any
failure to file by these dates with respect to Fiscal 1998. Based on
written representations of its directors and executive officers and copies
of reports they have filed with the Securities and Exchange Commission,
the only late reports filed for Fiscal 1998 were Form 4's for each of
Debbie Hobbs, Denise Landman and Margaret B. Pritchard relating to stock
option grants under the Company's 1992 Stock Option Plan and M. Catherine
Volker with respect to a stock option grant under a certain Stock Option
Agreement between Ms. Volker and the Company dated February 2, 1998.
Board of Directors and Board Committees
The Board of Directors met 5 times in 1998.
The Board of Directors has an Executive Committee, an Audit Committee, a
Compensation Committee and a Nominating Committee.
The Executive Committee is generally empowered to act on behalf of the
Board of Directors when the Board is not convened in meeting. The members
of the Executive Committee consist of Donald Schupak, Cathy Volker, Nina
McLemore and Andrew J. Astrachan. The Executive Committee held 6
meetings during 1998.
<PAGE>
The Audit Committee is generally responsible for recommending the appointment of
the Company's independent auditors and overseeing the accounting and internal
audit functions of the Company, including reviewing, with the Company's
independent auditors, (i) the general scope of their audit services and the
annual results of their audit, (ii) the reports and recommendations made to the
Audit Committee by the independent auditors, and (iii) the Company's internal
control structure. The members of the Audit Committee consist of Larry B.
Shelton, Henry T. Mortimer, Michael Hsieh and James P. Jalil. The Audit
Committee held 2 meetings during 1998.
The Compensation Committee is generally responsible for reviewing and making
recommendations to the Board of Directors concerning remuneration of the
Company's key employees, including executive officers. The Compensation
Committee also grants stock options pursuant to the Stock Option Plan. The
members of the Compensation Committee consist of Gabriel Brener, Donald Schupak
and Michael Hsieh. The Compensation Committee did not meet during 1998.
The Nominating Committee is generally responsible for recommending appropriate
individuals to serve as members of the Board of Directors. The members of the
Nomination Committee consist of Donald Schupak, Andrew J. Astrachan and Nina
McLemore. The Nominating Committee did not meet during 1998.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation earned
during the last three fiscal years by the Company's Chief Executive Officer and
each other executive officer of the Company (each, a "named executive officer").
The Company had five executive officers during the fiscal year ended December
26, 1998 ("fiscal 1998"). Ms. Domuracki was replaced as Chief Executive Officer
of the Company on March 2, 1998 and Ms. Eichel resigned as Chief Financial
Officer effective September 25, 1998.
<TABLE>
<CAPTION>
Name and Other Stock All Other
Principal Fiscal Salary Bonus Annual Options Compensation
Position Year ($) ($) Compensation (#) ($)
- ---------- ------ ------ ----- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
M.Catherine Volker (1) 1998 310,896 337,500 (2) - 2,550,000 448,000 (3)
Chief Executive
Officer
Beverly Eichel (4) 1998 250,000 - - 60,156 (5)
Chief Financial 1997 250,000 37,500 - 680,000 4,026 (7)
Officer 1996 228,942 (6) 40,000 - - 4,767
Debbie Hobbs 1998 133,653 30,000 - 225,000 2,550 (8)
SVP Marketing
Denise Landman 1998 127,723 50,000 - 225,000 676 (9)
President,
Pennaco Division
Margaret B. Pritchard 1998 184,615 75,000 - 125,000 1,173 (10)
SVP, Secretary and 1997 127,692 - - 100,000
General Counsel
Mary Ann Domuracki (11) 1998 80,769 - - - 336,439 (12)
Chief Executive Officer 1997 350,000 37,500 - 1,020,000 4,436 (13)
and President 1996 353,865 60,000 - 0 5,072
</TABLE>
(1) Ms. Volker became Chief Executive Officer of the Company effective
March 2, 1998.
(2) Amounts shown as 'Bonus' include a sign-on bonus in the amount of
$150,000 which was paid to Ms. Volker in connection with the
execution of her employment agreement, and $187,500 which was paid
to Ms. Volker in respect of fiscal 1998 in accordance with the terms
of such agreement.
(3) Amounts shown as 'Other Compensation' for Ms. Volker include
(i) $445,500 attributable to a stock grant, and (ii) a $2,500
contribution by the Company in 1998 as the 25% matching
contribution for the first 4% of earnings contributed by Ms.
Volker to the Company's Savings Plan, a tax qualified plan
covering full-time salaried employees over the age of 21 (the
"Savings Plan"). The Savings Plan allows participants
<PAGE>
to elect to make contributions, on a pre-tax basis, from 1% to
15% of their compensation, subject to applicable Internal Revenue
Code limitations, and the Company is required to make a matching
contribution equal to 25% of the participants contributions up to
4% of such compensation. A participant becomes 33 1/3% vested in
the matching contributions after three years of service, 66 2/3%
after four years of service and 100% after five years of service.
(4) Ms. Eichel resigned her position as Chief Financial Officer of the
Company effective September 25, 1998.
(5) Amounts shown as 'Other Compensation' for Ms. Eichel include (i)
vacation and deferred compensation totaling $54,647, (ii) premium
paid by the Company in respect of a life insurance policy for the
benefit of Ms. Eichel in the amount of $1,145, (iii) premium paid
by the Company with respect to a long term disability policy for
the benefit of Ms. Eichel in the amount of $1,864, and (iv) a
$2,500 matching contribution to the Savings Plan.
(6) Salary for Ms. Eichel for fiscal 1996 reflects a voluntary reduction
from $250,000 to $225,000 that was in effect from January 1, 1995 to
November 1, 1996, at which time the full contracted salary rate of
$250,000 was reinstated.
(7) Amounts shown as 'Other Compensation' for fiscal 1997 for Ms. Eichel
represents premiums paid by the Company in respect of a life
insurance policy for the benefit of Ms. Eichel in the amount of
$1,060, a $2,375 contributed by the Company as the matching
contribution to the Savings Plan and a discretionary profit sharing
contribution of $591 made by the Company in shares of common stock
(314 shares).
(8) Amounts shown as 'Other Compensation' for Ms. Hobbs include (i) $670
attributable to COBRA payments made by the Company for the benefit
of Ms. Hobbs, and (ii) $1,880 matching contribution to the Savings
Plan.
(9) Amounts shown as 'Other Compensation' for Ms. Landman include $676
attributable to COBRA payments made by the Company for the benefit
of Ms. Landman.
(10) Amounts shown as 'Other Compensation' for Ms. Pritchard include
$1,173 matching contribution to the Savings Plan.
(11) Ms. Domuracki was replaced as Chief Executive Officer of the Company
on March 2, 1998. On November 29, 1996, Ms. Domuracki received a
lump sum payment in the amount of $71,250 representing payment of
the contractual amount of salary due her for the period April 1,
1995 through October 31, 1996, less a voluntary 10% salary
reduction which was in effect during that period.
(12) Amounts shown as 'Other Compensation' for Ms. Domuracki for 1998
include $269,231 for severance payments, vacation and deferred
compensation totaling $89,840, premiums paid by the Company in
respect of life and long term disability insurance policies for the
benefit of Ms. Domuracki in the amount of $1,650 and $5,718
respectively and a $2,500 matching contribution to the Savings Plan.
(13) Amounts shown as 'Other Compensation' for Ms. Domuracki for 1997
include premiums paid by Company in respect of life insurance
policies for the benefit of Ms. Domuracki in the amount of $1,470, a
$2,375 matching contribution to the Savings Plan and a discretionary
profit sharing contribution of $591 made by the Company in shares of
common stock (314 shares).
Stock Option Grants in Last Fiscal Year
The following table shows information for Fiscal Year 1998 respecting stock
option grants to each named executive officer.
Fiscal 1998 Stock Option Grants to Named Executive Officers
<TABLE>
<CAPTION>
Individual Grants Grant Date Values
-------------------------- -----------------
Percent of
Number of Total Options
Securities Granted to Present
Underlying Employees Value
Options in Fiscal Exercise Expiration Grant
Name Granted Year Price Date Date (5)
---- ------- ---- ----- ---- --------
<S> <C> <C> <C> <C> <C>
Cathy Volker 2,550,000 (1) 54% $0.65 1/31/08 739,500
Debbie Hobbs 225,000 (2) 5% $1.63 5/18/08 211,500
Denise Landman 225,000 (3) 5% $1.63 5/18/08 211,500
Margaret B. Pritchard 125,000 (4) 3% $1.63 5/18/08 117,500
Beverly Eichel 0 N/A N/A N/A N/A
Mary Ann Domuracki 0 N/A N/A N/A N/A
</TABLE>
- --------------------------
(1) Pursuant to the terms of a Stock Option Agreement between the Company and
Ms. Volker dated February 2, 1998, Ms. Volker was granted six options, each
representing the right to purchase 425,000 shares of Common Stock. The exercise
price of the shares of Common Stock covered by each option is $ 0.65. Each
option is generally exercisable until January 31, 2008, unless earlier
terminated in accordance with the Stock Option Agreement. Such options were
not issued under the Stock Option Plan.
(2) Pursuant to a Stock Option Agreement between the Company and Ms. Hobbs,
dated October 1, 1998, Ms. Hobbs was granted 225,000 options to purchase Common
Stock at a per share price of $1.625. The options vest over a four year period,
and are, under certain circumstances, exercisable through October 1, 2008.
(3) Pursuant to a Stock Option Agreement between the Company and Ms. Landman,
dated October 1, 1998, Ms. Landman was granted 225,000 options to purchase
Common Stock at a per share price of $1.625. The options vest over a four year
period, and are,
<PAGE>
under certain circumstances, exercisable through October 1, 2008.
(4) Pursuant to a Stock Option Agreement between the Company and Ms. Pritchard,
dated October 1, 1998, Ms. Pritchard was granted 125,000 options to purchase
Common Stock at a per share price of $1.625. The options vest over a four year
period, and are, under certain circumstances, exercisable through October 1,
2008.
(5) The present values on the grant date are calculated under the Black-Scholes
valuation model. The Black-Scholes valuation model is a mathematical formula
used to value options, and considers expected stock price volatility, the
exercise period of the option and interest rates. Due to the historically thin
trading of the Company's stock, expected volatility has been estimated based on
the public trading histories of similar companies over the five years preceding
each respective grant date. The Black-Scholes valuation model was chosen in
accordance with Securities and Exchange Commission rules; however, this model
should not be construed as an endorsement of its accuracy at valuing options.
The real value of the options in this table depends upon the actual performance
of the Common Stock during the applicable period.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table shows information for fiscal 1998 respecting stock options
for each named executive officer.
<TABLE>
<CAPTION>
Value of
Numbers of Unexercised
Securities In-The-Money
Underlying Options
Unexercised at
Shares Options at Fiscal
Acquired on Value Fiscal Year Year
Name Exercise Realized End (1) End(2)($)
---- -------- -------- ------- ---------
<S> <C> <C> <C> <C>
M. Catherine Volker - $0 2,550,000 $586,500
Beverly Eichel - $0 506,666 $293,866
Debbie Hobbs - $0 225,000 $0
Denise Landman - $0 225,000 $0
Margaret B. Pritchard - $0 225,000 $25,000
Mary Ann Domuracki - $0 680,000 (3) $0
</TABLE>
- ------------------
(1) 539,999 options are presently exercisable.
(2) The value of an unexercised option at December 26, 1998 is determined by
subtracting the exercise price of such option from the market value of a share
of Common Stock on December 26, 1998, as published by the National Quotation
Bureau.
(3) Pursuant to an agreement between the Company and Ms. Domuracki, such options
are no longer exercisable by Ms. Domuracki.
Employment Agreements
M. Catherine Volker
- -------------------
On February 2, 1998, the Company entered into an employment agreement with
Catherine Volker, employing her as Chief Executive Officer of the Company from
March 2, 1998 until February 28, 2003, subject to earlier termination for death,
resignation or removal. Ms. Volker's annual base salary is $375,000. She is
entitled to receive an annual performance bonus of up to 100% of her base salary
as determined by the Board of Directors, in its sole discretion, based on such
quantitative and qualitative initiatives as indentified by the Board upon
consultation with Ms. Volker and upon approval of the budget for the respective
fiscal year. The Agreement provides that the performance bonus for fiscal year
ended December 26, 1998 would be no less that $187,500. Under Ms. Volker's
agreement, if she resigns her employment for `good reason' (as defined), if the
Company terminates her employment without `cause' (as defined), or she resigns
by reason of a `change of control' (as defined), the Company will be obligated
to continue her base salary payments for a period of one year, and she will be
entitled to a performance bonus in an amount equal to, depending upon the
circumstance of her resignation or termination, fifty percent (50%) to
one-hundred percent (100%) of the previous year's performance bonus.
<PAGE>
Mary Ann Domuracki
- ------------------
On August 1, 1994, the Company entered into an employment agreement with Mary
Ann Domuracki employing her as President and Chief Operating Officer until she
resigned or was terminated. This agreement was amended as of April 4, 1996 to
provide for her employment as Chief Executive Officer and was further amended,
most recently, on September 27, 1997, in connection with the Capital
Contribution. Her base salary compensation at the time she was replaced was
$350,000. On March 2, 1998, Ms. Domuracki was replaced as Chief Executive
Officer of the Company. Pursuant to the terms of her employment agreement, Ms.
Domuracki was entitled to receive compensation and benefits under such agreement
for the two year period following her replacement (offset by compensation
received from any new employer after one year). Pursuant to an agreement reached
between the Company and Ms. Domuracki, Ms. Domuracki will receive no
compensation or benefits in respect of any period following the one year
anniversary of her replacement.
Beverly Eichel
- --------------
Beverly Eichel resigned her position as Chief Financial Officer by reason of "a
change of control" effective September 25, 1998. Her base salary compensation at
the time of her resignation was $250,000. Under her employment agreement, if Ms.
Eichel resigned by reason of a "change of control," (as defined) (i) the Company
would be obligated to continue her base salary payments for two years
thereafter, at the annual rate of $250,000 (offset by compensation received from
any new employer after one year), (ii) the Company would be obligated to make a
prorated bonus payment for the fiscal year then in progress and (iii) any
granted, but unvested, stock options that she held (excluding certain the
options granted in connection with the amendment of her employment agreement
described above in "--Stock Option Plan") would vest immediately.
Compensation Committee Interlocks and Insider Participation
All of the members of the Compensation Committee are non-employee directors of
the Company and are not former officers of the Company or its subsidiaries. No
executive officer of the Company serves as a member of the Board of Directors or
on the compensation committee of a corporation for which any of the Company's
directors serving on the Compensation Committee or on the Board of Directors of
the Company is an executive officer.
Compensation of Directors
Directors who are employees of the Company are not compensated for serving as
directors. Directors who are not employees of the Company receive an annual
retainer fee of $12,000 plus fees of $1,000 per day for attendance at meetings
of the Board of Directors and $500 per day for attendance at meetings of its
committees. Each of the directors appointed by Danskin Investors has agreed to
waive receipt of such amount until such time as they, as a group, direct the
Company to the contrary. All non-employee directors of the Company are
reimbursed for out-of-pocket expenses. In addition, each non-employee director
receives, upon such person's initial election as a director, a grant of an
option to purchase 50,000 shares of the Common Stock under the Stock Option Plan
at fair market value, exercisable in three equal installments on the first,
second and third anniversaries of the grant date. Mr. Schupak has agreed to
defer the grant of his options until an amendment to the Stock Option Plan has
been approved by the stockholders, increasing the total number of shares
reserved for issuance thereunder.
Although neither Mr. Schupak nor Ms. McLemore receives a salary from the
Company, the Company provides for a payment of $10,000 per month to entities
designated by each of Mr. Schupak and Ms. McLemore to defray their respective
office overhead, and each is entitled to reimbursement of reasonable travel and
other expenses incidental to the performance of their duties.
CERTAIN TRANSACTIONS
On September 22, 1997, in connection with the Capital Contribution, Donald
Schupak (the Chairman of the Board of the Company) purchased from the Company,
the Schupak Warrant for the purchase of 5,372,315 shares of Common Stock,
subject to adjustment, at an exercise price of $.30 a share, subject to
adjustment. On the Contribution Closing Date, in consideration of the sale of
the Schupak Warrant, Mr. Schupak paid the Company the Warrant Price comprised of
(x) $20,000 in cash and (y) the Schupak Promissory Note in the amount of
$80,000. The outstanding principal balance of the Schupak Promissory Note bears
interest at a rate of 6.55% per annum, to be paid annually on the anniversary of
the Contribution Closing Date. The Schupak Warrant may be exercised, in whole at
any time or in part from time to time, commencing on the date of effectiveness
of an amendment to the Company's Amended and Restated Certificate of
Incorporation increasing the number of its authorized shares to 100,000,000 and
prior to 5:00 p.m., Eastern Standard Time, on September 22, 2004. In addition,
each of David Chu and Nina McLemore, a director of the Company, purchased from
the Company, for $14,815 and $29,607, respectively, a warrant for the purchase
of 795,900 shares of Common Stock and 1,591,797 shares of Common Stock
respectively, all at an exercise price of $.30 per share.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 1, 1999,
regarding the beneficial ownership of the Common Stock by (i) each person known
to the Company to beneficially own more than 5% of the Common Stock; (ii) each
director and each named executive officer; and (iii) all executive officers and
directors of the Company as a group. A person is a beneficial owner if he or she
has or shares voting power or investment power. On March 1, 1999, there were
outstanding 21,019,878 shares of Common Stock (including 1,083 shares held by a
subsidiary of the Company) and 2,400 shares of Series D Preferred Stock.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Percent of
Outstanding
Name and Address Amount and Nature of Voting
of Beneficial Owner Beneficial Ownership Securities*
------------------- -------------------- -----------
<S> <C> <C>
Danskin Investors, L.L.C.(1) 56,224,370 Common Stock 79.58%
9595 Wilshire Boulevard 2,311.7 Series D Preferred Stock 96.3%
Beverly Hills, CA 90212
The Oppenheimer Bond Fund For Growth(1) 5,607,887 Common Stock 9.14%
350 Linden Oaks 88.3 Series D Preferred Stock 3.7%
Rochester, NY 14625
Donald Schupak (2) 5,392,315 Common Stock 8.12%
0 Series D Preferred Stock 0%
Nina McLemore (3) 1,598,463 Common Stock 2.55%
0 Series D Preferred Stock 0%
David Chu (4) 802,566 Common Stock 1.30%
0 Series D Preferred Stock 0%
M. Catherine Volker 897,450 Common Stock 1.47%
0 Series D Preferred Stock 0%
Margaret B. Pritchard (5) 33,333 Common Stock 0.05%
0 Series D Preferred Stock 0%
Debbie Hobbs 0 Common Stock 0%
0 Series D Preferred Stock 0%
Denise Landman 0 Common Stock 0%
0 Series D Preferred Stock 0%
Henry T. Mortimer, Jr. (6) 20,000 Common Stock 0.03%
0 Series D Preferred Stock 0%
Larry B. Shelton (6) 20,000 Common Stock 0.03%
0 Series D Preferred Stock 0%
Andrew J. Astrachan (7) 6,666 Common Stock 0.01%
0 Series D Preferred Stock 0%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Gabriel Brener (7) 6,666 Common Stock 0.01%
0 Series D Preferred Stock 0%
Michael Hsieh (7) 6,666 Common Stock 0.01%
0 Series D Preferred Stock 0%
James P. Jalil (7) 6,666 Common Stock 0.01%
0 Series D Preferred Stock 0%
Beverly Eichel (8) 506,666 Common Stock 0.82%
0 Series D Preferred Stock 0%
Mary Ann Domuracki (9) 0 Common Stock 0%
0 Series D Preferred Stock 0%
All directors and executive 8,790,791 Common Stock 12.76%
officers as a group 0 Series D Preferred Stock 0%
(15 persons) (10)
</TABLE>
- --------------------------
* For the purpose of this calculation, the outstanding voting securities of
the Company include 21,019,878 shares of Common Stock presently issued and
40,000,000 shares of Common Stock, issuable upon the conversion of the Series
D Preferred Stock that the holders of the Series D Preferred Stock are
currently entitled to vote.
(1) The amount shown as Common Stock includes those shares of Common Stock
issuable upon conversion of the shares of Series D Preferred Stock held by
the beneficial owner and a presently exercisable warrant. Each share of
Series D Preferred Stock entitles the holder thereof to one vote per share
for each share of Common Stock that would be issued upon conversion of a
share of Series D Preferred Stock (16,666.66 votes per share).
(2) Includes 5,372,315 shares of Common Stock underlying a presently
exercisable warrant and 20,000 shares of Common Stock underlying presently
exercisable options which, if granted, would have vested upon the change of
control resulting from the Capital Contribution. Mr. Schupak was entitled to
the automatic grant of an option to purchase 20,000 shares of Common Stock
upon his appointment as a Director of the Company, but agreed to defer such
grant until an amendment to the Stock Option Plan has been approved by the
stockholders, increasing the total number of shares reserved for issuance
upon exercise of options granted thereunder.
(3) Includes 1,591,797 shares of Common Stock underlying a presently
exercisable warrant and 6,666 shares of Common Stock underlying presently
exercisable options.
(4) Includes 795,900 shares of Common Stock underlying a presently
exercisable warrant and 6,666 shares of Common Stock underlying presently
exercisable options.
(5) Includes 33,333 shares of Common Stock underlying presently exercisable
options.
(6) Includes 20,000 shares of Common Stock underlying presently exercisable
options.
(7) Includes 6,666 shares of Common Stock underlying presently exercisable
options.
(8) Includes 506,666 shares of Common Stock underlying presently exercisable
options.
(9) Ms. Domuracki was replaced as Chief Executive Officer of the Company on
March 2, 1998. Pursuant to an agreement between the Company and Ms.
Domuracki, such options are no longer exercisable by Ms. Domuracki.
(10) Includes 133,329 shares of Common Stock issuable upon the exercise of
presently exercisable stock options (including options to purchase 20,000
shares of Common Stock to which Mr. Schupak became entitled upon his
appointment as a director described in Note 2 above), 7,760,012 shares of
Common Stock issuable upon the purchase of shares of Common Stock pursuant to
presently exercisable warrants and 897,450 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's issuance of the Schupak warrant, Mr. Schupak
executed a seven-year promissory note in favor of the Company in the original
principal amount of $80,000. The promissory note bears interest at 6.55% per
annum, payable annually.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
1. Financial Statements
2. Financial Statement Schedules
The financial statements and financial statement schedules included in this
Annual Report on Form 10-K are listed in the accompanying Index to the Financial
Statements on Page F-1 of this Form 10-K.
All other schedules have been omitted because the required information is shown
in the Consolidated Financial Statements or Notes thereto or they are not
applicable.
3. Exhibits
The Exhibits designated by an asterisk are management contracts and compensatory
plans and arrangements required to be filed as Exhibits to this Form 10-K.
Exhibit
Number Description
- ------ -----------
3.1.1 Amended and Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1.1 to the Registration
Statement of the Registrant on Form S-1 (Reg. No. 33-49274)(the
"Registration Statement").)
3.1.2 Certificate of Correction, dated July 9, 1992, of the Amended and
Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1.2 to Amendment No. 1 to
the Registration Statement ("Amendment No. 1").)
3.1.3 Certificate of Amendment, dated the 27th day of January 1998 to
the Amended and Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to Exhibit 3.1.3 to the
Registrant's Form 10-K for the year ended December 27, 1997.)
3.2 Amended and Restated Certificate of Incorporation of the Registrant
dated as of January 27, 1998.
4.1 Form of Certificate for Common Stock of the Registrant.
(Incorporated by reference to Exhibit 4.1 to Amendment No. 1.)
4.2 Securities Purchase Agreement, dated as of September 22, 1997,
between the Registrant and Danskin Investors, LLC. (Incorporated by
reference to Registrant's Form 8-K dated September 22, 1997.
4.2.1 Form of Warrant Issued to Danskin Investors, LLC. (Incorporated
by reference to Registrant's Form 8-K dated September 22, 1997.
4.2.2 Certificate of Designations of Series C Cumulative Convertible
Preferred Stock (Incorporated by reference to the Registrant's Form
8-K dated September 22, 1997.
4.2.3 Certificate of Designations of Series D Cumulative Convertible
Preferred Stock. (Incorporated by reference to the Registrant's
Form 8-K dated September 22, 1997.)
4.2.4 Promissory Notes of the Registrant's in favor of Danskin
Investors, LLC. (Incorporated by reference to the Registrant's
Form 8-K dated September 22, 1997.)
<PAGE>
10.1.1 Tax Refund Agreement, dated July 22, 1986, by and among Danpen,
Inc., Beatrice Companies, Inc. and Esmark, Inc. (Incorporated by
reference to Exhibit 10.1.1 to the Registration Statement.)
10.1.2 Supplemental Tax Refund Agreement, dated March 15, 1990, among
Beatrice Companies, Inc., Esmark, Inc., Danpen, Inc. and the
Registrant. (Incorporated by reference to Exhibit 10.1.2 to the
Registration Statement.)
10.5.1 Lease Agreement, dated October 16, 1986, between the Registrant
and Robert H. Arnow, relating to leasehold interest at 111 West
40th Street, New York, New York, as amended, and related
agreement. (Incorporated by reference to Exhibit 10.5.1 to the
Registration Statement.)
10.5.4 Lease Agreement, dated March 22, 1996, between the City of
Grenada, Mississippi and the Registrant. (Incorporated by
reference to Exhibit 10.5.4 to the Registrant's Form 10-Q for the
fiscal quarter ended September 28, 1996.)
10.5.5 Agreements in connection with Industrial Revenue Bond for
property located at 1261 South Commerce Street, Grenada,
Mississippi, between the City of Grenada, Mississippi and the
Registrant (as assignee of International Playtex, Inc.).
(Incorporated by reference to Exhibit 10.5.5 to Amendment No. 1.)
10.5.7 Agreement between the Pennaco division and the City of Grenada,
Mississippi, relating to the issuance by the City of Grenada of
$1,500,000 principal amount of bonds to finance the construction
of a distribution center to be owned by the City of Grenada and
leased to the Pennaco division. (Incorporated by reference to
Exhibit 10.5.7 to Amendment No. 2 to the Registration Statement
("Amendment No. 2").)
10.5.11 Lease Agreement between Paul Klinge A/S and the Registrant.
(Incorporated by reference to Exhibit 10.5.11 to Amendment No.
2.)
10.5.12 Addendum to Lease between Henrik Klinge and the Registrant dated
August 23, 1996. (Incorporated by reference to Exhibit 10.5.12 to
the Registrant's Form 10-Q for the fiscal quarter ended September
28, 1996.)
*10.6.2B Employment Agreement dated April 1, 1996 between the Registrant and
Edwin W. Dean. (Incorporated by reference to Exhibit 10.6.2B to the
Registrant's Form 10-Q for the fiscal quarter ended March 30, 1996.)
*10.6.3A Amended Employment Agreement, dated April 1, 1994, between the
Registrant and Mary Ann Domuracki. (Incorporated by reference to
Exhibit 10.6.3A to the Registrant's Form 10-Q for the fiscal
quarter ended June 25, 1994.)
*10.6.3B Amendment One, effective November 1, 1994, to the amended Employment
Agreement, dated April 1, 1994, between the Registrant and Mary Ann
Domuracki. (Incorporated by reference to Exhibit 10.6.3B to the
Registrant's Form 10-Q for the fiscal quarter ended September 24,
1994.)
*10.6.3C Amendment Two, effective January 1, 1995, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and Mary
Ann Domuracki. (Incorporated by reference to Exhibit 10.6.3C to the
Registrant's Form 10-Q for the fiscal quarter ended December 24,
1994.)
<PAGE>
*10.6.3D Amendment Three, effective April 1, 1996, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and Mary
Ann Domuracki. (Incorporated by reference to Exhibit 10.6.3D to
the Registrant's Form 10-Q for the fiscal quarter ended September
28, 1996.)
*10.6.3E Amendment Four, effective as of November 1, 1996, to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Mary Ann Domuracki. (Incorporated by reference to
Exhibit 10.6.3E to the Registrant's Form 10-K for the year ended
December 27, 1997.)
*10.6.3F Amendment Five, effective as of September 22, 1997, to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Mary Ann Domuracki. (Incorporated by reference to
Exhibit 10.6.3F to the Registrant's Form 10-K for the year ended
December 27, 1997.)
*10.6.4A.1 Employment Agreement, dated August 1, 1994, between the Registrant
and Beverly Eichel. (Incorporated by reference to Exhibit
10.6.4A.1 to the Registrant's Form 10-K for the fiscal year ended
March 25, 1995.)
*10.6.4B Amendment One, effective November 1, 1994, to the Employment
Agreement, dated August 1, 1994, between the Registrant and
Beverly Eichel. (Incorporated by reference to Exhibit 10.6.4B to
the Registrant's Form 10-Q for the fiscal quarter ended September
24, 1994.)
*10.6.4C Amendment Two, effective January 1, 1995, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and
Beverly Eichel. (Incorporated by reference to Exhibit 10.6.4C to
the Registrant's Form 10-Q for the fiscal quarter ended December
24, 1994.)
*10.6.4D Amendment Three, effective April 1, 1996, to the amended Employment
Agreement, dated August 1, 1994, between the Registrant and
Beverly Eichel. (Incorporated by reference to Exhibit 10.6.4D to
the Registrant's Form 10-Q for the fiscal quarter ended September
28, 1996.)
*10.6.4E Amendment Four effective as of November 1, 1996 to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Beverly Eichel. (Incorporated by reference to
Exhibit 10.6.4E to the Registrant's Form 10-Q for the fiscal
quarter ended March 29, 1997.)
*10.6.4F Amendment Five effective as of September 22, 1997 to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Beverly Eichel. (Incorporated by reference to
Exhibit 10.6.4F to the Registrant's Form 10-K for the year ended
December 27, 1997.)
*10.6.5 Employment Agreement, dated February 2, 1998, between the Registrant
and Catherine Volker. (Incorporated by reference to Exhibit 10.6.5
to the Registrant's Form 10-K for the year ended December 27,
1997.)
*10.6.6 Stock Option Plan and Agreement, dated February 2, 1998, between
the Registrant and Catherine Volker. (Incorporated by reference to
Exhibit 10.6.6 to the Registrant's Form 10-K for the year ended
December 27, 1997.)
<PAGE>
*10.8.1 1992 Stock Option Plan of the Registrant, together with form of
Non-Qualified Stock Option Agreement. (Incorporated by reference
to Exhibit 10.8.1 to the Registration Statement.)
*10.8.1A Amendment No. 1 to the 1992 Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 10.8.1A to the Registrant's
Form 10-K for the fiscal year ended March 27, 1993.)
*10.8.2 Savings Plan of the Registrant, as amended. (Incorporated by
reference to Exhibit 4.1 to the Registration Statement of the
Registrant on Form S-8 (Reg. No. 33-53852).)
10.10.1A Renewal license agreement dated December 29, 1993 between Givenchy
and the Registrant. (Incorporated by reference to Exhibit
10.10.1A to the Registrant's Form 10-Q for the fiscal quarter
ended December 25, 1994.)
10.10.2B Renewal license agreement dated January 26, 1996 between Anne Klein
& Company and the Pennaco Division of Danskin, Inc. (Incorporated
by reference to Exhibit 10.10.2A to the Registrant's Form 10-Q
for the fiscal quarter ended March 30, 1996.)
10.10.3 License agreement, dated as of October 1, 1994, between SsangYong
(U.S.A.), Inc. and the Registrant. (Incorporated by reference to
Exhibit 10.10.3 to the Registrant's Form 10-Q for the fiscal
quarter ended September 24, 1994.)
10.10.5 License agreement, dated June 1, 1995, between Canari Cycle Wear,
a Division of Kassach Marketing and the Registrant. (Incorporated
by reference to Exhibit 10.10.5 to the Registrant's Form 10-K for
the fiscal year ended March 25, 1995.)
10.10.6 License Agreement dated November 1, 1996 between Wundies, Inc.
and the Registrant. (Incorporated by reference to Exhibit 10.10.6
to the Registrant's Form 10-Q for the fiscal quarter ended June
28, 1997.)
10.16.25 Amended and restated Loan and Security Agreement, dated as of
June 22, 1995, between the Registrant and First Union, with
attachments and exhibits. (Incorporated by reference to Exhibit
10.16.25 to the Registrant's Form 10-K for the fiscal year ended
March 25, 1995.)
10.16.25A First Amendment, dated August 17, 1995, to the Amended and
Restated Loan Agreement between the Registrant and First Union
National Bank of North Carolina, as Agent. (Incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K dated
August 17, 1995.)
10.16.25B Second Amendment dated February 29, 1996 to the Amended and
Restated Loan Agreement between the Registrant and First Union
National Bank of North Carolina, as Agent. (Incorporated by
reference to Exhibit 10.16.25B to the Registrant's Form 10-K for
the nine-month transition period ended December 30, 1995.)
10.16.25C Third Amendment dated March 18, 1996 to the Amended and Restated
Loan Agreement between the Registrant and First Union National
Bank of North Carolina, as Agent. (Incorporated by reference to
Exhibit 10.16.25C to the Registrant's Form 10-K for the
nine-month transition period ended December 30, 1995.)
10.16.25D Fourth Amendment dated July 31, 1996 to the Amended and Restated
Loan Agreement between the Registrant and First Union National
Bank of North Carolina, as Agent. (Incorporated by reference to
Exhibit 10.16.25D to the Registrant's Form 10-Q for the fiscal
quarter ended December 25, 1993)
<PAGE>
10.31## Financial Data Schedule.
21.1## Subsidiaries of the Registrant.
23.1## Consent of Arthur Andersen, LLP.
23.2## Consent of Deloitte & Touche LLP
99.1 Press release dated May 20, 1997. (Incorporated by reference to
Exhibit 99.1 to the Registrant's Form 8K dated May 19, 1997.)
99.2 Press release dated September 23, 1997. (Incorporated by reference
to the Registrant's Form 8-K dated September 22, 1997.)
- -----------------
## Filed herewith
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal year ended
December 26, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ M. Catherine Volker
---------------------------
M. Catherine Volker
Chief Executive Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
--------- ------------------------ ----
<S> <C> <C>
/s/ M. Catherine Volker
- -----------------------
M. Catherine Volker Chief Executive Officer March 26, 1999
/s/ Donald Schupak
- ------------------
Donald Schupak Chairman of the Board March 26, 1999
/s/ Nina McLemore
- -----------------
Nina McLemore Vice Chairperson of the Board March 26, 1999
/s/ Jeffrey L. Sentz
- --------------------
Jeffrey L. Sentz Controller March 26, 1999
/s/ Andrew J. Astrachan
- -----------------------
Andrew J. Astrachan Director March 26, 1999
/s/ Gabriel Brener
- ------------------
Gabriel Brener Director March 26, 1999
/s/ David Chu
- -------------
David Chu Director March 26, 1999
/s/ Michael Hsieh
- -----------------
Michael Hsieh Director March 26, 1999
/s/ James P. Jalil
- ------------------
James P. Jalil Director March 26, 1999
/s/ Larry Shelton
- -----------------
Larry Shelton Director March 26, 1999
/s/ Henry T. Mortimer
- ---------------------
Henry T. Mortimer Director March 26, 1999
</TABLE>
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Report of Previous Independent Public Accountants F-3
Consolidated Financial Statements as of December 27, 1997 and December 26, 1998,
and for the fiscal years ended December 28, 1996, December 27, 1997 and December
26, 1998:
Consolidated Balance Sheets as of December 27, 1997
and December 26, 1998 F-4
Consolidated Statements of Operations for the fiscal years ended
December 28, 1996, December 27, 1997 and
December 26, 1998 F-5
Consolidated Statements of Stockholders' Equity for the fiscal
years ended December 28, 1996, December 27, 1997
and December 26, 1998 F-6
Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 1996, December 27, 1997 and
December 26, 1998 F-7
Notes to Consolidated Financial Statements F-8 to F-25
Supplemental Financial Information:
Unaudited Selected Quarterly Financial Information S-1
Financial Statement Schedule:
Schedule II - Schedule of Valuation and Qualifying
Accounts S-2
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of DANSKIN, INC.:
We have audited the accompanying consolidated balance sheets of Danskin, Inc. (a
Delaware Corporation) and Subsidiaries (the "Company") as of December 26, 1998
and December 27, 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the fiscal years then ended.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Danskin, Inc. and Subsidiaries
as of December 26, 1998 and December 27, 1997, and the results of their
operations and their cash flows for the fiscal years then ended in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999
F-2
<PAGE>
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of DANSKIN, INC.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Danskin, Inc. and Subsidiaries (the
"Company") for the year ended December 28, 1996. Our audit also included
the financial statement schedule listed in the Index on page F-1. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Danskin, Inc.
and Subsidiaries for the year ended December 28, 1996 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
statements, taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
March 14, 1997 (Except for Note 1 - Loss per Common Share,
for which the date is March 6, 1998)
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 27, 1997 December 26, 1998
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 808,000 $ 546,000
Accounts receivable, less allowance for doubtful accounts of $848,000
at December 27, 1997 and $1,021,000 at December 26, 1998 14,935,000 13,518,000
Inventories 28,714,000 30,386,000
Prepaid expenses and other current assets 1,926,000 2,256,000
---------- ----------
Total current assets 46,383,000 46,706,000
Property, plant and equipment - net of accumulated depreciation and
amortization of $8,671,000 at December 27, 1997 and $8,807,000
at December 26, 1998 7,591,000 9,773,000
Other assets 1,028,000 1,227,000
---------- ----------
Total Assets $ 55,002,000 $ 57,706,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit $ 8,539,000 $ 16,029,000
Current portion of long-term debt 333,000 2,000,000
Accounts payable 8,043,000 8,440,000
Accrued expenses 10,398,000 13,692,000
---------- ----------
Total current liabilities 27,313,000 40,161,000
---------- ----------
Long-term debt, net of current maturities 9,667,000 6,674,000
Subordinated debt 3,000,000 -
Accrued dividends 216,000 1,176,000
Accrued retirement costs 1,985,000 2,301,000
---------- ---------
Total long-term liabilities 14,868,000 10,151,000
---------- ----------
Total Liabilities 42,181,000 50,312,000
---------- ----------
Commitments and contingencies
Series D Cumulative Convertible Preferred Stock, 2,400 shares,
Liquidation Value of $12,000,000 11,140,000 11,294,000
Stockholders' Equity (Deficit)
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 December 26, 1998, less 1,083 shares held by subsidiary at
December 27, 1997 and December 26, 1998 101,000 209,000
Additional paid-in capital 20,366,000 23,483,000
Accumulated deficit (16,511,000) (24,546,000)
Accumulated other comprehensive (loss) (2,275,000) (3,046,000)
------------ ------------
Total Stockholders' Equity (Deficit) 1,681,000 (3,900,000)
============ ============
Total Liabilities and Stockholders' Equity (Deficit) $ 55,002,000 $ 57,706,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 28, 1996 December 27, 1997 December 26, 1998
---------------------- --------------------- --------------------
<S> <C> <C> <C>
Net revenues $ 128,145,000 $ 121,986,000 $ 108,741,000
Cost of goods sold 83,610,000 81,822,000 68,428,000
---------- ---------- ----------
Gross profit 44,535,000 40,164,000 40,313,000
Selling, general and administrative expenses 42,069,000 40,125,000 41,785,000
Non-recurring charges - 300,000 2,419,000
Provision for doubtful accounts receivable (43,000) 49,000 327,000
Interest expense 4,721,000 4,278,000 2,513,000
---------- ---------- ----------
46,747,000 44,752,000 47,044,000
Loss before income tax provision and extraordinary item (2,212,000) (4,588,000) (6,731,000)
Provision for income taxes 2,777,000 245,000 190,000
---------- ---------- ----------
Net loss before extraordinary items (4,989,000) (4,833,000) (6,921,000)
Extraordinary gain from early retirement of debt - 5,245,000 -
---------- ---------- ----------
Net (loss) income (4,989,000) 412,000 (6,921,000)
Preferred dividends 202,000 425,000 1,114,000
---------- ---------- ----------
Net (loss) applicable to Common Stock ($5,191,000) ($13,000) ($8,035,000)
=========== ========== ============
Basic and diluted net (loss) per share:
Net (loss) per share before extraordinary item ($0.80) ($0.66) ($0.50)
Net income per share for extraordinary item - $0.66 -
---------- ---------- ----------
Net (loss) per share after extraordinary item ($0.80) ($0.00) ($0.50)
=========== =========== ============
Weighted average number of common shares outstanding 6,513,000 7,942,000 16,168,000
=========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Common Stock Paid-in
Stock Stock Amount Outstanding Amount Capital
----- ------------ ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Balance, December 30, 1995 5,921,375 $59,000 $14,614,000
Comprehensive (loss)
Net loss
Accumulated translation adjustment
Minimum pension liability adjustment
Total Comprehensive (loss)
Preferred stock dividend -
Purchase and retirement of Common Stock (41,013) - (140,000)
Sales and contribution of Common Stock to Employee
Savings Plan 55,893 1,000 178,000
Common Stock option exercises 110,000 1,000 318,000
Issuance of Preferred Stock 1,000 - 4,695,000
----- ---- --------- ------- -----------
Balance, December 28, 1996 1,000 - 6,046,255 $61,000 $19,665,000
Comprehensive Income
Net income
Accumulated translation adjustment
Minimum pension liability adjustment
Total Comprehensive Income
Preferred stock dividend 56,689 1,000 124,000
Reversal of accrued preferred stock dividend - 1996
Common Stock dividend 511,171 5,000 148,000
Purchase and retirement of Common Stock (9,415) - (20,000)
Sales and contribution of Common Stock 32,293 - 60,000
to Employee Savings Plan
Exchange of 10% Cumulative Preferred Stock (1,000) - 3,333,333 33,000 (33,000)
for shares of Common Stock
Preferred stock dividend 102,881 1,000 124,000
Series D preferred dividend
Warrants 359,000
Rights Redemption (61,000)
----- ---- --------- ------- -----------
Balance, December 27, 1997 - - 10,073,207 $101,000 $20,366,000
Comprehensive (loss)
Net loss
Minimum pension liability adjustment
Total Comprehensive (loss)
Preferred stock dividend
Sales and contribution of Common Stock 92,403 1,000 49,000
to Employee Savings Plan
Employee Stock Grant 750,000 7,000 439,000
Private Offering 7,864,336 79,000 2,281,000
Rights Offering 2,135,664 21,000 319,000
Warrants Issued 29,000
----- ---- --------- ------- -----------
Balance, December 26, 1998 - - 20,915,610 $209,000 $23,483,000
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Accumulated Deficit (Loss) Income Total
------------------- ------------- -----
<S> <C> <C> <C>
Balance, December 30, 1995 ($11,154,000) ($2,000,000) $1,519,000
Comprehensive (loss)
Net loss (4,989,000) (4,989,000)
Accumulated translation adjustment (15,000) (15,000)
Minimum pension liability adjustment (565,000) (565,000)
----------
Total Comprehensive (loss) (5,569,000)
----------
Preferred stock dividend (202,000) (202,000)
Purchase and retirement of Common Stock (140,000)
Sales and contribution of Common Stock to Employee
Savings Plan 179,000
Common Stock option exercises 319,000
Issuance of Preferred Stock 4,695,000
------------ ----------- ---------
Balance, December 28, 1996 ($16,345,000) ($2,580,000) $801,000
Comprehensive Income
Net income 412,000 412,000
Accumulated translation adjustment 15,000 15,000
Minimum pension liability adjustment 290,000 290,000
-------
Total Comprehensive Income 717,000
-------
Preferred stock dividend (125,000) -
Reversal of accrued preferred stock dividend - 1996 41,000 41,000
Common Stock dividend (153,000) -
Purchase and retirement of Common Stock (20,000)
Sales and contribution of Common Stock 60,000
to Employee Savings Plan
Exchange of 10% Cumulative Preferred Stock -
for shares of Common Stock -
Preferred stock dividend (125,000)
Series D preferred dividend (216,000) (216,000)
Warrants 359,000
Rights Redemption (61,000)
------------ ----------- ---------
Balance, December 27, 1997 ($16,511,000) ($2,275,000) $1,681,000
Comprehensive (loss)
Net loss (6,921,000) (6,921,000)
Minimum pension liability adjustment (771,000) (771,000)
--------
Total Comprehensive (loss) (7,692,000)
---------
Preferred stock dividend (1,114,000) (1,114,000)
Sales and contribution of Common Stock 50,000
to Employee Savings Plan
Employee Stock Grant 446,000
Private Offering 2,360,000
Rights Offering 340,000
Warrants Issued 29,000
------------ ----------- ---------
Balance, December 26, 1998 ($24,546,000) ($3,046,000) ($3,900,000)
============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 28, 1996 December 27, 1997 December 26, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) Income ($4,989,000) $412,000 ($6,921,000)
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 2,616,000 2,476,000 1,727,000
Write off of certain trademarks - - 184,000
Extraordinary gain from early retirement of debt - (5,245,000) -
Stock grants issued - - 446,000
Provision for doubtful accounts receivable (43,000) 49,000 327,000
Loss on property, plant and equipment 28,000 68,000 954,000
Deferred income taxes 2,536,000 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,419,000) 1,109,000 1,090,000
(Increase) decrease in inventories (3,226,000) 5,361,000 (1,672,000)
(Increase) in prepaid expenses and other current assets (62,000) (1,553,000) (698,000)
Increase (decrease) in accounts payable 321,000 (1,639,000) 397,000
Increase (decrease) in accrued expenses 77,000 (2,184,000) 2,693,000
---------- ---------- ----------
Net Cash used in operating activities (4,161,000) (1,146,000) (1,473,000)
---------- ---------- ----------
Cash Flows From Investing Activites:
Capital expeditures (738,000) (241,000) (4,673,000)
---------- ---------- ----------
Net cash used in investing activities (738,000) (241,000) (4,673,000)
---------- ---------- ----------
Cash Flows From Financing Activities:
Net borrowings (repayments) under revolving line of credit 5,868,000 (1,430,000) 7,490,000
Repayments of long-term debt (411,000) (333,000) (1,326,000)
Sale of Common Stock - - 3,000,000
Expenses associated with issuance of rights to purchase Common Stock - - (299,000)
Payment of subordinated debt - - (3,000,000)
Purchase and retirement of Common Stock (139,000) (20,000) -
Sale of Common Stock to Savings Plan 79,000 60,000 49,000
Common Stock option exercises 318,000 - -
Expenses associated with issuance of Preferred Stock (305,000) - -
Proceeds from recapitalization - 4,000,000 -
Proceeds from warrant notes - - 15,000
Financing costs incurred (275,000) (1,259,000) (45,000)
Preferred Stock dividend (202,000) - -
---------- ---------- ----------
Net cash provided by financing activities 4,933,000 1,018,000 5,884,000
---------- ---------- ----------
Net increase (decrease) in Cash and Cash Equivalents 34,000 (369,000) (262,000)
Cash and Cash Equivalents, Beginning of Period 1,143,000 1,177,000 808,000
---------- ---------- ----------
Cash and Cash Equivalents, End of period $ 1,177,000 $ 808,000 $ 546,000
=========== ========== ==========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 4,242,000 $ 3,767,000 $ 2,282,000
Income Taxes Paid 123,000 345,000 60,000
Cash refunds received for income taxes (10,000) (121,000) (29,000)
</TABLE>
Non-Cash Activities
The Company declared a stock dividend of 1 share for every 11.99 shares of
common stock on 9/29/97.
Early extinguishment of long term debt resulted in an extraordinary
gain of $5,245,000
The Company issued 159,570 shares to the Bond Fund for Growth as a dividend
in lieu of cash on 9/22/97
The Company issued a stock grant of 750,000 shares at $.594 to the CEO in
February 1998.
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Danskin, Inc. (the "Company") was incorporated on February 21, 1986 to own and
operate the business and assets of two divisions of a corporation acquired on
July 22, 1986.
The Company currently operates under two divisions: Danskin, which designs,
manufactures and markets dancewear, bodywear, tights and exercise apparel; and
also operates 43 retail outlet stores and 3 full price stores; and Pennaco,
which designs, manufactures and markets hosiery under the brand names Ralph
Lauren(R), Round-the-Clock(R), Givenchy(R), and under private labels for major
retailers, as well as socks under Round-the-Clock(R) and Danskin(R) brands. The
Company renewed the Givenchy Corporation license for three years and allowed its
license arrangement with Anne Klein to expire in December 1998.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of the
Company, including both of its operating divisions, and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Certain reclassifications were made to prior year information to conform to
current year presentation.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday in December. Fiscal 1996
ended on December 28, 1996, fiscal 1997 ended on December 27, 1997 and fiscal
1998 ended on December 26, 1998. In addition, all fiscal years presented contain
52 weeks.
INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. Inventories consist of:
December 28, 1997 December 26, 1998
-------------------- --------------------
Finished goods $17,557,000 $18,735,000
Work-in-process 5,749,000 6,271,000
Raw materials 4,708,000 4,725,000
Packaging Materials 700,000 655,000
------------------- --------------------
$28,714,000 $30,386,000
=================== ====================
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Furniture and fixtures, machinery and equipment and buildings
are depreciated by the straight-line method over the estimated useful lives of
the assets, ranging from 5 to 20 years. Leasehold improvements are amortized by
the straight-line method over the related lease terms or the estimated useful
life of the asset, whichever is less.
F-8
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED
The excess of purchase price over fair value of net tangible assets acquired is
amortized on a straight-line basis over 20 years.
DEFERRED FINANCING CHARGES
Deferred financing charges are amortized over the respective terms of debt
obtained under financing agreements.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with an
original maturity of three months or less to be cash equivalents.
TRADEMARKS
The Company amortizes capitalized costs to acquire trademarks over the estimated
useful life of the trademark, generally 15 years.
INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per share is calculated by dividing net income (loss)
applicable to Common Stock by the weighted average Common Stock outstanding
during the period. Diluted net income (loss) per share is calculated by dividing
net income (loss) applicable to Common Stock by the weighted average Common
Stock and Common Stock equivalents outstanding. Common Stock equivalents,
including Convertible Series D Preferred Stock, management options and warrants,
are reflected in diluted net income (loss) per share except to the extent they
are antidilutive.
At December 26, 1998 the Company had the following common shares and common
shares equivalents outstanding:
Common Stock 20,916,693
Preferred Stock 40,000,000
Warrants 17,760,012
Options 5,519,442
---------
Total Shares and Share Equivalents Outstanding 84,196,147
==========
Due to the net loss before extraordinary item for all periods presented, the
assumed exercise of common stock equivalents would be antidilutive and thus such
instruments have not been included as common stock equivalents for purposes of
the calculation of diluted earnings per share.
Net income (loss) per share has been restated for all periods presented to
reflect a stock dividend of one share for every 11.99 shares of Common Stock
declared on September 29, 1997.
F-9
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Non-cash activities
The Company contributed 29,629 of its common shares to the Danskin, Inc. Savings
Plan on March 22, 1996 at a fair market value of approximately $100,000.
The Company issued 7% warrants to First Union National Bank in July 1994,
subsequently increased in June 1995 to 10%, of the then outstanding common
stock. The warrants were surrendered to the Company without the payment of
further consideration in connection with the refinancing of the Company's
revolving credit obligations (See Note 11). Such warrants have been recorded as
additional financing fees totaling $764,000 and additional paid-in-capital
equity. The unamortized portion of such fees was offset against an extraordinary
gain from the early retirement of debt during the 1997 fiscal year.
The Company issued 10% Cumulative Convertible Preferred Stock with a $5,000,000
principal value on August 6, 1996, in exchange for subordinated convertible
debentures having an aggregate face value of $5,000,000. By agreement, between
the Company and the holder of the 10% Cumulative Preferred Stock, such preferred
stock, and any accrued but unpaid dividends, were exchanged for 3,436,214 shares
of Common Stock and certain additional consideration (See Note 12).
The Series D Preferred Stock is presented at its fair value at the date of
issuance, as determined by an independent valuation firm, less fees incurred to
effect the placement of the Series D Preferred Stock. The difference between
this amount and the Series D Preferred Stock's liquidation value of $12,000,000
is being amortized over the period through the October 8, 2004 maturity of the
Series D Preferred Stock as a component of preferred stock dividends.
Pursuant to the terms of the Employment Agreement between the Company and Ms.
Volker dated February 2, 1998, Ms. Volker was granted 750,000 shares of Common
Stock and recorded an expense of $446,000 which is included as a component of
selling, general and administrative expenses.
Advertising and Promotion
All costs associated with advertising and promoting products are expensed when
the advertising or event takes place. Costs associated with the Company's
catalogs are expensed when the catalogs are distributed. Advertising and
promotion expenses were $6.5 million in 1996, $6.0 million in fiscal 1997
and $7.4 million in fiscal 1998.
INCOME TAXES
The Company accounts for its income taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes", which requires the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
F-10
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company continually evaluates the carrying value and the economic useful
life of its long-lived assets based upon the Company's operating performance and
its expected future net cash flows and will adjust the carrying amount of assets
which may not be recoverable. The Company does not believe that any impairment
exists in the recoverability of its long-lived assets as of the fiscal year end.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and other equity instruments used for compensation purposes, and
requires companies electing to report in accordance with the standard to
recognize or disclose such compensation in its financial statements. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. The Company, as permitted, continues to account for
such transactions under Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees," but discloses in the notes to
the consolidated financial statements pro forma net income and earnings per
share as if the Company had adopted the fair value method of accounting (See
Note 2).
FINANCIAL INSTRUMENTS
In assessing the fair value of financial instruments at December 27, 1997 and
December 26, 1998, the Company has used a variety of methods and assumptions,
which were based on estimates of market conditions and risks existing at that
time. For certain instruments, including cash and cash equivalents, it was
assumed that the carrying amount approximated fair value for the majority of
these instruments because of their short maturity. Bank debt obligations are
valued at carrying amount due to floating interest rates on such debt. These
values merely represent a general approximation of possible value and may never
actually be realized.
F-11
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair values of the Company's financial instruments are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- -----------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 808,000 $ 808,000 $ 546,000 $ 546,000
Revolving line of credit (8,539,000) (8,539,000) (16,029,000) (16,029,000)
Long-term debt (10,000,000) (10,000,000) (8,674,000) (8,674,000)
</TABLE>
2. STOCK OPTION PLAN
On July 1, 1992, the Company's Board of Directors adopted the 1992 Stock Option
Plan (the "Plan"), pursuant to which 339,474 shares of common stock were
reserved for issuance. The Plan provides for the granting of options to
directors, officers and certain key employees of the Company. The option price
shall not be less than 100% of the fair market value on the date of grant. No
options may be granted after 10 years from the date of adoption but all options
then outstanding will remain outstanding in accordance with the exercise terms
as determined at each grant date. On July 29, 1993, the stockholders of Danskin
authorized an increase to the number of options available for distribution to
600,000. Options become exercisable at the discretion of the Compensation
Committee of the Board of Directors and the plan provides for discretion on
vesting requirements.
Effective October 19, 1994, the Board of Directors of the Company amended the
Plan to increase the number of options available for grant from 600,000 to
660,000. On October 27, 1994, the Board of Directors of the Company increased
the number of options available for grant from 660,000 to 900,000, which
received the approval of stockholders at the 1995 annual meeting.
Effective September 18, 1997, the Executive Committee of the Board of Directors
of the Company amended the Company's Stock Option Plan to clarify that the Board
of Directors retains the discretion to determine the fair market value of the
Common Stock with respect to periods when the Common Stock is not actively
traded on NASDAQ or any other national exchange or under circumstances where
significant transactions in the Common Stock have occurred outside traditional
trading venues.
Effective May 18, 1998, the Executive Committee of the Board of Directors of the
Company amended the 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 employees of the Company. Such options vest over a
four year period from the date of grant.
In October, 1997, a total of 239,943 options were repriced with an exercise
price of $.625. All participants granted options prior to repricing, with the
exception of certain executives and outside directors, were given the
opportunity to exchange previous grants, which were all originally granted at
higher exercise prices (ranging from $1.875 to $4.875).
F-12
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STOCK OPTION PLAN (CONTINUED)
The following table summarizes the activity relating to the Plan as of the
fiscal year ended December 28, 1996, the fiscal year ended December 27, 1997 and
for the fiscal year ended December 26, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 28, 1996 DECEMBER 27, 1997 DECEMBER 26, 1998
----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
PRICE RANGE # OF SHARES PRICE # OF SHARES PRICE # OF SHARES PRICE
----------- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year $0.625- 755,328 $3.800 701,918 $3.594 759,034 $2.275
$7.00
Granted $0.625- 168,000 $3.970 369,999 $0.763 2,370,000 $1.514
$4.375
Canceled $0.625- (111,410) $6.244 (312,883) $3.444 (573,376) $2.414
$4.00
Exercised $0.625- (110,000) $2.898 - - (92,882) $0.625
$3.00
Outstanding, end of year $0.625- 701,918 $3.594 759,034 $2.275 2,462,776 $1.414
$7.00
</TABLE>
Options exercisable and shares available for future grant amounted to:
DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- -----------------
Options exercisable 628,978 271,105
Shares available for grant* 30,966 844,342
The weighted average fair value of total stock options granted during 1998 was
$0.56 per share. The fair value of each stock option grant is estimated on the
date of grant using a pricing model, which approximates the Black-Scholes
pricing model, with the following weighted average assumptions used for grants
in fiscal 1998: risk-free interest rate of 5.53%; no expected dividend yield;
expected life of 9.8 years; and expected volatility of 29.43%; and for grants in
fiscal 1997: risk-free interest rate of 6.13%; no expected dividend yield;
expected life of seven years; and expected volatility of 24%. Stock options
generally expire 10 years from the grant date or at termination, if earlier. The
stock options exercisable at December 26, 1998 have a weighted average exercise
price of $1.11 per share.
- --------------------------
* "Shares available for grant" under the Plan is equal to (a) the total number
of options available for grant under the Plan, less (b) the sum of (x) options
presently exercisable, (y) non-exercisable options, and (z) previously exercised
options.
F-13
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STOCK OPTION PLAN (CONTINUED)
Pursuant to the terms of a Stock Option Agreement between the Company and
Ms. Volker dated February 2, 1998, Ms. Volker was granted six options, each
representing the right to purchase 425,000 shares of Common Stock. The exercise
price of the shares of Common Stock covered by each option is $ 0.65. Each
option is generally exercisable until January 31, 2008, unless earlier
terminated in accordance with the Stock Option Agreement. Such options were
not issued under the Stock Option Plan.
The Company accounts for stock options in accordance with APB No. 25, under
which no compensation cost has been recognized for stock option awards. Had
compensation cost for the Plan been determined consistent with SFAS No. 123, the
Company's pro forma net loss would have been $8.0 million and net loss
applicable to Common Stock and net loss per share (basic and diluted) for the
fiscal year ended December 26, 1998 would have been $9.1 million and $0.56 per
share, respectively; for the fiscal year ended December 27, 1997 the Company's
pro forma net income would have been $237,000 and net loss applicable to Common
Stock and net loss per share (basic and diluted) would have been $188,000 and
$0.02 per share, respectively. For the fiscal year ended December 28, 1996, the
Company's pro forma net loss and net loss per share (basic and diluted) would
have been $5.5 million and $0.90 per share. Since SFAS No. 123 was not
applicable to options granted prior to March 26, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
3. STOCKHOLDER RIGHTS PLAN
The Company adopted a stockholder rights plan on June 5, 1996, for stockholders
of record on June 17, 1996, which would become effective in the event of an
accumulation of more than 35% of its common stock by an acquirer. A rights
agreement was executed on June 5, 1996 between the Company and its Rights Agent,
a copy of which was filed as an exhibit to the Company's Report on Form 8-K
filed on June 6, 1996. In September 1997, the Board of Directors of the Company,
redeemed the Rights issued pursuant to the Rights Agreement for $.01 per right
in cash to holders of Common Stock held of record as of the close of business on
September 22, 1997.
4. STOCK MARKET LISTING
The Company's Common Stock was traded over-the-counter on the NASDAQ National
Market under the symbol "DANS" until August 8, 1996, at which time it was moved
to the NASDAQ SmallCap(TM) Market under the same symbol. Effective June 27,
1997, the Company's Common Stock was delisted due to the Company's
non-compliance with NASDAQ's minimum capital and surplus requirement. Bid
quotations for the Company's Common Stock may be obtained from the "pink sheets"
published by the National Quotation Bureau, and the Common Stock is traded in
the over-the-counter market.
5. SAVINGS AND PROFIT SHARING PLAN
The Company maintains a savings and profit sharing plan (the "Salaried Savings
Plan") for the benefit of salaried employees meeting certain eligibility
requirements. Company profit sharing contributions are made at the discretion of
the Board of Directors. Effective April 1, 1987, under a 401(k) vehicle,
eligible employees may elect to defer a portion of their base salary, up to the
maximum allowed, as a deduction for Federal income tax purposes. The Company
will match 25% of each participant's investment, up to 6% of the participant's
base salary. Total expense for this plan, for the fiscal years ended December
28, 1996, December 27, 1997 and December 26, 1998, was approximately $100,000,
$150,000 and $152,000, respectively. The Company also maintains an hourly
savings and profit sharing plan (the "Hourly Savings Plan"), for which the
Company will match 10% of each participant's investment up to 6% of base salary,
with nominal plan expense.
On October 28, 1992, the Company registered a total of 200,000 shares of the
Company's common stock and participating interests in the Salaried Savings Plan
in conjunction with an amendment to the Salaried Savings Plan to add shares of
the Company's common stock as an investment option under such a plan. All shares
issued to or purchased from the Salaried Savings Plan are issued or sold at the
then current market price.
F-14
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
Property, plant and equipment consist of: DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- -----------------
<S> <C> <C>
Land $ 56,000 $ 45,000
Buildings and improvements 2,374,000 1,777,000
Machinery and equipment 6,396,000 6,658,000
Furniture and fixtures 3,989,000 4,345,000
Leasehold improvements 3,280,000 2,680,000
Construction in progress 167,000 3,075,000
------------- -----------
16,262,000 18,580,000
Accumulated depreciation and (8,671,000) (8,807,000)
amortization ------------- -----------
$ 7,591,000 $ 9,773,000
============= ===========
7. OTHER ASSETS
Other assets consisted of: DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- -----------------
Excess of purchase price over fair value of net tangible assets acquired
(net of accumulated amortization of $635,000 at December 1997) $ 205,000 $ -
Deferred financing charges
(net of accumulated amortization of $16,000 at December 1997
and $152,000 at December 1998) 611,000 520,000
Unrecognized net pension obligation 2,000 139,000
Notes Receivable - Related Party 95,000 88,000
Notes Receivable - Sea & Ski (non-current portion) - 400,000
Trademarks (net of accumulated amortization of $412,000 at December 1997 115,000 80,000
and $447,000 at December 1998) ------------- -----------
$ 1,028,000 $ 1,227,000
============= ===========
8. ACCRUED EXPENSES
Accrued expenses consist of: DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- -----------------
Salaries, wages and other compensation $ 381,000 $ 695,000
Employee benefits 2,526,000 2,829,000
Accrued cooperative advertising and promotion costs 4,795,000 4,821,000
Accrued rent 362,000 2,051,000
Other accrued expenses 2,334,000 3,296,000
------------- -----------
$ 10,398,000 $13,692,000
============= ===========
</TABLE>
F-15
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NET REVENUES
Net revenues consisted of:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 28, 1996 DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $127,168,000 $120,965,000 $108,024,000
Royalties and licensing fees 977,000 1,021,000 717,000
------------ ------------ ------------
$128,145,000 $121,986,000 $108,741,000
------------ ------------ ------------
</TABLE>
10. NON-RECURRING CHARGES
Non-recurring charges of $300,000 for the fiscal year ended December 27, 1997
consisted of certain executive employee severance costs.
Non-recurring charges were $2.4 million for the fiscal year ended December 26,
1998. These charges consisted of severance costs related to the resignation and
termination of former executives of the Company, a provision established for the
remaining net lease obligation for the former corporate office at 111 W. 40th
Street in New York City and write-offs of non-operating assets, offset by the
recognition of the outstanding amount owed the Company for the sale of the Sea &
Ski trademark and the gain on the sale of the Reading, PA outlet store. The
components of the non-recurring charges for the fiscal year ended December 26,
1998 are as follows:
Severance expense $1,399,000
Write-off of leasehold improvements (111 W. 40th Street) 416,000
Write-off of Miami South Beach leasehold improvements 162,000
Write-off of Dance France Goodwill 184,000
Provision for remaining lease obligation for 111 W. 40th Street 1,350,000
Gain on sale of Reading, PA outlet store (592,000)
Sea & Ski receivable (500,000)
----------
$2,419,000
==========
11. BANK FINANCING
<TABLE>
<CAPTION>
DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- -----------------
<S> <C> <C>
Current portion of revolving line of credit $ 8,539,000 $16,029,000
============ ===========
Long-term debt:
Term notes $10,000,000 $ 8,674,000
------------ -----------
Less current maturities of long-term debt 333,000 2,000,000
------------ -----------
$ 9,667,000 $ 6,674,000
============ ===========
</TABLE>
Maturities of term notes are as follows for the year ended:
December 1999 $2,000,000
December 2000 2,000,000
December 2001 2,000,000
December 2002 2,674,000
-----------
$8,674,000
===========
F-16
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BANK FINANCING (CONTINUED)
On June 22, 1995, the Company entered into an Amended and Restated Loan and
Security Agreement with First Union National Bank of North Carolina ("First
Union") (the "Loan and Security Agreement"). The Loan and Security Agreement was
amended subsequent to June 22, 1995 to allow for the Company's change in fiscal
year end, to permit the establishment of a Canadian subsidiary and related
factoring arrangements for purposes of selling direct to customers in Canada, to
restate certain financial covenants, to obtain approval for the issuance of a
subordinated convertible debenture, the exchange of such debenture for preferred
stock and payment of the related dividends, and to increase an annual capital
expenditure limitation to $2,000,000.
On March 27, 1997, the Company entered into a Sixth Amendment to the Loan and
Security Agreement with First Union (the "Sixth Amendment") which (i) increased
the revolving credit "cap" from $25,000,000 to $28,500,000 for the period from
March 26, 1997 to March 31, 1998, (ii) altered certain advance rate formulas
under the revolving credit facility during a specific period of time, (iii)
amended financial covenants with respect to fiscal 1997, (iv) deferred all
fiscal 1997 term loan amortization payments until fiscal 1998, (v) required the
Company to pay First Union an "additional equity fee" of $3,000,000 in 2002,
unless the Company obtained at least $6,000,000 of net equity proceeds prior to
August 31, 1997, (vi) provided for an amendment fee of $250,000, and (vii)
provided that the Company retain certain business consultants as advisors and
outline certain business strategy plans.
On August 28, 1997, First Union, the Company and Danskin Investors, LLC, (the
"Investor") entered into a letter agreement which among other things, provided
for (i) the purchase by the Investor of certain notes executed by the Company
and payable to First Union under the First Union Loan and Security Agreement in
the approximate principal amount of $21.256 million (the "Term Loan"), (ii) the
restructuring of First Union's revolving credit commitments to the Company (the
"Revolving Credit Facility") pending a contemplated refinancing thereof, and
(iii) the disposition of the warrants (the "Warrants") issued to First Union in
June 1995 in connection with the prior restructuring of the Company's
obligations to First Union.
On August 28, 1997, the Company also agreed to the terms of a Memorandum of
Understanding with the Investor pursuant to which the Investor would make a
capital investment in the Company. In accordance with the terms and conditions
of the Memorandum of Understanding, the Investor would (i) contribute the
$21.256 million face amount of the Term Loan to the Company and (ii) invest an
additional $4 million cash in the Company (collectively, the "Capital
Infusion"). In exchange for the Capital Infusion, it was agreed that the
Investor would receive (a) $15 million face amount of debt (the "Subordinated
Debt"), subordinated only to the Company's obligations to First Union under the
Revolving Credit Facility, and (b) convertible preferred stock of the Company
having a liquidation preference of $500,000 (the "Investor Preferred Stock").
The Memorandum of Understanding further provided that the Company would repay
all principal and accrued but unpaid interest under the Revolving Credit
Facility with the proceeds from a new revolving credit facility (the "New
Revolving Credit Facility") and term loan (the "New Term Loan") to be provided
by a new lender.
Pursuant to certain letter agreements, First Union, subject to the terms and
provisions of the First Union Loan and Security Agreement, agreed to make
overadvances (collectively, the "Overadvance") available to the Company in
varying amounts up to a maximum aggregate principal amount equal to $1,500,000
at any one time outstanding for borrowings on or before August 28, 1997. First
Union also agreed to continue to make the Overadvance available to the Company
in varying amounts up to a maximum aggregate principal amount not to exceed $2.0
million through October 31, 1997.
On September 22, 1997, the Company consented to the assignment to the Investor
of approximately $21.256 million face amount (the "Loan Amount") of the Term
Loan. In addition, at ther Term Loan Closing, the Revolving Credit Facility was
amended to, among other things, (i) adjust applicable interest rates, (ii) reset
the maturity date for such Facility to March 31, 1998 and (iii) eliminate the
Additional Equity Fee.
Effective October 8, 1997 (the "Closing Date"), the Company replaced its former
financing arrangements with First Union with a new loan and security agreement
(the "Loan and Security Agreement") with Century Business Credit Corporation
("CBCC" or the "Lender") which matures on October 8, 2002. Proceeds of the Loan
and Security Agreement were used to pay all of the Company's indebtedness to
First Union, and to establish working capital lines of credit. On the closing
date, the Warrants were surrendered to the Company without the payment of any
additional consideration.
Pursuant to and in accordance with its terms, the Loan and Security Agreement
provides the Company with a term loan facility in the aggregate principal amount
of $10 million (the "Term Loan Facility") and a revolving credit facility,
including a provision for the issuance of letters of credit (the "Revolving
Credit Facility") generally in an amount not to exceed the lesser of (a) $45
million less the aggregate outstanding principal balance under the Term Loan
Facility, or (b) a formula amount based upon the Company's available inventory
and accounts receivable levels, minus certain discretionary reserves. The
Company's obligations to CBCC under the Loan and Security Agreement are
generally secured by a first priority interest in all present and future assets
of the Company. The Loan and Security Agreement contains certain affirmative and
negative covenants including, maintenance of tangible net worth and a limitation
on capital expenditures, respectively. In connection with the closing on the
Loan and Security Agreement, the Company paid CBCC a facility fee equal to
$300,000.
On the Closing Date, two term loans were advanced to the Company in accordance
with the terms of the Term Loan Facility. A term loan in the original principal
amount of $5 million was advanced to the Company and is, with respect to
principal, payable in thirty (30) consecutive monthly installments commencing on
the first day of the first month following the first anniversary of the Closing
Date. A second term loan in the original principal amount of $5 million was
advanced to the Company and is, with respect to principal, payable in eighteen
(18) consecutive monthly installments commencing on the first day of the
forty-third (43) month following the Closing Date. At the Closing Date, and
after the satisfaction in full of the Company's obligations to First Union,
availability under the Revolving Credit Facility was approximately $15 million.
Availability at December 26, 1998 was approximately $9.0 million.
Interest on the Company's obligations and under the Loan and Security Agreement
generally accrues at a rate per annum equal to the sum of the Prime Rate plus
one half of one (1/2%) percent and is payable monthly. Interest may also accrue
at a rate per annum equal to the sum of the Eurodollar Rate, as defined in the
Loan and Security Agreement, plus two and three quarters percent (2 3/4%).
12. Preferred Stock and Subordinated Convertible Debentures
In accordance with the terms of the Securities Purchase Agreement, upon the
Closing Date, the Investor Preferred Stock and the Subordinated Debt were, by
their terms, automatically exchanged for (a) $12 million stated value of Series
D Redeemable Cumulative Convertible Preferred Stock (the "Series D Stock") of
the Company, (b) a seven year warrant to purchase 10 million shares of Common
Stock at a per share price of $0.30 (the "Warrants"), and (c) a $3 million
aggregate principal amount subordinated note of the Company (the "Remaining
Subordinated Debt").
The 2,400 shares of Series D Stock are convertible into Common Stock, at the
option of the holder and, in certain circumstances, mandatorily, at an initial
conversion rate of 16,666.66 shares of Common Stock for each share of the Series
D Stock so converted, subject to adjustment in certain circumstances. The terms
of the Series D Stock also provide that upon the seventh anniversary of the date
of its issuance, the Series D Stock shall be redeemed by the Company for an
amount equal to the sum of (x) $5,000 per share (as adjusted for any
combinations, divisions or similar recapitalizations affecting the shares of
Series D Stock), plus (y) all accrued and unpaid dividends on such shares of
F-17
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES (CONTINUED)
Series D Stock to the date of such redemption. Holders of the Series D Stock are
entitled to vote, together with the holders of the Common Stock and any other
class of series of stock then entitled to vote, as one class on all matters
submitted to a vote of stockholders of the Company, in the same manner and with
the same effect as the holders of the Common Stock. In any such vote each share
of issued and outstanding Series D Stock shall entitle the holder thereof to one
vote per share for each share of Common Stock that would be obtained upon
conversion of all of the outstanding shares of Series D Stock held by such
holder, rounded up to the next one-tenth of a share. Therefore, the exchange of
the Series D Stock for the Subordinated Debt was highly dilutive of existing
holders of Common Stock. Holders of the Series D Stock are also entitled to
designate a majority of the directors to the Board of Directors of the Company.
The Series D Stock has an 8% annual dividend rate, payment of which is deferred
through December 31, 1999, and a seven year maturity. If, for any fiscal year
beginning with the fiscal year ended December 31, 1999, the Company meets
certain agreed upon financial targets, all accrued dividends for such fiscal
year will be forgiven and the Series D Stock will automatically convert into 40
million shares of Common Stock. The Investor has agreed that, for the period
beginning on the date of issuance of the Series D Stock and ending on December
31, 1999, all dividends accrued on the Series D Stock may be paid, at the option
of the Company, in cash or in additional Common Stock, legally available for
such purpose. The issuance of such Common Stock to the Investor shall, in
accordance with the agreement, constitute full payment of such dividend.
On August 6, 1996, the Company issued to a bond fund, certain 10% Cumulative
Preferred Stock, having a liquidation preference of $5,000,000, in exchange for
an 8% subordinated convertible debenture, which had an aggregate face value of
$5,000,000. The Preferred Stock was entitled to vote on an as converted basis
and was convertible into 4,403,339 shares of Common Stock at a conversion price
of $1.14 per share following the "reset" of such conversion price that took
place on August 6, 1997. Holders of the Preferred Stock had the right to vote
separately as a class for the election of one Director, and the right to require
the Company to redeem their shares for liquidation value in the event of a
"change of control", as defined. The director previously elected to the Board of
Directors of the Company in this capacity resigned in May 1997. The Company had
the right to make quarterly dividend payments by issuing additional shares of
common stock in lieu of cash and did so in March 1997 by issuing 56,689 shares
of Common Stock at $2.205 per share and in June 1997 by issuing 102,881 shares
of Common Stock at $1.21 per share. By agreement of the Company and the holder
of the 10% Cumulative Preferred Stock, the issuance in June 1997 of Common Stock
in lieu of cash was rescinded. The Company did not take action with respect to
the dividend payment which was due on September 1, 1997. In connection with the
closing of the Capital Contribution, the holder of the 10% Cumulative Preferred
Stock exchanged such preferred stock, and any accrued but unpaid dividends, for
3,436,214 shares of Common Stock and certain other rights, including the right
to participate in the purchase of the securities issued to the Investor on the
same terms as the Investor. Thereupon, the 10% Cumulative Preferred Stock was
canceled and retired.
13. RELATED PARTY ACTIVITIES
In connection with the Company's issuance of the Schupak Warrant, Mr. Schupak
executed a seven-year promissory note in favor of the Company in the original
principal amount of $80,000. The promissory note bears interest at 6.55% per
annum, payable annually.
14. PENSION PLANS
The Company sponsors and administers two defined benefit pension plans, the
Danskin Division Hourly Employees' Pension Plan and the Pennaco Hosiery Division
Hourly Employees' Pension Plan. Substantially all of the hourly employees of the
Danskin division and the Pennaco Hosiery division participate in these plans.
Benefits under the plans are based on years of service. The Company's funding
policy is to contribute the minimum required contribution for each plan year.
Effective April 15, 1997, the Pennaco Hosiery Division Hourly Employees' Pension
Plan was frozen. No person who is not already a Participant can now become a
participant and no additional credited service shall be granted to any
Participant. The resulting loss from curtailment of this Plan, amounting to
$178,000, has been reflected as a component of net pension cost in 1997.
In addition, as of December 27, 1997 and December 26, 1998, the Company recorded
a minimum pension liability adjustment to equity of $2,275,000 and $3,046,000
respectively.
In October of 1998, the Company amended the Danskin Division Hourly Employees'
Pension Plan to increase the monthly benefit level for 1997 credited service
from $7.00 to $8.00 and amended the Pennaco Hosiery Division Hourly Employees'
Pension Plan to increase the monthly benefit level for 1997 credited service
from $0.00 to $8.00.
F-18
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS (CONTINUED)
The following table sets forth the plans' funded status at December 27, 1997 and
December 26, 1998:
<TABLE>
<CAPTION>
DECEMBER 27, 1997
-----------------
DANSKIN PENNACO
------------------------ ------------------------
<S> <C> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of Year $5,511,000 $7,259,000
Service Cost 98,000 27,000
Interest Cost 396,000 536,000
Amendments 0 0
Acturial Loss 330,000 537,000
Benefits Paid (530,000) (572,000)
------------------------ ------------------------
$5,805,000 $7,787,000
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year $5,068,000 $5,140,000
Actual Return on Plan Assets 916,000 1,071,000
Employer Contribution 119,000 416,000
Benefits Paid (530,000) (572,000)
------------------------ ------------------------
Fair Value of Plan Assets at End of Year $5,573,000 $6,055,000
Funded Status ($232,000) ($1,732,000)
Unrecognized Net Transition Asset (226,000) 0
Unrecognized Prior Service Cost 2,000 0
Unrecognized Net Actuarial Loss 1,256,000 1,245,000
------------------------ ------------------------
Net amount recognized $800,000 ($487,000)
======================== ========================
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $800,000 $0
Accrued benefit liability (1,032,000) (1,732,000)
Intangible Asset 2,000 0
Accumulated other comprehensive loss 1,030,000 1,245,000
------------------------ ------------------------
$800,000 ($487,000)
======================== ========================
Significant Actuarial Assumptions used in the valuation include:
Discount rate 7.0% 7.0%
Expected long-term rate of return on assets 9.5% 9.5%
Components of Net Periodic Pension Cost
Service Cost $97,000 $27,000
Interest Cost 396,000 535,000
Expected Return on Plan Assets (464,000) (488,000)
Amortization of Net Transition (Asset) Obligation (53,000) 24,000
Amortization of Prior Service Cost 0 7,000
Recognized Actuarial Loss 64,000 48,000
------------------------ ------------------------
Net Periodic Pension Cost 40,000 153,000
Curtailment Loss 0 178,000
------------------------ ------------------------
Total Pension Cost $40,000 $331,000
======================= ========================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 26, 1998
-----------------
Danskin Pennaco
-------------------------- --------------------
<S> <C> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of Year $5,805,000 $7,787,000
Service Cost 103,000 0
Interest Cost 407,000 511,000
Amendments 15,000 126,000
Acturial Loss 804,000 464,000
Benefits Paid (537,000) (568,000)
-------------------------- --------------------
$6,597,000 $8,320,000
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year $5,573,000 $6,055,000
Actual Return on Plan Assets 726,000 708,000
Employer Contribution 169,000 344,000
Benefits Paid (537,000) (568,000)
-------------------------- --------------------
Fair Value of Plan Assets at End of Year $5,931,000 $6,539,000
Funded Status ($666,000) ($1,781,000)
Unrecognized Net Transition Asset (173,000) 0
Unrecognized Prior Service Cost 15,000 124,000
Unrecognized Net Actuarial Loss 1,727,000 1,492,000
-------------------------- --------------------
Net amount recognized $903,000 ($165,000)
========================== ====================
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $0 $0
Accrued benefit liability (666,000) (1,781,000)
Intangible Asset 15,000 124,000
Accumulated other comprehensive loss 1,554,000 1,492,000
-------------------------- --------------------
$903,000 ($165,000)
========================== ====================
Significant Actuarial Assumptions used in the valuation include:
Discount rate 6.75% 6.75%
Expected long-term rate of return on assets 8.5% 8.5%
Components of Net Periodic Pension Cost
Service Cost $103,000 $0
Interest Cost 407,000 511,000
Expected Return on Plan Assets (460,000) (509,000)
Amortization of Net Transition (Asset) Obligation (53,000) 0
Amortization of Prior Service Cost 1,000 2,000
Recognized Actuarial Loss 68,000 17,000
-------------------------- --------------------
Net Periodic Pension Cost 66,000 21,000
Curtailment Loss 0 0
-------------------------- --------------------
Total Pension Cost $66,000 $21,000
========================= ====================
</TABLE>
F-19
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RECAPITALIZATION
In connection with the capital infusion, an investor group in the Company
contributed $21,256,000 of the Company's then outstanding term loan, and
$4,000,000 in cash in exchange for Series C Preferred Stock and $15,000,000 in
Subordinated Debt. Shortly thereafter, upon a refinancing of the Company's then
existing revolving credit facility, the $15,000,000 in Subordinated Debt and the
Series C Preferred Stock were exchanged for $3,000,000 in Subordinated Debt,
$12,000,000 (liquidation value) of Series D Preferred Stock and warrants to
purchase 10,000,000 shares of Common Stock at $0.30 per share. This effectively
created a non-cash reduction in the Company's debt of $10,256,000. Refer to Note
12 for a discussion of the Subordinated Debt and the Series D Preferred Stock
and Note 16 for a discussion of the Warrants.
16. WARRANTS
In accordance with the debt restructuring, the Company granted warrants to the
investor group to purchase 10,000,000 shares of the Company's common stock at a
price of $0.30 per share. This has been accounted for as an addition to paid-in
capital at their fair value of $244,000, as determined by an independent
valuation firm, and a reduction of the extraordinary gain described in Note 17.
In addition, the Company sold warrants to purchase 5,372,315, 795,900 and
1,591,797 of the Company's common shares at $0.30 per share to three members
of the Company's Board of Directors for their fair values aggregating to
$144,600. These have been accounted for as additions to paid in capital.
17. EXTRAORDINARY GAIN
As discussed herein, the Company restructured its debt during fiscal 1997. This
has been accounted for as a troubled debt restructuring. The write-off of old
deferred financing costs and legal and other costs that the Company incurred to
effect this debt restructuring have been offset against the extraordinary gain.
The extraordinary gain is comprised of the following:
Gain for forgiveness of debt $10,256,000
Valuation of warrants given to investor group (244,000)
Write-off of deferred financing to Investor Group (2,603,000)
Fees incurred in effecting the debt restructuring (2,164,000)
-----------
Total $ 5,245,000
===========
18. INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 28, 1996 December 27, 1997 December 26, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal:
Current Provision $ - $ 50,000 $ -
Deferred Provision 2,536,000 - -
------------ --------- ----------
2,536,000 50,000 -
State:
Current Provision 241,000 195,000 190,000
------------ --------- ----------
$ 2,777,000 $ 245,000 $ 190,000
============ ========= ==========
</TABLE>
F-20
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. INCOME TAXES (CONTINUED)
The following represented the significant items comprising net deferred taxes as
of December 27, 1997 and December 26, 1998:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
December 27, 1997 December 26, 1998
----------------- -----------------
<S> <C> <C>
Future deductible items:
Accounts receivable allowances $ 339,000 $ 408,000
Inventory allowance 1,269,000 1,215,000
Non-deductible accruals 2,834,000 2,946,000
Pension and retirement accruals 718,000 243,000
Net operating loss carryforward 4,514,000 7,144,000
Other 2,468,000 2,906,000
------------ -------------
12,142,000 14,862,000
Future taxable items:
Prepaid expenses (307,000) (301,000)
Property, plant and equipment (901,000) 240,000
------------ -------------
(1,208,000) (61,000)
Valuation allowance (10,934,000) (14,801,000)
------------ -------------
Net Deferred Tax Asset $ - $ -
------------ -------------
</TABLE>
The difference between income tax expense and the tax computed by applying the
statutory income tax rate to income before taxes was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 28, 1996 December 27, 1997 December 26, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statutory Federal income tax rate (34%) 34% (34%)
State Income taxes, net of Federal benefit 7 30 3
Change in valuation allowance 115 47 -
Losses not utilized 36 - 34
Losses utilized - (81) -
Alternative Minimum Tax - 7 -
Other 1 - -
----------------- ----------------- -----------------
Effective income tax rate 125% 37% 3%
</TABLE>
The valuation allowance for the period ended December 1996 increased $4,549,000
to $10,625,000. The valuation allowance for the period ended December 1997
increased $309,000 to $10,934,000. The valuation allowance for the period ended
December 1998 increased $3,867,000 to $14,801,000. Valuation allowances have
been established since management deems it is more likely than not that certain
tax benefits will not be realized.
Deferred income taxes result primarily from net operating losses, certain
inventory adjustments not currently deductible for income tax purposes, the use
of accelerated depreciation methods for income tax purposes, accruals and
reserves not currently deductible, and differences in reporting pension expense
for financial statement and income tax purposes.
Net operating losses amounting to approximately $14 million at December 27, 1997
expire during the years 2010 to 2011; Annual usage is subject to the limitations
discussed below. An additional net operating loss of approximately $4 million
was generated for the fiscal year ended December 26, 1998. This NOL generated
from 1998 losses, is not subject to any limitations and will expire in the year
2018.
F-21
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. INCOME TAXES (CONTINUED)
During fiscal 1997, the Company underwent a change of ownership within the
meaning of Internal Revenue Code Section 382. As a result of this change in
ownership, the future utilization of the Company's net operating loss (NOL)
carry forward will be limited. Under these rules, the amount of the Company's
NOL carry forward that can be used in each subsequent year is limited to an
annual amount. This annual limitation is determined by multiplying the value of
the Company on the date of the ownership change by the Federal long-term
interest rate of approximately 5.5%.
19. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On November 25, 1996, the Company commenced suit against Herman Gruenwald,
former President, Director and Principal shareholder of Siebruck Hosiery Ltd.
("Siebruck") for damages in the amount of $1,450,000 in the Superior Court,
Montreal. The claim relates to unreported sales in excess of $1.5 million
arising under a license agreement entered into by and between the Company and
Siebruck, which expired on December 31, 1995. Siebruck was placed under the
provision of the Canadian Bankruptcy and Insolvency Act. Mr. Gruenwald's
statement of defense included a cross-demand against the Company wherein he is
claiming damages to his reputation in the amount of Cdn. $3.0 million. A
reasonable evaluation of the claim against the Company cannot be made at this
time. However, the Company does not presently anticipate that the ultimate
resolution of such claim will be material to its financial condition, results of
operations, liquidity, or business of the Company.
The Company is a party to a number of other legal proceedings arising in the
ordinary course of business. Management believes that the ultimate resolution of
these proceedings will not, in the aggregate, have a material adverse impact on
the financial condition, results of operations, liquidity or business of the
Company.
TAX AUDITS
The Company has been selected for audit by certain state tax authorities, for
which resolution cannot be determined at this time. Management believes that any
possible ultimate liability resulting from these audits will not materially
effect the consolidated financial position or results of operations of the
Company.
OPERATING LEASES
The minimum annual rental commitments under non-cancelable operating leases at
December 26, 1998 for office space, manufacturing space, equipment and retail
stores were approximately as follows:
FISCAL YEARS ENDING: AMOUNT
-------------------- ------
December 1999 $5,213,000
December 2000 4,518,000
December 2001 3,576,000
December 2002 2,503,000
December 2003 1,845,000
Thereafter 5,387,000
---------
Total minimum rental payments $23,042,000
===========
F-22
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The majority of operating leases are for three-year to five-year terms,
generally with options to renew for similar terms, except for the corporate
office, certain full price retail stores, and the Pennaco mill and warehouse
space, which are for terms of 9 to 15 years. Certain leases require the payment
of contingent rent based upon sales and other factors.
Rent expense was approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 28, 1996 December 27, 1997 December 26, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Minimum rent $6,637,000 $6,150,000 $5,802,000
Contingent rent 829,000 892,000 1,054,000
----------------- ----------------- -----------------
Rent expense $7,466,000 $7,042,000 $6,856,000
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements that provide for base and
incentive compensation, and that are terminable for "cause", as defined, or
resignation following a "change of control", as defined. The Company has total
minimum commitment pursuant to the term of these agreements for fiscal 1999 and
future years totaling $887,500, unless employment is terminated in which case
total pay will generally continue for 12 to 24 months following such
termination.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of accounts receivable from department stores,
sporting goods stores and other specialty retailers as well as commercial
letters of credit. Although the concentration of risk is limited due to the
large number of customers included within the Company's customer base, various
of the Company's retail customers have experienced financial difficulties in
recent years. These financial difficulties have increased the risk of extending
credit to such customers. The Company subjects all customers to credit
evaluation prior to acceptance and maintains ongoing reviews based on
established policies.
MINIMUM ROYALTY COMMITMENTS
The Company generally enters into licensing arrangements, as a licensee, that
provide for minimum annual royalty payments and additional royalty payments
based on a percentage of net revenues. The Company also licenses its Danskin(TM)
and Round-the-Clock(TM) names to selected companies. As of December 26, 1998,
the Company was committed to certain minimum licensing arrangements as follows:
Fiscal Years Ending: ROYALTY EXPENSE ROYALTY INCOME
- -------------------- --------------- --------------
December 1999 500,000 242,000
December 2000 1,075,000 165,000
December 2001 1,970,000 120,000
December 2002 2,575,000 120,000
---------- --------
$6,120,000 $647,000
20. STOCK ISSUANCES
In furtherance of the terms of the Securities Purchase Agreement, on April
28, 1998, the Company filed a Registration Statement on Form S-1 in connection
with the registration under the Securities Act of 1933, as amended, of (i) an
aggregate of 10,838,124 rights to purchase shares of 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
approximately1.6 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 of Common Stock, at $0.30 per share. The Company realized
aggregate gross proceeds of approximately $640,000.
In addition, on May 27, 1998, the Company, the Investor, and a bond fund
purchased, pro rata in proportion to their respective holdings of Remaining
Subordinated Notes, 7,864,336 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.
21. SEGMENT INFORMATION
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information."
F-23
<PAGE>
The Company is organized based on the products that it offers. The Company
currently operates under two operating segments: Danskin, which designs,
manufactures, markets and sells activewear, dance wear, bodywear, tights and
exercise apparel through wholesale channels to retailers and through the
Company's outlet and retail stores; and Pennaco, which designs, manufactures and
markets hosiery under the brand names Ralph Lauren(R), Round-The-Clock(R),
Givenchy(R), and under private labels for major retailers.
The Company evaluates performance based on profit or loss from operations before
extraordinary items, interest expense and income taxes. The Company allocates
corporate administrative expenses to each segment. The Danskin Division was
allocated $3.9 million in fiscal 1998, $2.4 million in fiscal 1997 and $2.5
million in fiscal 1996. Pennaco was allocated $3.3 million in fiscal 1998, $2.0
million in fiscal 1997 and $2.1 million in fiscal 1996. Capital expenditures for
corporate administration are included with the Danskin division. In addition,
the Company does not allocate interest expense to the divisions.
Financial information by segment for the fiscal years ended December 26, 1998,
December 27, 1997 and December 26, 1996 is summarized below.
($000 omitted)
<TABLE>
<CAPTION>
Danskin Pennaco Total
------- ------- -----
1998
<S> <C> <C> <C>
Net Revenues $73,468 $35,273 $108,741
Operating (Loss) (2,671) (1,547) (4,218)
Identifiable assets at year-end 41,549 16,157 57,706
Depreciation and amortization 1,108 485 1,593
Capital expenditures 3,450 1,223 4,673
1997
Net Revenues $81,158 $40,828 $121,986
Operating (Loss) (13) (297) (310)
Identifiable assets at year-end 38,509 16,493 55,002
Depreciation and amortization 1,345 751 2,096
Capital expenditures 236 5 241
1996
Net Revenues $80,608 $47,537 $128,145
Operating Income (Loss) 3,172 (663) 2,509
Identifiable assets at year-end 46,731 20,209 66,940
Depreciation and amortization 1,460 752 2,212
Capital expenditures 641 97 738
</TABLE>
F-24
<PAGE>
Reconciliation of depreciation and amortization to consolidated totals is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Total segment depreciation and amortization $2,212 $2,096 $1,593
Amortization of deferred financing costs 404 380 134
------ ------ ------
Consolidated depreciation and amortization $2,616 $2,476 $1,727
------ ------ ------
</TABLE>
F-25
22. SUBSEQUENT EVENTS
The Investor has agreed that, for the period beginning on the date of issuance
of the Series D Stock (See Note 12) and ending on December 31, 1999, all
dividends accrued on the Series D Stock may be paid, at the option of the
Company, in cash or in additional Common Stock, legally available for such
purpose. The issuance of such Common Stock to the Investor shall, in accordance
with the agreement, constitute full payment of such dividend.
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(UNAUDITED) FISCAL QUARTERS ENDED
MARCH JUNE SEPTEMBER DECEMBER
----------- ------------ ------------- ------------
Fiscal year ended December 26, 1998:
<S> <C> <C> <C> <C>
Net revenues $28,251,000 $26,444,000 $27,959,000 $26,087,000
=========== ============ ============= ============
Gross profit $10,473,000 $10,275,000 $10,813,000 $8,752,000
=========== ============ ============= ============
Net (loss) ($1,757,000) ($319,000) ($1,862,000) ($2,983,000)
=========== ============ ============= ============
Net (loss) applicable to Common Stock ($2,062,000) ($586,000) ($2,133,000) ($3,254,000)
=========== ============ ============= ============
Basic and diluted net (loss) per share ($0.20) ($0.04) ($0.11) ($0.16)
=========== ============ ============= ============
Weighted average common shares and share
equivalents outstanding 10,529,000 13,538,000 19,689,000 20,917,000
=========== ============ ============= ===========
Fiscal year ended December 27, 1997:
Net revenues $30,785,000 $29,469,000 $32,699,000 $29,033,000
=========== ============ ============= ============
Gross profit $10,830,000 $9,308,000 $11,631,000 $8,395,000
=========== ============ ============= ============
Net (loss) income ($844,000) ($1,587,000) $4,931,000 ($2,088,000)
=========== ============ ============= ============
Net (loss) income applicable to Common Stock ($969,000) ($1,712,000) $4,819,000 ($2,151,000)
=========== ============ ============= ============
Basic and diluted net (loss) earnings per share ($0.15) ($0.25) $0.50 ($0.20)
=========== ============ ============= ============
Weighted average common shares and share
equivalents outstanding 6,570,000 6,812,000 9,677,000 10,516,000
=========== ============ ============= ===========
</TABLE>
S-1
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
SCHEDULE II
-----------
COLUMN A COLUMN B COLUMN C-ADDITIONS COLUMN D COLUMN E
-------- -------- ------------------- -------- --------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS (a) PERIOD
------ -------- -------- ------------ ------
<S> <C> <C> <C> <C> <C>
Fiscal year Ended December 26, 1998:
Allowance for doubtful accounts receivable $848,000 $327,000 $-- $154,000 $1,021,000
======== ======== === ======== ==========
Fiscal year Ended December 27, 1997:
Allowance for doubtful accounts receivable $938,000 $49,000 $-- $139,000 $848,000
======== ======= === ======== ========
Fiscal year Ended December 28, 1996:
Allowance for doubtful accounts receivable $1,631,000 ($43,000) $-- $650,000 $938,000
========== ========= === ======== ========
</TABLE>
(a) Uncollectible accounts receivable written off, net of recoveries
S-2
Exhibit 21.1
Subsidiaries of the Registrant
Danpen, Inc.
Danskin Sports, Inc.
Danskin Canada, Inc.
Danskin Assemblies De Mexico S.A. de C.V.
Custom Collection, Inc.
International Activewear
Pennaco, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 5, 1999 included in this Form 10-K, into the
Company's previously filed Registration Statement File Nos. 33-89692, 33-53852
and 33-67644.
ARTHUR ANDERSEN LLP
New York, New York
March 26, 1999
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
Numbers 33-89692, 33-53852 and 33-67644 of Danskin, Inc. and Subsidiaries on
Form S-8 of our report dated March 14, 1997 (Except for Note 1 - Loss per
Common Share for which the date is March 6, 1998) appearing in and incorporated
by reference in this Annual Report on Form 10-K of Danskin, Inc. and
Subsidiaries for the year ended December 26, 1998.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889299
<NAME> Danskin, Inc.
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> DEC-26-1998
<EXCHANGE-RATE> 1.00
<CASH> 546,000
<SECURITIES> 0
<RECEIVABLES> 13,518,000
<ALLOWANCES> 1,021,000
<INVENTORY> 30,386,000
<CURRENT-ASSETS> 46,706,000
<PP&E> 9,773,000
<DEPRECIATION> 8,807,000
<TOTAL-ASSETS> 57,706,000
<CURRENT-LIABILITIES> 40,161,000
<BONDS> 0
0
11,294,000
<COMMON> 209,000
<OTHER-SE> (4,109,000)
<TOTAL-LIABILITY-AND-EQUITY> 57,706,000
<SALES> 108,741,000
<TOTAL-REVENUES> 108,741,000
<CGS> 68,428,000
<TOTAL-COSTS> 68,428,000
<OTHER-EXPENSES> 44,204,000
<LOSS-PROVISION> 327,000
<INTEREST-EXPENSE> 2,513,000
<INCOME-PRETAX> (7,845,000)
<INCOME-TAX> 190,000
<INCOME-CONTINUING> (8,035,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,035,000)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
