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 March 27, 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
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(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
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __x__ No _____
The number of shares outstanding of the issuer's Common Stock, $0.01 par value,
as of March 31, 1999, excluding 1,083 shares held by a subsidiary: 21,020,795
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE FISCAL THREE MONTH PERIODS
ENDED MARCH 28, 1998 and MARCH 27,1999
INDEX
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<CAPTION>
Page No.
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets (Unaudited)
As of December 26, 1998 and March 27, 1999
Consolidated Condensed Statements of Operations (Unaudited)
For the Fiscal Three Month Periods Ended
March 28, 1998 and March 27, 1999
Consolidated Condensed Statements of Cash Flows (Unaudited)
For the Fiscal Three Month Periods Ended
March 28, 1998 and March 27, 1999
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 26, 1998 March 27, 1999
(unaudited)
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Current assets:
Cash and cash equivalents $ 546,000 $ 604,000
Accounts receivable, less allowance for doubtful accounts of $1,021,000
at December 26, 1998 and $1,082,000 at March 27, 1999 13,518,000 15,056,000
Inventories (Note 5) 30,386,000 29,445,000
Prepaid expenses and other current assets 2,256,000 2,053,000
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Total current assets 46,706,000 47,158,000
Property, plant and equipment - net of accumulated depreciation and
amortization of $8,807,000 at December 26, 1998 and $9,069,000
at March 27, 1999 9,773,000 10,812,000
Other assets 1,227,000 1,204,000
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Total Assets $57,706,000 $59,174,000
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit (Note 2) $16,029,000 $20,708,000
Current portion of long-term debt (Note 2) 2,000,000 2,189,000
Accounts payable 8,440,000 8,204,000
Accrued expenses 13,692,000 13,063,000
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Total current liabilities 40,161,000 44,164,000
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Long-term debt, net of current maturities (Note 2) 6,674,000 6,912,000
Accrued dividends 1,176,000 1,416,000
Accrued retirement costs 2,301,000 2,301,000
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Total long-term liabilities 10,151,000 10,629,000
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Total Liabilities 50,312,000 54,793,000
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Commitments and contingencies
Series D Cumulative Convertible Preferred Stock, 2,400 shares Liquidation
Value $12,000,000 (Note 3) 11,294,000 11,324,000
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 at March 27, 1999, less 1,083 shares held by
subsidiary at December 26, 1998 and March 27, 1999 209,000 210,000
Additional paid-in capital 23,483,000 23,579,000
Accumulated deficit (24,546,000) (27,686,000)
Accumlated other comprehensive loss (Note 12) (3,046,000) (3,046,000)
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Total Stockholders' Deficit (3,900,000) (6,943,000)
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Total Liabilities and Stockholders' Deficit $57,706,000 $59,174,000
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</TABLE>
These Statements should be read in conjunction with
the accompanying Notes to Consolidated Condensed Financial Statements.
3
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Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
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<CAPTION>
Fiscal Three Months Ended
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March 28, 1998 March 27, 1999
(Unaudited) (Unaudited)
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Net revenues $28,251,000 $24,141,000
Cost of goods sold 17,778,000 16,021,000
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Gross profit 10,473,000 8,120,000
Selling, general and administrative expenses (Note 9) 10,647,000 10,301,000
Non-recurring charges (Note 10) 964,000 --
Interest expense 574,000 644,000
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Total Expenses 12,185,000 10,945,000
Loss before income tax provision (1,712,000) (2,825,000)
Provision for income taxes 45,000 45,000
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Net loss (1,757,000) (2,870,000)
Preferred dividends 305,000 270,000
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Net loss applicable to Common Stock ($2,062,000) ($3,140,000)
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Basic/Diluted net loss per share: (Note 11)
- -------------------------------------------
Net loss per share ($0.20) ($0.15)
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Weighted average number of common shares 10,529,000 21,012,000
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</TABLE>
These statements should be read in conjunction with
the accompanying Notes to Consolidated Condensed Financial Statements.
4
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Item 1. Financial Statements (continued)
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL THREE MONTHS ENDED
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March 28, 1998 March 27, 1999
(Unaudited) (Unaudited)
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Cash Flows From Operating Activities:
Net Loss $(1,757,000) $(2,870,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 445,000 414,000
Provision for doubtful accounts receivable 82,000 55,000
Loss on sale of property, plant and equipment 34,000 13,000
Stock grants issued 446,000 94,000
Changes in operating assets and liabilities:
Increase in accounts receivable (2,326,000) (1,593,000)
(Increase) decrease in inventories (30,000) 941,000
Decrease in prepaid expenses and other current assets 171,000 203,000
Increase (decrease) in accounts payable 475,000 (236,000)
Increase (decrease) in accrued expenses 1,339,000 (627,000)
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Net cash used in operating activities (1,121,000) (3,606,000)
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Cash Flows From Investing Activites:
Capital expeditures (462,000) (1,422,000)
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Net cash used in investing activities (462,000) (1,422,000)
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Cash Flows From Financing Activities:
Net receipts under revolving line of credit 1,717,000 4,679,000
Proceeds from new term note -- 943,000
Proceeds from stock options exercised 13,000 --
Payments of long-term debt -- (516,000)
Expenses associated with issuance of rights (42,000) --
to purchase Common Stock
Interest earned on promissiry notes for
purchases price of Warrants to purchase
Common Stock (3,000) --
Financing costs incurred -- (20,000)
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Net cash provided by financing activities 1,685,000 5,086,000
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Net increase in Cash and Cash Equivalents 102,000 58,000
Cash and Cash Equivalents, Beginning of Period 808,000 546,000
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Cash and Cash Equivalents, End of Period $ 910,000 $ 604,000
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Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 479,000 $ 608,000
Income taxes paid 10,000 48,000
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 Consolidated Condensed Financial Statements.
5
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Item 1. Financial Statements (continued)
1. In the opinion of the management of Danskin Inc. and Subsidiaries (the
"Company"), the accompanying Consolidated Condensed Financial Statements
have been presented on a basis consistent with the Company's fiscal year
financial statements and contain all adjustments (all of which were of a
normal and recurring nature) necessary to present fairly the financial
position of the Company as of March 27, 1999, as well as its results of
operations for the fiscal three month periods ended March 27, 1999 and
March 28, 1998 and its cash flows for the fiscal three month periods
ended March 27, 1999 and March 28, 1998. Certain information and
footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted. See the Annual Report of the Company on
Form 10-K for the Fiscal Year Ended December 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
replaced its former financing arrangements with First Union National
Bank ("First Union") with a new loan and security agreement (the "Loan
and Security Agreement") with Century Business Credit Corporation
("CBCC" or the "Lender"), which matures on October 8, 2002. Proceeds of
the Loan and Security Agreement were used to pay all of the Company's
indebtedness to First Union, and to establish working capital lines of
credit.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement provides the Company with a term loan facility (the "Term Loan
Facility") and a revolving credit facility, including a provision for
the issuance of letters of credit (the "Revolving Credit Facility")
generally in an amount not to exceed the lesser of (a) $45 million less
the aggregate outstanding principal balance under the Term Loan
Facility, or (b) a formula amount based upon the Company's available
inventory and accounts receivable levels, minus certain discretionary
reserves. The Company's obligations to CBCC under the Loan and Security
Agreement are generally secured by a first priority security interest in
all present and future assets of the Company. The Loan and Security
Agreement contains certain affirmative and negative covenants, including
maintenance of tangible net worth and a limitation on capital
expenditures, respectively. The tangible net worth covenant is
calculated by subtracting from total assets all intangible assets and
total liabilities. The covenant stipulates that the Company must
maintain a minimum tangible net worth of $2 million. At March 27, 1999,
the Company's tangible net worth was approximately $4.1 million.
On the Refinancing Closing Date, two term loans were advanced to the
Company in accordance with the terms of the Term Loan Facility. A term
loan in the original principal amount of $5 million was advanced to the
Company and is, with respect to principal, payable in thirty (30)
consecutive months 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 $940,000, which is, with
respect to principal, payable in equal monthly installments of $15,715.
The Company used the proceeds of such loan to purchase certain machinery
and equipment for use in its operations. The Company paid the Lender a
fee in the amount of $9,400 in connection with such term loan.
Interest on the Company's obligations under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of the
Prime Rate plus one half of one percent (1/2%) and is payable monthly.
Interest may also accrue at a rate per annum equal to the sum of the
Eurodollar Rate, as defined in the Loan and Security Agreement, plus two
and three quarters percent (2 3/4%). Availability under the Revolving
Credit Facility at March 27, 1999 was approximately $4 million.
3. In accordance with the terms of a certain Securities Purchase Agreement
dated September 22, 1997 (the "Securities Purchase Agreement") entered
into by the Company and Danskin Investors, LLC. (the "Investor"), the
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, legally available for such purpose. The issuance of such
Common Stock to the Investor shall, in accordance with the agreement,
constitute full payment of such dividend.
6
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4. Bid quotations for the Company's Common Stock may be obtained from the
`pink sheets" published by the National Quotation Bureau and the Common
Stock is traded in the over-the-counter market.
5. Inventories are stated at the lower of cost or market on a first-in,
first-out basis. Inventories consisted of the following:
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<CAPTION>
December 26, March 27,
1998 1999
(Unaudited)
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Finished goods $18,735,000 $18,324,000
Raw Materials 4,725,000 5,057,000
Work-in-Process 6,271,000 5,420,000
Packaging Materials 655,000 644,000
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$30,386,000 $29,445,000
</TABLE>
6. Effective May 18, 1998, the Executive Committee of the Board of
Directors of the Company amended the 1992 Stock Option Plan to increase
the number of options available for grant thereunder by 2.5 million
shares. The Executive Committee also provided for grants to senior level
employees of the Company. In accordance with the terms of the Plan, the
option price of such grants is not less than 100% of the fair market
value of the Common Stock on the date of grant. Such options vest over a
four year period from the date of grant. The Company has granted 200,000
options to senior level employees of the Company in fiscal 1999.
7. 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 $1.45
million 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.
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. The Company has been selected for audit by certain State tax
authorities, the resolution of which cannot be determined at this time.
Management believes that any possible ultimate liability resulting from
these audits will not materially affect the consolidated financial
position or results of operations of the Company.
9. Included in Selling, General and Administrative Expenses ("SG&A") for
the fiscal three months ended March 28, 1998 were approximately $0.8
million of one time charges relating to the hiring of M. Catherine
Volker, Chief Executive Officer of the Company.
10. Non-recurring charges of approximately $1.0 million for the three months
ended March 28, 1998 consisted of certain executive employee severance
costs primarily relating to the termination of the former Chief
Executive Officer of the Company.
11. For the fiscal three months ended March 1999 and March 1998, basic and
diluted net loss per share is computed based on weighted average common
and common equivalent shares outstanding of 21,012,000 and 10,529,000,
respectively. Common Stock equivalents are excluded from basic and
diluted net loss per share calculation for both fiscal periods because
the effect would be antidilutive.
At March 27, 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 23,533,000
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Total Shares and Share Equivalents Outstanding 84,555,000
12. Comprehensive loss for all periods presented, representing all changes
in stockholders' deficit during the period, other than changes resulting
from the Company's stock and dividends, was equal to net losses as
presented, as the minimum pension liability adjustment has not changed
in the respective periods.
13. 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
7
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designs, manufactures, and markets hosiery under the brand names
Round-the-Clock(R) and Givenchy(R) and, in the near term, under the
Ralph Lauren(R)brand name. 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 three months ended March 1999, Danskin was allocated
$1.2 million and Pennaco was allocated $0.6 million. For the three
months ended March 1998, Danskin was allocated $1.1 million and Pennaco
was allocated $0.9 million. The non-recurring charges of $1.0 million
for March 1998 were allocated $0.6 million to Danskin and $0.4 million
to Pennaco. The Company does not allocate interest expense to the
divisions.
Financial information by segment for the three month periods ended March
27, 1999 and March 28, 1998 is summarized below:
($000 omitted)
Danskin Pennaco Total
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March 1999
Net Revenues $ 16,607 $ 7,534 $ 24,141
Operating Loss (1,670) (511) (2,181)
March 1998
Net Revenues $ 19,851 $ 8,400 $ 28,251
Operating Loss (177) (961) (1,138)
8
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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 Consolidated Condensed Financial Statements, related notes and other
information included in this quarterly report on Form 10-Q (operating
data includes operating data for the Company's retail activities) and
with the Company's Annual Report on Form 10-K for the fiscal year ended
December 26, 1998.
Results of Operations
Comparison of the fiscal three month period ended March 27, 1999 with
the fiscal three month period ended March 28, 1998.
Net Revenues:
Net revenues amounted to $24.1 million for the three months ended March
1999, a decrease of $4.2 million, or 14.8% , from the three months ended
March 1998.
Danskin activewear net revenues, which include the Company's retail
operations, amounted to $16.6 million for the three months ended March
1999, a decrease of $3.3 million, or 16.6%, from $19.9 million in the
prior year three month period. This decrease in net wholesale revenues
was principally attributable to a decline in retail revenues, a decline
in revenues from the sporting goods and specialty stores class of trade
and the discontinuance of the Dance France business in the fourth
quarter of fiscal 1998, which accounted for approximately $0.5 million
of revenues in the prior year fiscal period. The Company believes that
the decline in the sporting goods class of trade was the result of
conditions in the segment generally, as well as the limited sell in of
certain of the Company's offerings to the segment. The Company believes
that its new initiatives in the sporting goods channel will result in
improved results in the second half of the year and in the year 2000.
Marketing of activewear wholesale products continues to address the
trend toward casual wear and to emphasize fashion and dancewear product
offerings to complement 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. Sales in the
Company's retail stores were $3.9 million for the three-month period
ended March 1999, compared to $4.5 million for the same prior year
period. Comparable retail store sales declined 11.4% for the three
months ended March 1999. In its retail stores, the Company continues its
efforts to improve store product offerings, to renegotiate existing
leases to achieve optimum store size and to streamline store operations
to reduce store operating costs. The decline in retail store sales is
attributable to, among other factors, the negative effects of the
Company's retail inventory reduction plan, which included taking no new
merchandise into the retail stores for a two month period, and the
disruptive impact of the implementation of a new inventory management
system, combined with a depressed retail environment in the Southern
Florida/Orlando market which has had a disproportion effect on the
Company's retail operations.
Pennaco legwear revenues amounted to $7.5 million for the three months
ended March 1999, a decline of $0.9 million, or 10.7%, from the three
month period ended March 1998. The decline in legwear revenues over the
prior year fiscal period continues to reflect a confirmed weak sheer
hosiery market in the department store class of trade, a softness in the
Givenchy(R) sheer hosiery business, a decline in the Company's private
label business in the quarter, and the expiration of
9
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the Anne Klein(R) legwear license at December 31, 1998, which
contributed approximately $730,000 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) product, attributable to the
introduction of the 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. Take Two value packs
package two pairs of hosiery in a single package at a suggested retail
lower than two pairs purchased individually.
Gross Profit:
Gross profit decreased by $2.4 million, or 22.5%, to $8.1 million for
the three months ended March 1999 from $10.5 million for the three
months ended March 1998. Gross profit, as a percentage of net revenues,
decreased to 33.6% in the three month period ended March 1999 from 37.1%
in the same prior year period.
Activewear gross profit decreased to 37.4% for the three months ended
March 1999 from 39.2% for the three months ended March 1998. The three
month decrease was primarily a result of a lower sales mix of higher
margin Brand Danskin basic product, as well as markdowns taken in the
Company's retail stores to stimulate sales and reduce inventory.
Legwear gross profit decreased to 25.4% for the three months ending
March 1999 from 32.1% in the prior fiscal year period. The lower gross
profit level was 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.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses, which include retail store
operating costs, decreased $0.3 million, or 3.2%, to $10.3 million, or
42.7% of net revenues, in the three months ended March 1999 from $10.6
million, or 37.7% of net revenues, for the three month period ending
March 1998. However, adjusting for certain one-time charges of $0.8
million relating to changes in senior management in the prior year
fiscal quarter, selling, general and administrative expenses for the
three month period ended March 1999 increased $0.5 million over the
prior year fiscal period. Such increase is primarily attributable to
increased print advertising expense to promote Brand Danskin(R).
Operating Income/Loss:
As a result of the foregoing, the loss from operations (i.e.,
income/loss before interest expense and income taxes) amounted to $2.2
million for the three months ended March 1999, a decline of $1.1 million
from a loss of $1.1 million for the prior fiscal year period. In
addition, excluding non-recurring charges, loss from operations for
March 1998 was $0.2 million
Interest Expense:
Interest expense amounted to $0.6 million for the three months ended
March 1999 and $0.6 million for the three months ended March 1998. The
Company's effective interest rate was 9.1% and 9.9% for the three months
ended March 1999 and 1998, respectively.
Non-recurring Charges:
Non-recurring charges were $1.0 million for the three months ended March
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 months ended March 1999 and March 1998. The Company's net
deferred tax balance was $0 at both March 1999 and March 1998.
Net Loss:
As a result of the foregoing, the net loss was $2.9 million for the
three months ended March 1999, compared to a net loss of $1.8 million
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
10
<PAGE>
remediation was successful. It expects to complete such testing within
the next ninety days. There can be no assurance, however, that the
Company's systems will be rendered year 2000 compliant in a timely
manner, either through replacement or remediation, or that the Company
will not incur significant unforeseen additional expenses to assure such
compliance. Failure to successfully complete and implement the
replacement project on a timely basis, or to successfully remediate
legacy systems, could have a material adverse impact on the Company's
operations.
The Company is also evaluating and remediating its non-information
systems for year 2000 compliance. It is seeking to obtain year 2000
compliance certification letters from key non-information systems
vendors, and anticipates commencing test simulations in the near term.
The Company presently anticipates that such testing will be completed
within the next ninety days. 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 either its financial condition and
its results of operations during fiscal 1999. The Company's information
technologies staff is currently evaluating and remediating the year 2000
issues within existing systems. Therefore, the cost to evaluate and
remediate such systems is principally the related payroll costs for its
information systems group. The Company does not have a project tracking
system that tracks the cost and time that its own internal employees
spend on year 2000 projects.
The Company presently has incomplete information concerning the year
2000 compliance status of its suppliers and customers. It is in the
process of 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 within the next ninety days. 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,
combined with a failure by the Company to timely remediate any year 2000
issues relating to any of its material operating or manufacturing
systems. Such events, together or independently, would likely have a
material adverse effect on the Company's results of operations, although
the extent of such effect cannot be reasonably estimated at this time.
This document contains Year 2000 Readiness Disclosures as defined in
Year 2000 Information and Readiness Disclosure Act, P.L. 105-271 (Oct
19, 1998). Accordingly, this disclosure, in whole or in part, is not, to
the extent provided in the act, admissible in any state or federal civil
action to prove the accuracy or truth of any Year 2000 statements
contained herein.
Liquidity and Capital Resources
The Company's primary liquidity and capital requirements relate to the
funding of working capital needs, primarily inventory, 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 $2.5 million to $3.6
million for the three months ended March 1999, from a use of cash in
operations of $1.1 million in the three months ended March 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 $3.0 million at March 27, 1999 compared to $6.5
million at December 26, 1998. The change in working capital was
primarily attributable to an increase of $4.7 million in the revolving
line of credit to fund operations, payment of term loans and investments
in capital
11
<PAGE>
expenditures. At fiscal month ended April 1999, the Company had
approximately $31.3 million in outstanding advances under the Loan and
Security Agreement with CBCC; availability under such credit facility
based upon the Company's accounts receivable and inventory positions,
equaled approximately $2.3 million at fiscal month ended April 1999. The
maximum amount available for advances to the Company under the Loan and
Security Agreement is $45 million. See Note 2 to the Consolidated
Condensed Financial Statements. At March 27, 1999, the Company's
tangible net worth (as defined in the Term Loan and Security Agreement)
was approximately $4.1 million.
The Company has reached an agreement with CBCC to increase the Company's
availability under the Revolving Credit Facility by an amount not to
exceed $3 million, in support of which certain shareholders and
affiliates of the Company have agreed to provide stand-by guarantees as
set forth below. In addition, CBCC has agreed to further amend the Loan
and Security Agreement (i) to provide that (a) the Company's tangible
net worth shall be no less than $0 through July 31, 1999, at which time
the tangible net worth covenant will be reinstated, and (b) at July 31,
1999, the Company shall have availability under the Revolving Credit
Facility of not less than $3 million, and (ii) to create an additional
Event of Default relating to a default under any of the Guarantees (as
defined below). The Company has agreed to pay CBCC $25,000 in connection
with the amendments to the Loan and Security Agreement.
Certain shareholders and affiliates of the Company have agreed to issue
limited guarantees in favor of the Lender in an aggregate principal
amount not to exceed $3 million (each, a "Guarantee," together, the
"Guarantees"). Pursuant to the terms of the Guarantees, each guarantor
will guarantee 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 availability.
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 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 described below.
The Company intends to raise additional equity capital in the next
several months. The additional equity capital will be used to provide
the Company with sufficient liquidity to meet its working capital needs,
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 including the specialty store channel
of trade. No assurances can be given, however, regarding the Company's
ability to raise sufficient equity to satisfy these needs, or that, if
such additional equity is raised, that the Company's working capital
needs or its business or growth objectives will be met.
12
<PAGE>
Strategic Outlook
The Company's business strategy is to capitalize on and enhance the
consumer recognition of Brand Danskin(R) by emphasizing the Company's
core product offerings for Danskin(R), Danskin Plus(R) and its
children's line, while continuing to develop new and innovative
activewear and legwear products that reflect today's active lifestyle,
and to offer those products to the consumer in traditional and
non-traditional channels of distribution.
The Company continues to pursue its "Primary Resource Strategy," moving
Brand Danskin(R) beyond its traditional stretch bodywear platform. The
Company intends to continue to offer new and innovative products that
blend technical innovation with comfort and style, broadening the
position of Brand Danskin(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 recognizes that an integral aspect of its business strategy
is to achieve greater distribution of its products. Recognizing that the
Company's own retail stores allow the Company to showcase its products,
provide an additional channel of distribution and act as a laboratory
for product innovation and introduction, the Company continues to
explore opportunities for selective national expansion of its full price
retail strategy. The Company is also in the process of exploring its
alternatives for the marketing and distribution of its activewear and
legwear products over the internet. The Company anticipates that its
e-commerce business will consist 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 including the
specialty store channel of trade. 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 1/2%) and, therefore, the Company is subject to market-risk
in the form of interest rate fluctuations.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 in the Notes to Consolidated Condensed Financial Statements
in Part I - Financial Information of this Quarterly Report on Form
10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Financial Data Schedule.
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANSKIN, INC.
May 11, 1999
By: /s/ M. Catherine Volker
-------------------------
M. Catherine Volker
Chief Executive Officer
May 11, 1999
By: /s/ Jeffrey Sentz
-------------------------
Jeffrey Sentz
Controller
(Principal Financial Officer)
14
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