SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 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.
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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
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(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 June 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 SIX MONTH PERIODS
ENDED JUNE 27, 1998 and JUNE 26,1999
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets (Unaudited)
As of December 26, 1998 and June 26, 1999 ............. 3
Consolidated Condensed Statements of Operations
(Unaudited) For the Fiscal Three and Six Month
Periods Ended June 27, 1998 and June 26, 1999 ......... 4
Consolidated Condensed Statements of Cash Flows
(Unaudited) For the Fiscal Six Month Periods Ended
June 27, 1998 and June 26, 1999 ....................... 5
Notes to Unaudited Consolidated Condensed
Financial Statements .................................. 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 12-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ........................................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 22
Item 5. Other ................................................. 22
Item 6. Exhibits and Reports on Form 8-K ...................... 22
SIGNATURES .............................................................. 23
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Finmancial Statements
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 26, 1998 June 26, 1999
(unaudited)
----------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 546,000 $ 789,000
Accounts receivable, less allowance for doubtful accounts
of $1,021,000 at December 26, 1998 and $1,060,000 at June 26, 1999 13,518,000 14,905,000
Inventories (Note 6) 30,386,000 28,773,000
Prepaid expenses and other current assets 2,256,000 2,102,000
------------ ------------
Total current assets 46,706,000 46,569,000
Property, plant and equipment - net of accumulated depreciation and
amortization of $8,807,000 at December 26, 1998 and $9,425,000 at
June 26, 1999 9,773,000 10,986,000
Other assets 1,227,000 1,174,000
------------ ------------
Total assets $ 57,706,000 $ 58,729,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit (Note 2) $ 16,029,000 $ 25,780,000
Current portion of long-term debt (Note 2) 2,000,000 2,189,000
Accounts payable 8,440,000 7,916,000
Accrued expenses 13,692,000 11,056,000
------------ ------------
Total current liabilities 40,161,000 46,941,000
------------ ------------
Long-term debt, net of current maturities (Note 2) 6,674,000 6,365,000
Accrued dividends 1,176,000 1,656,000
Accrued retirement costs 2,301,000 2,301,000
------------ ------------
Total long-term liabilities 10,151,000 10,322,000
------------ ------------
Total Liabilities 50,312,000 57,263,000
------------ ------------
Commitments and contingencies
Series D Cumulative Convertible Preferred Stock, 2,400
shares Liquidation Value $12,000,000 (Note 4) 11,294,000 11,355,000
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 June 26, 1999, less 1,083 shares held by
subsidiary at December 26, 1998 and June 26, 1999 209,000 210,000
Additional paid-in capital 23,483,000 23,579,000
Accumulated deficit (24,546,000) (30,632,000)
Accumulated other comprehensive loss (3,046,000) (3,046,000)
============ ============
Total Stockholders' Deficit (3,900,000) (9,889,000)
============ ============
Total Liabilities and Stockholders' Deficit $ 57,706,000 $ 58,729,000
============ ============
</TABLE>
These Statements should be read in conjunction with the
Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Six Months Ended
------------------------- -----------------------
June 27, 1998 June 26, 1999 June 27, 1998 June 26, 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 26,444,000 $ 23,526,000 $ 54,695,000 $ 47,667,000
Cost of goods sold 16,169,000 17,009,000 33,947,000 33,030,000
------------ ------------ ------------ ------------
Gross profit 10,275,000 6,517,000 20,748,000 14,637,000
Selling, general and administrative expenses 9,941,000 8,402,000 20,588,000 18,703,000
Non-recurring charges (Note 8) -- -- 964,000 --
Interest expense 607,000 745,000 1,181,000 1,389,000
------------ ------------ ------------ ------------
Total Expenses 10,548,000 9,147,000 22,733,000 20,092,000
Loss before income tax provision (273,000) (2,630,000) (1,985,000) (5,455,000)
Provision for income taxes 46,000 45,000 91,000 90,000
------------ ------------ ------------ ------------
Net loss (319,000) (2,675,000) (2,076,000) (5,545,000)
Preferred dividends 267,000 271,000 572,000 541,000
------------ ------------ ------------ ------------
Net loss applicable to Common Stock ($586,000) ($2,946,000) ($2,648,000) ($6,086,000)
============ ============ ============ ============
Basic/Diluted net loss per share: (Note 9)
Net loss per share ($0.04) ($0.14) ($0.22) ($0.29)
============ ============ ============ ============
Weighted average number of common shares 13,538,000 21,022,000 12,033,000 21,017,000
============ ============ ============ ============
</TABLE>
These statements should be read in conjunction with the
accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
4
<PAGE>
Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
-----------------------------
June 27, 1998 June 26, 1999
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(2,076,000) $(5,545,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 867,000 830,000
Provision for doubtful accounts receivable 162,000 110,000
Loss on sale of property, plant and equipment 80,000 13,000
Stock grants issued 446,000 94,000
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,183,000) (1,497,000)
(Increase) decrease in inventories (4,484,000) 1,613,000
(Increase) decrease in prepaid expenses and other current assets (336,000) 179,000
Increase (decrease) in accounts payable 2,008,000 (524,000)
Increase (decrease) in accrued expenses 1,276,000 (2,636,000)
----------- -----------
Net cash used in operating activities (3,240,000) (7,363,000)
----------- -----------
Cash Flows From Investing Activites:
Capital expeditures (1,168,000) (1,966,000)
----------- -----------
Net cash used in investing activities (1,168,000) (1,966,000)
----------- -----------
Cash Flows From Financing Activities:
Net receipts under revolving line of credit 4,645,000 9,751,000
Proceeds from new term note -- 943,000
Proceeds from stock options exercised 26,000 --
Payments of long-term debt -- (1,063,000)
Expenses associated with issuance of rights (121,000) --
to purchase Common Stock
Proceeds from warrant notes 15,000
Financing costs incurred (45,000) (59,000)
----------- -----------
Net cash provided by financing activities 4,520,000 9,572,000
----------- -----------
Net increase in Cash and Cash Equivalents 112,000 243,000
Cash and Cash Equivalents, Beginning of Period 808,000 546,000
----------- -----------
Cash and Cash Equivalents, End of Period $ 920,000 $ 789,000
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 1,009,000 $ 1,331,000
Income Taxes paid 27,000 85,000
Non-Cash Activities
Stock grants issued to executives 446,000 94,000
</TABLE>
These statements should be read in conjunction with the
accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE>
Item 1. Financial Statements (continued)
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
1. In the opinion of the management of Danskin Inc. and Subsidiaries (the
"Company"), the accompanying Consolidated Condensed Financial Statements
have been presented on a basis consistent with the Company's fiscal year
financial statements and contain all adjustments (all of which were of a
normal and recurring nature) necessary to present fairly the financial
position of the Company as of June 26, 1999, as well as its results of
operations and its cash flows for the fiscal three and six month periods
ended June 26, 1999 and June 27, 1998, 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.
2. 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 million less the aggregate outstanding
principal balance under the Term Loan Facility, or (b) a formula amount
based upon the Company's available inventory and accounts receivable
levels, minus certain discretionary reserves. The Company's obligations to
CBCC under the Loan and Security Agreement are generally secured by a
first priority security interest in all present and future assets of the
Company.
The Loan and Security Agreement contains certain affirmative and negative
covenants including maintenance of tangible net worth and 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 million as of
the end of December 1999 and each month thereafter. At June 26, 1999, the
Company's tangible net worth was approximately $1.3 million. The undrawn
availability covenant provides that the Company must have undrawn
availability of at least $3 million as of the end of December 1999 and
each month thereafter. Undrawn availability at June 26, 1999 was
approximately $2.3 million. The Company expects to be in compliance with
the
6
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
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 million 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 million 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 $0.94 million which is, with respect to
principal, payable in equal monthly installments of $15,715. 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, CBCC increased the Company's availability under the
Revolving Credit Agreement by an amount not to exceed $5.76 million (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
$1.25 million (the "Overadvance Amount") of additional borrowing capacity.
3. 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 $5.23 million (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
million, 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
7
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
the Guarantee is in place. The exercise price of all warrants 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 `Liquidity and Capital Resources'
4. 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 million 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)
5. 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.
6. Inventories are stated at the lower cost or market on a first-in,
first-out basis. Inventories consisted of the following:
December 26, 1998 June 26, 1999
(Unaudited)
----------------- -------------
Finished Goods $ 18,735,000 $ 17,174,000
Raw Materials 4,725,000 5,520,000
Work-in-Process 6,271,000 5,453,000
Packaging Materials 655,000 626,000
----------------- -------------
$ 30,386,000 $ 28,773,000
7. 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 $1,450,000 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 its business. Management believes that the ultimate
resolution of these proceedings will not, in the aggregate, have a
material adverse impact on the financial condition, results of operations,
liquidity or business of the Company.
8. Non-recurring charges of approximately $1.0 million for the six months
ended June 27, 1998 consisted of certain executive employee severance
costs primarily relating to the termination of the former Chief Executive
Officer of the Company.
9
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
9. For the six months ended June 1999 and June 1998, basic and diluted net
loss per share was computed based on weighted average common and common
equivalent shares outstanding of 21,017,000 and 12,033,000, 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 June 26, 1999, the Company had the following common shares and common
share equivalents outstanding:
Common Shares 21,022,000
Preferred Stock 40,000,000
Warrants/Options 24,044,000
----------
Total Shares and Share Equivalents Outstanding 85,066,000
10. 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 six
months ended June 1999, Danskin was allocated $1.9 million and Pennaco was
allocated $1.0 million. For the six months ended June 1998, Danskin was
allocated $1.9 million and Pennaco was allocated $1.6 million. The
non-recurring charges of $1.0 million for June 1998 were allocated $0.6
million to Danskin and $0.4 million to Pennaco. The Company does not
allocate interest expense to the divisions.
10
<PAGE>
Danskin, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
Financial information by segment for the six month periods ended June 26, 1999
and June 27, 1998 is summarized below:
($000 omitted)
Danskin Pennaco Total
------- ------- -----
June 1999
Net Revenues $ 32,472 $ 15,195 $ 47,667
Operating Loss (3,007) (1,059) (4,066)
June 1998
Net Revenues $ 37,285 $ 17,410 $ 54,695
Operating Loss (2) (802) (804)
11
<PAGE>
Danskin, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 (operating data includes operating data for the Company's retail
activities) and with the
12
<PAGE>
Danskin, Inc. and Subsidiaries
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 six month periods ended June 26, 1999
with the fiscal three and six month periods ended June 27, 1998.
Net Revenues:
Net revenues amounted to $23.5 million for the three months ended June
1999, a decrease of $2.9 million, or 11.0% from the prior year three
months ended June 1998. Net revenues for the six months ended June 1999
amounted to $47.7, a decrease of $7.0 million, or 12.8%, from the prior
year six months ended June 1998.
Danskin activewear net revenues, which include the Company's retail
operations, amounted to $15.9 million for the three months ended June
1999, a decrease of $1.5 million, or 8.6%, from $17.4 million in the prior
year three months ended June 1998. Activewear revenues amounted to $32.5
million for the six months ended June 1999, a decrease of $4.8 million, or
12.9%, from $37.3 million in the prior year six month period. Revenues for
the three and six month periods were adversely impacted by a decline in
retail revenues and the discontinuance of the Dance France business in the
fourth quarter of fiscal 1998, which accounted for approximately $0.4
million of revenues in the prior year fiscal quarter, 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. The Company believes that its recent fashion offerings and
casual wear offerings have been well received by its customers. 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.
In fiscal 1998, the Company restructured its activewear 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 activewear 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.
13
<PAGE>
Danskin, Inc. and Subsidiaries
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 $3.7 million for the three-month
period ended June 1999, compared to $4.6 million for the same prior year
period, and were $7.6 million for the six-month period ended June 1999,
compared to $9.1 million for the same prior year period. Comparable retail
store sales declined 20.1% for the three months ended June 1999 and 15.9%
for the six months ended June 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 $7.7 million for the three months
ended June 1999, a decline of $1.3 million, or 14.4%, from the prior year
three month period. Revenues amounted to $15.2 million for the six months
ended June 1999, a decline of $2.2 million, or 12.6%, from the six month
period ended June 1998. The decline in legwear revenues over the prior
year fiscal periods continues to reflect a confirmed weak sheer hosiery
market in the department store class of trade, a continued softness in the
Givenchy(R) sheer hosiery business, a decline in the Company's private
label business in the quarter, and the expiration of the Anne Klein(R)
legwear license at December 31, 1998, which contributed approximately $0.3
million in net revenue in the 1998 fiscal quarter. These declines were
partially offset by an increase in sales of the Company's
Round-the-Clock(R) Take Two value pack, a program designed by the Company
to address the effects of the overall decline in the sheer category on the
Round-the-Clock(R) brand. The Company expects to continue to see increased
revenues from this program as it expands distribution within the channel.
Take Two value packs package two pairs of hosiery in a single package at a
suggested retail lower than two pairs purchased individually.
14
<PAGE>
Danskin, Inc. and Subsidiaries
Gross Profit:
Gross profit decreased by $3.8 million, or 36.6%, to $6.5 million for the
three months ended June 1999. Gross profit decreased by $6.2 million, or
29.8%, to $14.6 million for the six months ended June 1999 from $20.8
million for the six months ended June 1998. Gross profit, as a percentage
of net revenues, decreased to 30.7% in the six month period ended June
1999 from 37.9% in the same prior year period.
Activewear gross profit, as a percentage of net revenue, decreased to 30.0
% for the three months ended June 1999 from 41.5% for the three months
ended June 1998, and to 33.8% for the six months ended June 1999 from
40.3% for the six months ended June 1998. The three and six month
decreases were primarily a result of a lower sales mix of higher margin
Brand Danskin basic product, increased sales of closeout merchandise,
unfavorable manufacturing variances due to lower volumes, as well as
markdowns taken in the Company's retail stores to stimulate sales and
reduce inventory.
Legwear gross profit, as a percentage of net revenue, decreased to 23.0%
in the three months ended June 1999 from 33.8% in the prior fiscal year
period, and decreased to 24.2% in the six months ended June 1999 from
33.0% 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
volume production.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses, which include retail store
operating costs, decreased $1.5 million, or 15.5%, to $8.4 million, or
35.7% of net revenues, in the three months ended June 1999, from $9.9
million, or 37.6% of net revenues for the three months ended June 1998.
For the six-month period ended June 1999, selling, general and
administrative expenses decreased $1.9 million, or 9.2%, to $18.7 million,
or 39.2% of net revenues, from $20.6 million, or 37.6% of net revenues,
for the six month period ending June 1998. The Company continues to
scrutinize its selling, general and administrative expenses to obtain
further reductions in such expenses.
15
<PAGE>
Danskin, Inc. and Subsidiaries
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 $1.9 million for the three months ended June 1999, a decline of $2.2
million from the gain of $.3 million for the three months ended June 1998.
The loss from operations amounted to $4.1 million for the six months ended
June 1999, a decline of $4.3 million from a gain of $0.2 million for the
prior fiscal year period.
Interest Expense:
Interest expense amounted to $0.7 million for the three months ended June
1999 and $0.6 million for the prior fiscal year period. Interest expense
amounted to $1.4 million for the six months ended June 1999 and $1.2
million for the six months ended June 1998. The Company's effective
interest rate was 9.2% and 9.9% for the three months ended June 1999 and
June 1998, respectively, and 9.2% and 10.0% for the six months ended June
1999 and June 1998, respectively.
Non-recurring Charges:
Non-recurring charges were $1.0 million for the six month period ending
June 1998. These charges consisted of 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 six months ended June 1999 and June 1998. The Company's
net deferred tax balance was $0 at both June 1999 and December 1998.
Net Loss:
As a result of the foregoing, the net loss was $2.7 million for the three
months ending June 1999, a decline of $2.4 million compared to the net
loss of $0.3 million for the three months ending June 1998. For the six
months ended June 1999, the net loss was $5.5 million, compared to a net
loss of $2.1 million for the prior year fiscal period.
16
<PAGE>
Danskin, Inc. and Subsidiaries
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 September 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.
17
<PAGE>
Danskin, Inc. and Subsidiaries
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 September 30, 1999. The Company's
contingency plans 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 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.
18
<PAGE>
Danskin, Inc. and Subsidiaries
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 $4.2 million to $7.4 million
for the six months ended June 1999, from a use of cash in operations of
$3.2 million in the six months ended June 1998, principally attributable
to increases in accounts receivable and decreases in accounts payable and
accrued expenses, offset by decreases in inventories and prepaid expenses.
Working capital was $(0.4) million at June 26, 1999 compared to $6.5
million at December 26, 1998. The change in working capital is primarily
attributable to an increase of $9.8 million in the revolving line of
credit to fund operations, payment of term loans and investments in
capital expenditures.
The Company continues to manage its cash needs despite restricted credit
terms from certain of its vendors and suppliers. As reflected in the
financial statements, the Company has incurred operating losses during the
first six months of Fiscal 1999. The Company's management believes that it
will be able to provide through its operations the necessary liquidity for
the next year. Achieving such liquidity is dependent upon the Company's
ability to achieve its operating plan. This operating plan anticipates net
revenue increases and margin improvement. The operating plan also
anticipates cost savings in certain administrative areas. Additionally,
the Company is engaged in an equity private placement offering which it
presently anticipates will be successfully completed by month end October
1999. The additional equity capital will be used to provide the Company
with sufficient liquidity to meet its working capital requirements, to
fund the Company's capital expenditures, to complete the Company's
management information systems upgrades currently being implemented, and
to fund the development of the Company's planned e-commerce business,
consisting of a web site for branding, elements of community building,
sales of certain of the Company's merchandise, and a secure site for
various of its wholesale customers. No assurances can be given however,
regarding the Company's ability to meet its business plan in 1999 and 2000
and regarding its ability to raise sufficient equity to satisfy the
aforementioned requirements, or that if such additional equity is raised,
that the Company's working capital needs or its business or growth
objectives will be met.
19
<PAGE>
Danskin, Inc. and Subsidiaries
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.
20
<PAGE>
Danskin, Inc. and Subsidiaries
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 1/2%) and, therefore, the Company is subject to market-risk in
the form of interest rate fluctuations.
21
<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 5. Other
Effective as of June 7, 1999, the Company entered into an employment
agreement with Carol Hochman, employing her as Chief Executive Officer of
the Company from June 7, 1999 until June 30, 2004, subject to earlier
termination for death, resignation or removal, at a annual base salary of
$425,000 per annum, plus a deferred compensation arrangement on terms to
be determined. Ms. Hochman replaces M. Catherine Volker whose relationship
with the Company was severed in June 1999. 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. Ms. Hochman
is the wife of Richard Hochman, a principal of Regent Capital, an investor
in Danskin Investors, LLC.
The Company also entered into an agreement with Ms. Hochman whereby the
Company agreed to grant to Ms. Hochman, six options, each representing the
right to purchase 500,000 shares of Common Stock. The purchase price of
the shares of Common Stock covered by each option shall be equal to the
lowest price at which equity is raised by the Company on or before May
2000. Each option is generally exercisable until April 2009, unless
earlier terminated in accordance with the terms of the agreement granting
such options. The Company also agreed to sell Ms. Hochman 1 million shares
of Common Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Financial Data Schedule.
(b) Reports on Form 8-K
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANSKIN, INC.
August 16, 1999 By: /s/ Donald Schupak
------------------------------------
Donald Schupak
Chairman of the Board
August 16, 1999 By: /s/ Jeffrey Sentz
------------------------------------
Jeffrey Sentz
Controller
(Principal Financial Officer)
23
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