SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1999.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 of 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-20382
Danskin, Inc.
Exact name of registrant as specified in its charter)
Delaware 62-1284179
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation Or organization Identification No.)
530 Seventh Avenue, New York, NY 10018
(Address of principal executive offices)
(212) 764-4630
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of the issuer's Common Stock, $0.01 par value,
as of September 30, 1999, excluding 1,083 shares held by a subsidiary:
21,020,795
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE FISCAL THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 26, 1998 and SEPTEMBER 25, 1999
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets As of December 26, 1998
and September 25, 1999 (Unaudited)................................ 3
Consolidated Condensed Statements of Operations For the Fiscal
Three and Nine Month Periods Ended September 26, 1998 and
September 25, 1999 (Unaudited).................................... 4
Consolidated Condensed Statements of Cash Flows For the Fiscal
Nine Month Periods Ended September 26, 1998 and September 25,
1999 (Unaudited).................................................. 5
Notes to Unaudited Consolidated Condensed Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 17
Item 6. Exhibits and Reports on Form 8-K .............................. 17
SIGNATURES................................................................... 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 26,1998 September 25, 1999
---------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 546 $ 709
Accounts receivable, less allowance for doubtful accounts of $1,021
at December 26, 1998 and $1,057 at September 25, 1999 13,518 12,992
Inventories (Note 1) 30,386 28,781
Prepaid expenses and other current assets 2,256 1,867
-------- --------
Total current assets 46,706 44,349
Property, plant and equipment - net of accumulated depreciation and
amortization of $8,807 at December 26, 1998 and $9,943 at
September 25, 1999 9,773 11,012
Other assets 1,227 1,192
-------- --------
Total Assets $ 57,706 $ 56,553
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit (Note 3) $ 16,029 $ 28,139
Current portion of long-term debt (Note 3) 2,000 2,189
Accounts payable 8,440 7,238
Accrued expenses 13,692 11,093
-------- --------
Total current liabilities 40,161 48,659
-------- --------
Long-term debt, net of current maturities (Note 3) 6,674 5,817
Accrued dividends 1,176 1,896
Accrued retirement costs 2,301 2,301
-------- --------
Total long-term liabilities 10,151 10,014
-------- --------
Total Liabilities 50,312 58,673
-------- --------
Commitments and contingencies
Series D Cumulative Convertible Preferred Stock, 2,400 shares Liquidation
Value $12,000,000 (Note 5) 11,294 11,386
Stockholders' Deficit
Common Stock, $.01 par value, 100,000,000 shares authorized, 20,916,693
shares issued at December 26, 1998 and 21,021,878 shares
issued at September 25, 1999, less 1,083 shares held by
subsidiary at December 26, 1998 and September 25, 1999 209 210
Additional paid-in capital 23,483 23,579
Accumulated deficit (24,546) (34,249)
Accumulated other comprehensive loss (3,046) (3,046)
-------- --------
Total Stockholders' Deficit (3,900) (13,506)
======== ========
Total Liabilities and Stockholders' Deficit $ 57,706 $ 56,553
======== ========
</TABLE>
These Statements should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
3
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Nine Months Ended
------------------------- ------------------------
September 26, 1998 September 25, 1999 September 26, 1998 September 25, 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues $ 27,959 $ 21,173 $ 82,654 $ 68,840
Cost of goods sold 17,146 14,947 51,093 47,977
-------- -------- -------- --------
Gross profit 10,813 6,226 31,561 20,863
Selling, general and administrative expenses 11,487 8,544 32,075 27,245
Non-recurring charges (Note 7) 475 -- 1,439 --
Interest expense 669 985 1,850 2,374
-------- -------- -------- --------
Total Expenses 12,631 9,529 35,364 29,619
Loss before income tax provision (1,818) (3,303) (3,803) (8,756)
Provision for income taxes 44 45 135 135
-------- -------- -------- --------
Net loss (1,862) (3,348) (3,938) (8,891)
Preferred dividends 271 271 843 812
-------- -------- -------- --------
Net loss applicable to Common Stock ($ 2,133) ($ 3,619) ($ 4,781) ($ 9,703)
======== ======== ======== ========
Basic/Diluted net loss per share: (Note 1)
Net loss per share ($ 0.11) ($ 0.17) ($ 0.33) ($ 0.46)
======== ======== ======== ========
Weighted average number of common shares 19,689 21,022 14,585 20,966
======== ======== ======== ========
</TABLE>
These statements should be read in conjunction with
the accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL NINE MONTHS ENDED
------------------------
September 26, 1998 September 25, 1999
(unaudited) (unaudited)
------------------ ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (3,938) $ (8,891)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,372 1,401
Provision for doubtful accounts receivable 244 173
Loss on sale of property, plant and equipment -- 13
Stock grants issued 446 94
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,478) 353
(Increase) decrease in inventories (6,402) 1,605
(Increase) decrease in prepaid expenses and other
current assets (145) 412
Increase (decrease) in accounts payable 318 (1,202)
Increase (decrease) in accrued expenses 3,158 (2,597)
-------- --------
Net cash used in operating activities (7,425) (8,639)
-------- --------
Cash Flows From Investing Activites:
Capital expenditures (1,813) (2,510)
-------- --------
Net cash used in investing activities (1,813) (2,510)
-------- --------
Cash Flows From Financing Activities:
Net receipts under revolving line of credit 9,892 12,110
Sale of Common Stock 3,000 --
Proceeds from new term note -- 943
Proceeds from stock options exercised 49 --
Payments of long-term debt -- (1,610)
Expenses associated with issuance of rights (299) --
to purchase Common Stock
Interest earned on promissory notes for purchase price
of Warrants to purchase Common Stock -- --
Proceeds from warrant notes 15
Payment of Subordinated Debt (3,000) --
Financing costs incurred (45) (131)
-------- --------
Net cash provided by financing activities 9,612 11,312
-------- --------
Net increase in Cash and Cash Equivalents 374 163
Cash and Cash Equivalents, Beginning of Period 808 546
-------- --------
Cash and Cash Equivalents, End of Period $ 1,182 $ 709
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 1,647 $ 2,288
Income taxes paid 50 94
Non-Cash Activities
Stock grants issued to executives 446 94
</TABLE>
These statements should be read in conjunction with the
accompanying notes to Consolidated Condensed Financial Statements.
5
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollar amounts in thousands except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
In the opinion of the management of Danskin Inc. and Subsidiaries (the
"Company"), the accompanying Consolidated Condensed Financial Statements
have been presented on a basis consistent with the Company's annual
financial statements and contain all adjustments (all of which were of a
normal and recurring nature) necessary to present fairly the financial
position of the Company as of September 25, 1999, as well as its results
of operations and its cash flows for the fiscal three and nine month
periods ended September 26, 1998 and September 25, 1999, respectively.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Unaudited
Consolidated Condensed Financial Statements should be read in conjunction
with the Consolidated Condensed Financial Statements, related notes and
other information included in the Company's Annual Report on Form 10-K for
the Fiscal Year Ended December 26, 1998. Operating results for interim
periods may not be indicative of results for the full fiscal year.
Inventories
Inventories are stated at the lower cost or market on a first-in,
first-out basis. Inventories consisted of the following:
December 26, 1998 September 25, 1999
(Unaudited)
------------------
Finished Goods $18,735 $17,720
Raw Materials 4,725 5,183
Work-in-Process 6,271 5,308
Packaging Materials 655 570
------- -------
$30,386 $28,781
Income (Loss) Per Common Share
For the nine months ended September 25, 1999 and September 26, 1998, basic
and diluted net loss per share was computed based on weighted average
common and common equivalent shares outstanding of 20,966,000 and
14,585,000, respectively. Common Stock equivalents are excluded from the
basic and diluted net loss per share calculation for both fiscal periods
because the effect would be antidilutive.
At September 25, 1999, the Company had the following common shares and
common share equivalents outstanding:
Common Shares 21,022
Preferred Stock 40,000
Warrants/Options 24,622
-------
Total Shares and Share Equivalents Outstanding 85,644
2. Liquidity
As reflected in the financial statements, the Company has incurred
operating losses during the first nine months of Fiscal 1999, anticipates
a loss for Fiscal 1999, and has a working capital deficit of $4,310. The
Company continues to manage its short-term cash needs despite restricted
credit terms from certain of its vendors and suppliers. Such short-term
liquidity has been managed through additional availability provided under
the Loan and Security Agreement (Note 3), a company-wide cost reduction
program and delaying certain expenditures. The Company is engaged in an
equity private placement offering which it presently anticipates will be
successfully completed by mid-December 1999. Until such time as the equity
financing is completed, the Company expects to continue to manage its
short-term cash needs by continuing to implement its cost savings strategy
company-wide, continuing to delay expenditures and meeting
6
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollar amounts in thousands except per share amounts)
its operating plan for the remainder of Fiscal Year 1999. No assurances
can be given, however, regarding the Company's ability to raise sufficient
equity capital in the short-term, or to successfully implement its cost
savings strategy, delay its expenditures or meet its operating plan for
the remainder of Fiscal Year 1999 and beyond.
The Company expects to finance its long-term growth, working capital
requirements, capital expenditures, management information systems
upgrades, development of its planned e-commerce business, and debt service
requirements through a combination of cash provided from operations, the
aforementioned equity private placement and bank credit lines. No
assurances can be given however, regarding the Company's ability to raise
sufficient equity to satisfy the aforementioned requirements, including
the provision for sufficient working capital to enable the Company to
sustain its current and future operations, or that if such additional
equity is raised, that the Company's current and future working capital
needs or its long-term business or growth objectives will be met.
3. Bank Financing
Effective October 8, 1997 (the "Refinancing Closing Date"), the Company
entered into a loan and security agreement (as subsequently amended, the
"Loan and Security Agreement") with Century Business Credit Corporation
("CBCC" or the "Lender") which matures on October 8, 2002. Pursuant to and
in accordance with its terms, the Loan and Security Agreement provides the
Company with a term loan facility (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) $45,000 less the aggregate outstanding
principal balance under the Term Loan Facility, or (b) a formula amount
based upon the Company's available inventory and accounts receivable
levels, minus certain discretionary reserves. The Company's obligations to
CBCC under the Loan and Security Agreement are generally secured by a
first priority security interest in all present and future assets of the
Company.
The Loan and Security Agreement contains certain affirmative and negative
covenants including maintenance of tangible net worth and undrawn
availability, and a limitation on capital expenditures, respectively. The
tangible net worth covenant is calculated by subtracting from total assets
all intangible assets and total liabilities. The tangible net worth
covenant stipulates that the Company must maintain a tangible net worth of
not less than (a) $0.00 as of the end of each of the months of June, July,
August, September, October and November of 1999, and (b) $2,000 as of the
end of December 1999 and each month thereafter. The Lender has waived
compliance with the tangible net worth covenant through and including
November 1999. At September 25, 1999, the Company's tangible net worth was
approximately ($2,300). The undrawn availability covenant provides that
the Company must have undrawn availability of at least $3,000 as of the
end of December 1999 and each month thereafter. Undrawn availability at
September 25, 1999 was approximately $2,300. The Company expects to be in
compliance with the foregoing covenants as a result of cash flow from
operations and additional financing which the Company anticipates closing
prior to December 31, 1999.
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 $5,000 was advanced to the
Company and is, with respect to principal, payable in thirty (30)
consecutive monthly which commenced on November 1, 1998. A second term
loan, in the original principal amount of $5,000 was advanced to the
Company and is, with respect to principal, payable in eighteen (18)
consecutive monthly installments commencing on May 1, 2001. In February
1999, the Lender advanced a third term loan to the Company in the original
principal amount of approximately $940 which is, with respect to
principal, payable in equal monthly installments of $16. The Company used
the proceeds of such third term loan to purchase certain machinery and
equipment for use in its operations.
Pursuant to certain amendments to the Loan and Security Agreement executed
in fiscal 1999, the Lender increased the Company's availability under the
Revolving Credit Agreement by an amount not to exceed $6,210 (the
"Additional Collateral Amount"), in support of which certain shareholders
and affiliates of the Company, and various third parties, have provided
stand-by guarantees, as set forth below, and has provided the Company with
$2,150 (the "Overadvance Amount") of additional borrowing capacity through
November 30, 1999 and $1,250 through December 31, 1999. 7
7
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollar amounts in thousands except per share amounts)
4. Guarantees
In connection with the availability of the Additional Collateral Amount,
certain shareholders and affiliates of the Company, and various third
parties, issued limited guarantees in favor of the Lender in an aggregate
principal amount not to exceed $6,210 (each, a "Guarantee," together, the
"Guarantees"). Pursuant to the terms of the Guarantees, each guarantor
guarantees the performance of the Company's obligations under the Loan and
Security Agreement, and the payment of any and all sums due and owing by
the Company to the Lenders under such Agreement, in all cases, limited to
the dollar amount of the Guarantee. In accordance with their terms, the
Guarantees may be withdrawn at such time as the Company has availability
under the Loan and Security Agreement in excess of $6,000, without giving
effect to the Additional Collateral Amount.
In consideration for the issuance of the Guarantees, the Company has
agreed (i) to issue warrants to each guarantor, and (ii) to pay to each
guarantor interest on the amount of each Guarantee at a rate not to exceed
the difference between (a) the Prime Rate minus 3% and (b) 10% per annum.
Each warrant represents the right to purchase one share of Common Stock.
The number of warrants issued to each guarantor is based upon a formula
which takes into account the number of days that the Guarantee is in
place. The exercise price of all warrants to be issued in consideration
for a Guarantee shall be equal to $.01; provided, however, that such
exercise price will be adjusted to the price prospective investors pay for
equity in the Company's planned placement of additional equity as
discussed below. See Note 3 and `Liquidity and Capital Resources'
5. Preferred Stock and Subordinated Convertible Debentures
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
Company has issued $12,000 stated value of Series D Redeemable Cumulative
Convertible Preferred Stock (2,400 shares) (the "Series D Stock") of the
Company and a seven year warrant to purchase 10 million shares of Common
Stock at a per share price of $0.30 (the "Warrant") to the Investor.
The 2,400 shares of Series D Stock are convertible into Common Stock, at
the option of the holder and, in certain circumstances, mandatorily, at an
initial conversion rate of 16,666.66 shares of Common Stock for each share
of the Series D Stock so converted, subject to adjustment in certain
circumstances. The terms of the Series D Stock also provide that, upon the
seventh anniversary of the date of its issuance, the Series D Stock shall
be redeemed by the Company for an amount equal to the sum of (x) $5,000
per share (as adjusted for any combinations, divisions, or similar
recapitalizations affecting the shares of Series D Stock), plus (y) all
accrued and unpaid dividends on such shares of Series D Stock to the date
of such redemption. Holders of the Series D Stock are entitled to vote,
together with the holders of the Common Stock and any other class 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. Holders of the Series D Stock are also entitled to designate a
majority of the directors to the Board of Directors of the Company. The
Series D Stock has an 8% annual dividend rate, payment of which is
deferred through December 31, 1999, and a seven year maturity. If, for any
fiscal year beginning with the fiscal year ending December 25, 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. The issuance of such Common Stock to the
Investor shall, in accordance with the agreement, constitute full payment
of such dividend.
8
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollar amounts in thousands except per share amounts)
6. Legal Proceedings
The Company severed its relationship with Cathy Volker, the Company's
former Chief Executive Officer, in June 1999. The Company's and Ms.
Volker's respective rights and obligations under Ms. Volker's Employment
Agreement, dated as of February 2, 1998, if any, are the subject of a
pending arbitration.
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 in the Superior
Court, Montreal. The claim relates to unreported sales in excess of $1,500
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. $3,000. 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 its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a
material adverse impact on the financial condition, results of operations,
liquidity or business of the Company.
7. Non-Recurring Charges
Non-recurring charges of approximately $1,400 for the nine months ended
September 26, 1998 consisted of certain executive employee severance costs
primarily relating to the termination of the former Chief Executive
Officer and resignation of the former Chief Financial Officer.
8. SFAS No. 131 Disclosure
Effective December 26, 1998, the Company adopted SFAS No. 131 "Disclosure
about Segments of an Enterprise and Related Information." The Company is
organized based on the products its offers. The Company presently operates
under two operating segments: Danskin, which designs, manufactures,
markets, and sells activewear, dancewear, bodywear, tights and exercise
apparel through wholesale channels to retailers and through the Company's
outlet and retail stores; and Pennaco, which currently designs,
manufactures, and markets hosiery under the brand names Round-the-Clock
(R) and Givenchy (R). Pennaco also manufactures under private labels for
select 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. For the nine
months ended September 25, 1999, Danskin was allocated $2,900 and Pennaco
was allocated $1,500. For the nine months ended September 26, 1998,
Danskin was allocated $3,100 and Pennaco was allocated $2,500. The
non-recurring charges of $1,400 for September 1998 were allocated $800 to
Danskin and $600 to Pennaco. The Company does not allocate interest
expense to the divisions.
9
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollar amounts in thousands except per share amounts)
Segment Information
Financial information by segment for the nine month periods ended
September 26, 1998 and September 25, 1999 is summarized below:
Danskin Pennaco Total
------- ------- -----
September 26, 1998
Net Revenues $ 56,628 $ 26,026 $ 82,654
Operating Loss (1,496) (457) (1,953)
September 25, 1999
Net Revenues $ 48,221 $ 20,619 $ 68,840
Operating Loss (4,124) (2,258) (6,382)
9. Common Stock
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.
10
<PAGE>
Danskin, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollar Amounts in thousands, except per share amounts)
Cautionary Statements
Statements contained in the discussion below, and in 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 the
authorized personnel that relate to the Company's future performance,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects," "projects," "currently envisions," and words of
similar import, shall be deemed "forward-looking" statements within the
meaning of 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 known and unknown risks,
uncertainties and certain assumptions. These factors include, among
others, changes in regional, global and 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 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. 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 Unaudited Consolidated Condensed Financial Statements, related notes
and other information included elsewhere, in this quarterly report on Form
10-Q and with the Company's Annual Report on Form 10-K for the fiscal year
ended December 26, 1998.
Results of Operations
Comparison of the fiscal three and nine month periods ended September 25,
1999 with the fiscal three and nine month periods ended September 26,
1998.
Net Revenues:
Net revenues amounted to $21,173 for the three months ended September 25,
1999, a decrease of $6,786, or 24.3% from the prior year three months
ended September 26, 1998. Net revenues for the nine months ended September
25, 1999 amounted to $68,840, a decrease of $13,814, or 16.7%, from the
prior year nine months ended September 25, 1998.
Danskin Activewear net revenues, which include the Company's retail
operations, amounted to $15,749 for the three months ended September 25,
1999, a decrease of $3,594, or 18.6%, from $19,343 in the prior year three
months ended September 26, 1998. Danskin Activewear revenues amounted to
$48,221 for the nine months ended September 25, 1999, a decrease of
$8,407, or 14.8%, from $56,628 in the prior year nine month period.
Revenues for the three and nine month periods were adversely impacted by a
decline in both wholesale and retail revenues, discontinuation of Dance
France in the fourth quarter of 1998, as well as, a decline in the rate of
fulfillment of customer orders.
The Company's marketing of activewear wholesale products continues to
address the trend toward casual wear and emphasizes fashion and dancewear
product offerings complementing the Company's basic replenishment
products. In addition, the Company continues to work with its major retail
partners to increase the percentage of orders of basic product placed via
electronic re-order/fulfillment programs (Electronic Data Interchange
"EDI") in an effort to drive its replenishment business.
11
<PAGE>
Danskin, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollar Amounts in thousands, except per share amounts)
In fiscal 1998, the Company restructured its Danskin sales force to
address the multiple channels of trade in which Brand Danskin product is
sold. Specifically, each of the department store, sporting goods store and
specialty store class of trade has a dedicated sales force. As a further
step, and to drive the volume in the specialty store class of trade, the
Company recently converted to an independent commissioned sales
representative strategy for such channel, and has contracted with
independent, fully commissioned sales representatives and agents. The
Company believes that this strategy will allow it to more effectively
service and grow its specialty store account base resulting in increased
revenues.
Sales in the Company's retail stores were $5,038 for the three-month
period ended September 25, 1999, compared to $6,201 for the same prior
year period, and were $12,601 for the nine-month period ended September
25, 1999, compared to $15,283 for the same prior year period. Comparable
retail store sales declined 19.9% for the three months ended September 25,
1999 and 17.5% for the nine months ended September 25, 1999. The decline
in retail store sales is attributable to, among other factors, the
continuing negative effects of the Company's retail inventory reduction
plan and the disruptive impact of the implementation of a new inventory
management system. The Company also continues to see the effects of the
depressed retail environment in the Southern Florida/Orlando market. To
address these declines, and to enhance the performance of its retail
stores, the Company continues to improve store product offerings, to
renegotiate existing leases to achieve optimum store size, and to
streamline store operations to reduce store operating costs. In addition,
the Company is taking the steps necessary to evaluate certain unprofitable
or underperforming locations.
Pennaco legwear revenues amounted to $5,424 for the three months ended
September 25, 1999, a decline of $3,192, or 37.0%, from the prior year
three month period. Revenues amounted to $20,619 for the nine months ended
September 25, 1999, a decline of $5,407, or 20.8%, from the nine month
period ended September 26, 1998. The decline in legwear revenues over the
prior year fiscal periods reflects ongoing weekness in the sheer hosiery
markets and, in particular, sales of basic, "everyday" sheer hosiery, as
well as the expiration of the Anne Klein(R) legwear license at December
31, 1998, which contributed approximately $400 in net revenue in the 1998
third fiscal quarter. Management believes that opportunities exist for
margin and revenue improvement in niche and occasioned-oriented sheer
hosiery. Accordingly, the Company has initiated a program of product
development focused on those product segments.
Gross Profit:
Gross profit decreased by $4,587 to $6,226 for the three months ended
September 25, 1999. Gross profit decreased by $10,698 to $20,863 for the
nine months ended September 25, 1999 from $31,561 for the nine months
ended September 26, 1998. Gross profit, as a percentage of net revenues,
decreased to 29.4% in the three month period ended September 25, 1999 from
38.7% in the same prior year period. Gross profit, as a percentage of net
revenues, decreased to 30.3% in the nine month period ended September 25,
1999 from 38.2% in the same prior year period.
Danskin Activewear gross profit, as a percentage of net revenue, decreased
to 33.8% for the three months ended September 25, 1999 from 41.5% for the
three months ended September 26, 1998, and to 33.8% for the nine months
ended September 25, 1999 from 40.7% for the nine months ended September
26, 1998. The three and nine month period decreases were primarily a
result of a lower sales mix of higher margin Brand Danskin basic product,
increased sales of closeout inventory, unfavorable manufacturing variances
due to lower volumes, as well as markdowns taken in the Company's retail
stores to stimulate sales and reduce inventory.
Pennaco legwear gross profit, as a percentage of net revenue, decreased to
16.8% in the three months ended September 25, 1999 from 32.3% in the prior
fiscal year period, and decreased to 22.2% in the nine months ended
September 25, 1999 from 32.7% in the prior fiscal year period. The lower
gross profit level is driven principally by the higher sales mix of lower
margin Round-the-Clock(R) Take Two value pack product and legwear
continuity programs, coupled with the decline in sales of the higher
margin Givenchy(R) product and certain operating inefficiencies due to
lower production volume. In addition, markdown allowances given to
customers for the liquidation of the Round-the-Clock(R) single packs in
the stores has deteriorated the Pennaco margins. In addition to the
aforementioned product development programs, the Company has also
initiated a program to phase out unprofitable styles within its existing
lines.
12
<PAGE>
Danskin, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollar Amounts in thousands, except per share amounts)
Selling, General and Administrative Expenses:
Selling, general and administrative expenses, which include retail store
operating costs, decreased $2,943, or 25.6%, to $8,544, or 40.3% of net
revenues, in the three months ended September 25, 1999, from $11,487, or
41.1% of net revenues for the three months ended September 26, 1998. For
the nine-month period ended September 25, 1999, selling, general and
administrative expenses decreased $4,830, or 15.1%, to $27,245, or 39.6%
of net revenues, from $32,075, or 38.8% of net revenues, for the nine
month period ending September 26, 1998. The decrease for the three and
nine month periods in Fiscal Year 1999 was principally a result of a
reduction in advertising and selling expenditures and corporate expenses.
The Company is presently undergoing a review of all its selling, general
and administrative expenses in an effort to right-size the infrastructure.
This encompasses implementation of a cost-savings strategy to control all
expenses and streamline processes to increase efficiencies. As indicated
previously, the Company is in the process of streamlining retail store
operations to reduce operating costs.
Operating Income/Loss:
As a result of the foregoing, the loss from operations (i.e., income/loss
before interest expense, non-recurring charges and income taxes) amounted
to $2,318 for the three months ended September 25, 1999, an increased loss
of $1,644 from the operating loss of $674 for the three months ended
September 26, 1998. The loss from operations amounted to $6,382 for the
nine months ended September 25, 1999, a deterioration of $5,868 from a
loss of $514 for the prior fiscal year period.
Interest Expense:
Interest expense amounted to $985 for the three months ended September 25,
1999 and $669 for the prior fiscal year period. Interest expense amounted
to $2,374 for the nine months ended September 25, 1999 and $1,850 for the
nine months ended September 26, 1998. The Company's effective interest
rate was 10.8% and 9.7% for the three months ended September 25, 1999 and
September 26, 1998, respectively, and 9.8% and 9.9% for the nine months
ended September 25, 1999 and September 26, 1998, respectively.
Non-recurring Charges:
Non-recurring charges were $475 for the three month period ending
September 26, 1998. These charges consisted of executive employee
severance costs primarily relating to the resignation of the former Chief
Financial Officer of the Company. Non-recurring charges were $1,439 for
the nine month period ended September 26, 1998. The nine month charges
consisted of the aforementioned employee expenses related to the
resignation of the Chief Financial Officer and certain executive employee
severance costs primarily relating to the replacement of the Chief
Executive Officer of the Company in March 1998.
Income Tax Provision (Benefit):
The Company's income tax provision (benefit) rates differed from the
Federal statutory rates due to the utilization of net operating losses,
the effect of the Alternative Minimum Tax and the effect of state taxes
for the three and nine months ended September 25, 1999 and September 26,
1998. The Company's net deferred tax balance was $0 at both September 25,
1999 and December 26, 1998.
13
<PAGE>
Danskin, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollar Amounts in thousands, except per share amounts)
Net Loss:
As a result of the foregoing, the net loss was $3,348 for the three months
ended September 25, 1999, a decline of $1,486 compared to the net loss of
$1,862 for the three months ending September 26, 1998. For the nine months
ended September 25, 1999, the net loss was $8,891, compared to a net loss
of $3,938 for the prior year fiscal period.
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 November 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 has
conducted successful test simulations of such systems. 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 technology infrastructure to be Year 2000
compliant 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 continues to collect information concerning the year 2000
compliance status of its suppliers and customers. It is in the process of
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, identifying
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
assessments which can reasonably be expected to materially impact its
manufacturing ability. The Company anticipates that its contingency
planning will be completed by November 30, 1999. The Company's contingency
plans will evolve as additional information becomes available.
14
<PAGE>
Danskin, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollar Amounts in thousands, except per share amounts)
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 who 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, accounts
receivable, capital investments in operating facilities, machinery and
equipment, and principal and interest payments on indebtedness. The
Company's primary sources of liquidity have been from bank financing,
issuance of convertible securities, vendor credit terms and internally
generated funds.
Net cash flow used in operations increased by $1,214 to $8,639 for the
nine months ended September 25, 1999, from a use of cash in operations of
$7,425 in the nine months ended September 26, 1998, principally
attributable to the increased operating loss in Fiscal Year 1999,
decreases in accounts payable and accrued expenses, offset by decreases in
inventories, account receivable and prepaid expenses.
Working capital was $(4,310) at September 25, 1999 compared to $6,545 at
December 26, 1998. The change in working capital is primarily attributable
to an increase of $12,110 in the revolving line of credit to fund
operations, payment of term loans and investments in capital expenditures.
As reflected in the financial statements, the Company has incurred
operating losses during the first nine months of Fiscal 1999, anticipates
a loss for Fiscal Year 1999, and has a working capital deficit of $4,310.
The Company continues to manage its short-term cash needs despite
restricted credit terms from certain of its vendors and suppliers. Such
short-term liquidity has been managed through additional availability
provided under the Loan and Security Agreement (Note 3), a company-wide
cost reduction program and delaying certain expenditures. The Company is
engaged in an equity private placement offering which it presently
anticipates will be successfully completed by mid-December 1999. Until
such time as the equity financing is completed, the Company expects to
continue to manage its short-term cash needs by continuing to implement
its cost savings strategy company-wide, continuing to delay expenditures
and meeting its operating plan for the remainder of Fiscal Year 1999. No
assurances can be given, however, regarding the Company's ability to raise
sufficient equity capital in the short-term, or to successfully implement
its cost savings strategy, delay its expenditures or meet its operating
plan for the remainder of Fiscal Year 1999 and beyond.
The Company expects to finance its long-term growth, working capital
requirements, capital expenditures, management information systems
upgrades, development of its planned e-commerce business, and debt service
requirements through a combination of cash provided from operations, the
aforementioned equity private placement and bank credit lines. No
assurances can be given however, regarding the Company's ability to raise
sufficient equity to satisfy the aforementioned requirements, including
the provision for sufficient working capital to enable the Company to
sustain its current and future operations, or that if such additional
equity is raised, that the Company's current and future working capital
needs or its long-term business or growth objectives will be met.
15
<PAGE>
Danskin, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollar Amounts in thousands, except per share amounts)
Strategic Outlook
The Company's business strategy is to capitalize on and enhance the
consumer recognition of brand Danskin(R) and products by continuing to
develop new and innovative activewear, casual wear 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's strategy is to regain leadership and market share in core
apparel segments such as dance, and to upgrade its information systems to
facilitate manufacturing and shipping efficiencies. 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(R) to the consumer beyond `activewear' to one of `active
lifestyle.' The Company continues to expand the visibility of Brand
Danskin(R) 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 with respect to both its branded and private label products to
enable it to maintain its industry position in a contracting sheer hosiery
market.
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 channel of distribution 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(R) as well as seeking to increase its presence in various
international markets.
There can be no assurance 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 3. 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 an applicable percentage) and, therefore, the Company is
subject to market-risk in the form of interest rate fluctuations.
16
<PAGE>
Danskin, Inc. and Subsidiaries
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 in the Notes to Unaudited Consolidated Condensed Financial
Statements in Part I - Financial Information of this Quarterly Report on
Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Financial Data Schedule.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANSKIN, INC.
November 15, 1999 By: /s/ Donald Schupak
------------------------------------
Donald Schupak
Chairman of the Board
November 15, 1999 By: /s/ Jeffrey Sentz
------------------------------------
Jeffrey Sentz
Controller
(Principal Financial Officer)
17
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