<PAGE>
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 July 1, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-20382
DANSKIN, INC.
-------------
Exact name of registrant as specified in its charter)
DELAWARE 62-1284179
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation Or organization Identification No.)
530 SEVENTH AVENUE, NEW YORK, NY 10018
--------------------------------------
(Address of principal executive offices)
(212) 764-4630
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of the issuer's Common Stock, $0.01 par value,
as of June 30, 2000, excluding 1,083 shares held by a subsidiary: 73,985,454
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE FISCAL THREE AND SIX MONTH PERIODS
ENDED June 26, 1999 and July 1, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of December 25, 1999 and July 1, 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations
For the Fiscal Three and Six Month Periods Ended
June 26, 1999 and July 1, 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For the Fiscal Six Month Periods Ended
June 26, 1999 and July 1, 2000 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 22
</TABLE>
2
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 25, 1999 JULY 1, 2000
----------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 663 $ 777
Accounts receivable, less allowance for doubtful accounts of
$1,087 at December 25, 1999 and $1,095 at July 1, 2000 9,448 12,982
Inventories 24,159 25,165
Prepaid expenses and other current assets 1,756 1,647
-------- --------
Total current assets 36,026 40,571
Property, plant and equipment - net of accumulated depreciation and
amortization of $9,366 at December 25, 1999 and $10,251 at
July 1, 2000 10,747 10,110
Other assets 1,115 1,007
-------- --------
======== ========
Total assets $ 47,888 $ 51,688
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 10,041 $ 19,078
Accounts payable 7,316 6,731
Accrued expenses 10,434 8,986
-------- --------
-------- --------
Total current liabilities 27,791 34,795
-------- --------
Long-term debt, net of current maturities 11,500 11,500
Accrued dividends 65 749
Accrued retirement costs 2,658 2,658
-------- --------
-------- --------
Total long-term liabilities 14,223 14,907
-------- --------
Total liabilities 42,014 49,702
-------- --------
Commitments and contingencies
Stockholders' Equity
Series E Cumulative Convertible Preferred Stock, 3,042 shares
Liquidation Value of $15,210 15,210 15,210
Common Stock, $.01 par value, 100,000,000 shares authorized,
73,985,878 shares issued at December 25, 1999 and 73,986,537 shares
issued at July 1, 2000, less 1,083 shares held by
subsidiary at December 25, 1999 and July 1, 2000 739 739
Additional paid-in capital 39,853 39,852
Notes receivable from stock sale (1,361) (1,361)
Accumulated deficit (45,532) (49,419)
Accumulated other comprehensive loss (3,035) (3,035)
-------- --------
Total Stockholders' Equity 5,874 1,986
======== ========
Total Liabilities and Stockholders' Equity $ 47,888 $ 51,688
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements
3
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL THREE MONTHS ENDED FISCAL SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 26, 1999 JULY 1, 2000 JUNE 26, 1999 JULY 1, 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 23,526 $ 20,471 $ 47,667 $ 41,502
Cost of goods sold 17,009 14,419 33,030 29,281
------------ ------------ ------------ ------------
Gross profit 6,517 6,052 14,637 12,221
Selling, general and administrative expenses 8,402 7,230 18,703 14,631
Non-recurring income (665) (665)
Interest expense 745 750 1,389 1,438
------------ ------------ ------------ ------------
9,147 7,315 20,092 15,404
Loss before income tax provision (2,630) (1,263) (5,455) (3,183)
Provision for income taxes 45 5 90 20
------------ ------------ ------------ ------------
Net loss (2,675) (1,268) (5,545) (3,203)
Preferred dividends 271 342 541 684
------------ ------------ ------------ ------------
Net loss applicable to Common Stock ($ 2,946) ($ 1,610) ($ 6,086) ($ 3,887)
============ ============ ============ ============
Basic and diluted loss per share:
Net loss per share ($ 0.14) ($ 0.02) ($ 0.29) ($ 0.05)
============ ============ ============ ============
Weighted average number of common shares
outstanding basic and diluted 21,022,000 73,987,000 21,017,000 73,986,000
============ ============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements
4
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
JUNE 26, 1999 JULY 1, 2000
------------- ------------
UNAUDITED UNAUDITED
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($5,545) ($3,203)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 830 1,035
Stock grants issued 94 --
Provision for doubtful accounts receivable 110 30
Net loss on sale of property, plant and equipment 13 1
Net gain on sale of trademark -- (365)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,497) (3,564)
Decrease (increase) in inventories 1,613 (1,006)
Decrease in prepaid expenses and other assets 179 62
Decrease in accounts payable (524) (585)
Decrease in accrued expenses (2,636) (1,636)
------- -------
Net cash used in operating activities (7,363) (9,231)
------- -------
Cash Flows From Investing Activites:
Capital expenditures (1,966) (368)
Proceeds from sale of trademark -- 600
Proceeds from sale of property, plant and equipment -- 77
------- -------
Net cash used in investing activities (1,966) 309
------- -------
Cash Flows From Financing Activities:
Net borrowings under revolving line of credit 9,751 9,037
Repayments of long-term debt (1,063) --
Proceeds from term loans 943 --
Expenses related to recapitalization -- (1)
Financing costs incurred (59) --
------- -------
Net cash provided by financing activities 9,572 9,036
------- -------
Net increase in Cash and Cash Equivalents 243 114
Cash and Cash Equivalents, Beginning of Period 546 663
------- -------
Cash and Cash Equivalents, End of period $ 789 $ 777
======= =======
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 1,331 $ 1,307
Income taxes paid 85 17
Non-Cash Activities
The Company issued a stock grant of 100,000 shares valued at $.9375 per share
to the CFO in January 1999.
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements
5
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
1. LIQUIDITY
During fiscal 1999, capital constraints impacted all aspects of
Danskin, Inc.'s and Subsidiaries' (the "Company") businesses. This
included, among other aspects: the Company's ability to purchase piece
goods; its ability to fulfill customers' orders resulting in both a
decline in potential revenues, as a substantial percentage of orders
were either shipped late and/or only partially fulfilled, and declines
in orders as a result of inadequate and/or mismatched inventory, poor
reporting systems and the absence of an integrated and focused retail
strategy.
The Company has taken a number of positive steps. In June 1999, the
then Chief Executive Officer was terminated and was replaced by Carol
Hochman. During the second half of fiscal 1999, Carol Hochman and a number
of new senior executives addressed the foregoing operating issues. In this
regard, in December 1999, the Company raised $19,250 of new capital (from
the sale of $15,210 of an authorized $20,000 issuance of convertible
preferred stock, and $4,040 in the term loan portion of the Company's
secured credit facility) resulting in $10,000 in undrawn availability at
close. (Refer to Notes 3, 4 and 5 for a discussion of the equity private
placement completed to-date and the refinancing of the Company's bank
debt.) In addition, beginning in the second half of fiscal 1999, new
management undertook a "right-sizing" reorganization of the Company's
personnel and manufacturing infrastructures, eliminated substantial
operating costs and changed its approach to merchandising and selling,
eliminating unprofitable SKUs, emphasizing high quality businesses, and
instituting a replenishment and forecasting capability to improve
fulfillment and maximize revenue. These actions resulted in improved
financial results during the first fiscal six months ended July 1, 2000 as
compared to the prior year fiscal six months ended June 26, 1999. At July
1, 2000 availability under the Company's Revolving Credit Facility was
approximately $4,500.
The Company is currently seeking to place the remaining $4,790 of
such convertible preferred stock on the same terms and conditions as the
December offering and has engaged an investment banker to promote the
placement. The Company presently anticipates that the proceeds from such
sale, if successful, will be used to finance the Company's Internet
efforts and for general working capital purposes. (Refer to "Item 2.
Management Discussion and Analysis, Strategic Outlook").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of the management of the Company, the accompanying
Condensed Consolidated Financial Statements have been presented on a
basis consistent with the Company's fiscal year end 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 July 1, 2000, as well as its results of operations and its
cash flows for the fiscal six month periods ended June 26, 1999 and July
1, 2000. The fiscal six months ended July 1, 2000 consisted of
twenty-seven weeks and the fiscal six months ended June 26, 1999
consisted of twenty-six weeks. 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 25, 1999. Operating results for
interim periods may not be indicative of results for the full fiscal
year.
6
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower cost or market on a first-in,
first-out basis. Inventories consisted of the following:
<TABLE>
<CAPTION>
December 25, July 1,
1999 2000
(Unaudited)
-------------- ------------
<S> <C> <C>
Finished goods $ 13,978 $ 14,621
Raw materials 4,365 4,500
Work-in-process 5,339 5,265
Packaging materials 477 779
-------------- ------------
$ 24,159 $ 25,165
============== ============
</TABLE>
INCOME (LOSS) PER COMMON SHARE
For the six months ended June 26, 1999 and July 1, 2000, basic and
diluted net loss per share was computed based on weighted average common
and common equivalent shares outstanding of 21,017 and 73,986,
respectively. Common Stock equivalents are excluded from the basic and
diluted net loss per share calculation for both periods because the effect
would be antidilutive.
At July 1, 2000, the Company had the following common shares and
common share equivalents outstanding:
<TABLE>
<S> <C>
Common Shares 73,986,537
Preferred Stock 49,064,516
Warrants/Options 38,196,609
-----------
Total Shares and Share Equivalents Outstanding 161,247,662
===========
</TABLE>
3. BANK FINANCING
Effective October 8, 1997, the Company entered into a loan and security
agreement (the "Loan and Security Agreement") with Century Business Credit
Corporation ("CBCC" or the "Lender") which matures on December 8, 2004. Proceeds
of the Loan and Security Agreement were used to pay all of the Company's
indebtedness to its former lender, and to establish working capital lines of
credit. 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.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement initially provided the Company with a term loan facility in the
aggregate principal amount of $10,000 (the "Term Loan Facility") and a revolving
credit facility, including a provision for the issuance of letters of credit
(the "Revolving Credit Facility") generally in an amount not to exceed the
lesser of (a) $45,000 less the aggregate outstanding principal balance under the
Term Loan Facility, or (b) a formula amount based upon the Company's available
inventory and accounts receivable levels, minus certain discretionary reserves.
7
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. BANK FINANCING (CONTINUED)
In December 1999, the Loan and Security Agreement was amended to, among
other things, (i) extend the maturity date of the facility from October 8, 2002
to December 8, 2004, and (ii) increase the amount available under the Term Loan
Facility to $11,500. The Term Loan Facility is payable, with respect to
principal, in equal consecutive monthly installments of $192 commencing on the
first day of December 2001.
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 Loan and Security Agreement was re-finalized to
stipulate that (i) the Company must maintain a tangible net worth of not less
than $0 as of the end of May 2000 and as of the end of each month thereafter,
and (ii) it shall be an Event of Default if the Company fails to maintain
average undrawn availability under the Loan and Security Agreement for the
month of August, and for any month thereafter, of less than $1,000. At July
1, 2000, the Company's tangible net worth was approximately $1,700.
Availability at July 1, 2000 was approximately $4,500. The maximum borrowings
under the Revolving Credit Facility was $19,078 during the fiscal six months
ended July 1, 2000.
Interest on the Company's obligations and under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of the Prime
Rate plus one half of one (1/2%) percent and is payable monthly. Interest may
also accrue at a rate per annum equal to the sum of the Eurodollar Rate, as
defined in the Loan and Security Agreement, plus two and three quarters percent
(2 3/4%).
4. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES
In December 1999, the Company issued $15,210 stated value of 9% Series
E Senior Step-Up Convertible Preferred Stock (the "Series E Stock"). The 3,042
shares of Series E Stock are convertible into Common Stock, at the option of the
holder, at an initial conversion rate of 16,129 shares of Common Stock for each
share of Series E Stock so converted, subject to adjustment in certain
circumstances. The terms of the Series E Stock also provide that, at any time
after the fifth anniversary of the date of its issuance, the Series E Stock may,
at the election of the Company, 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 E Stock), plus (y)
all accrued and unpaid dividends on such shares of Series E Stock to the date of
redemption. Holders of the Series E 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 E 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 E Stock held by such holder, rounded up
to the next one-tenth of a share. Therefore, the issuance of the Series E Stock
by the Company was highly dilutive of existing holders of Common Stock. Until
the fifth anniversary of the date of its issuance, the Series E Stock has a 9%
annual dividend rate, provided that the Company may at its sole option pay a
portion of such dividend equal to up to 2% per annum in shares of common stock
of the Company; provided however, that the Company has an obligation with
respect to the holders of the Series E Stock to cause the common stock of the
Company to be listed on the Nasdaq Small Cap Market or the Nasdaq National
Market as promptly as feasible following the issuance of the Series E Stock. If
the Company does not achieve such listing, within eighteen (18) calendar months
following the issuance date of the Series E Stock, dividends
8
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
shall accrue prospectively at a rate of 14% per annum, payable in cash only,
until such time such listing is effected. Notwithstanding the forgoing, from and
after the fifth anniversary of the date of issuance, dividends accrue on the
Series E Stock at a rate of 14% per annum, payable only in cash.
Simultaneously with the Company's issuance of the Series E Stock, the
holders of the Company's Series D Redeemable Cumulative Convertible Preferred
Stock (the "Series D Stock"), agreed to convert such Series D Stock into Common
Stock of the Company in accordance with the terms and conditions of the Series D
Stock. The holders of the 2,400 shares of Series D Stock issued by the Company
converted such preferred stock into Common Stock at the stated conversion rate
of 16,666.66 shares of Common Stock for each share of the Series D Stock so
converted. In addition, the Series D Stock had an 8% annual dividend rate,
payment of which was deferred through December 31, 1999. Danskin Investors
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 could be paid, at the option of the Company, in cash or in additional
Common Stock of the Company. Therefore, as a result of the conversion of the
Series D Stock, the Company issued 46,924,000 shares of Common Stock in respect
of the Series D Stock and all accrued but unpaid dividends through the effective
date of the conversion.
5. WARRANTS
In November 1999, the Company issued 12,103,200 warrants to certain
shareholders, affiliates of the Company, and various third parties in
consideration for providing stand-by guarantees of the Company's obligations
under the Loan and Security Agreement. Each warrant represents the right to
purchase one share of Common Stock for $0.27 through May 2009. The number of
warrants issued to each guarantor was based upon a formula that took into
account the dollar amount of the limited guarantee and the number of days that
such guarantee was in place. These warrants have been accounted for as an
increase to additional paid in capital and was amortized as interest expense
over the life of the guarantee.
In December 1999, in connection with an amendment to the Loan and
Security Agreement, the Company issued to CBCC, its secured lender, a warrant to
purchase 550,000 shares of the Company's Common Stock at a price of $0.27 per
share. This has been accounted for as additional financing fees totaling $110
and additional paid-in-capital. The unamortized portion of such fees will be
amortized over the remaining life of the loan.
In connection with the placement of the Series E Preferred Stock, the
Company issued to Utendahl Capital Partners for its services as placement agent
in connection with the sale of certain of the Series E Preferred Stock, a
warrant to purchase 119,987 shares of the Company's Common Stock at a price of
$0.31 per share. Such warrants were recorded as additions to paid-in capital.
6. NON-RECURRING INCOME
Non-recurring income for the three and six months ended July 1, 2000 was
$665 primarily as a result of a net recovery of $365 for an outstanding amount
owed the Company for the sale of a trademark, and $300 resulting from securing a
subtenant for the Company's former corporate offices in New York City, in
respect of which the Company previously recognized a loss in 1999.
7. NEW LICENSES
Effective May 5, 2000, the Company reached an agreement with Ellen
Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture
and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and
trouser socks under the Ellen Tracy(R) name. The agreement provides that Pennaco
shall have the exclusive right and license to use the Ellen Tracy(R) trademark
in connection with the
9
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
manufacture, assemblage, sale, marketing and distribution, advertising and
promotion of legwear in the United States and Canada. Ridgeview, Inc. previously
held the license.
In a separate transaction, Pennaco obtained an exclusive license for
the manufacture and sale of sheer hosiery and knee-highs under the
Evan-Picone(R) name. The agreement provides that Pennaco shall have the
exclusive right and license to use the Evan-Picone(R) trademark in connection
with the manufacture, assemblage, sale, marketing and distribution, advertising
and promotion of sheer hosiery in the United States and Canada. Ridgeview, Inc
previously held this license as well.
In connection with obtaining the Ellen Tracy(R) and Evan-Piccone(R)
licenses, Danskin has hired Barry Tartarkin, former President of Ridgeview,
Ladies Hosiery Group, as the Vice President, General Manager of its Pennaco
Hosiery division, along with certain other members of Mr. Tartarkin's management
team. Mr. Tartarkin is entitled to, among other things, a percentage of sales of
product under the aforementioned license agreements. Mr. Tartarkin replaces
Joyce Darkey who has been appointed Vice President, Strategic Planning &
Development for Danskin, Inc., spearheading Danskin's Internet efforts.
8. LEGAL PROCEEDINGS
The Company severed its relationship with Cathy Volker, the Company's
former Chief Executive Officer, in June 1999. The Company's and Ms. Volker's
respective rights and obligations under Ms. Volker's Employment Agreement, dated
as of February 2, 1998, if any, are the subject of a pending arbitration.
On November 25, 1996, the Company commenced suit against Herman
Gruenwald, former President, Director and Principal shareholder of Siebruck
Hosiery, Ltd. ("Siebruck") for damages in the amount of $1,450 in the Superior
Court, Montreal. The claim relates to unreported sales in excess of $1,500
arising under a license agreement entered into by and between the Company and
Siebruck, which expired on December 31, 1995. Siebruck was placed under the
provision of the Canadian Bankruptcy and Insolvency Act. Mr. Gruenwald's
statement of defense included a cross-demand against the Company wherein he is
claiming damages to his reputation in the amount of Cdn. $3,000. A reasonable
evaluation of the claim against the Company cannot be made at this time.
However, the Company does not presently anticipate that the ultimate resolution
of such claim will be material to its financial condition, results of
operations, liquidity, or business of the Company.
The Company is a party to a number of other legal proceedings arising
in the ordinary course of business. Management believes that the ultimate
resolution of these proceedings will not, taken together, have a material
adverse impact on the financial condition, results of operations, liquidity or
business of the Company.
9. SEGMENT DISCLOSURE
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),
Givenchy(R), Evan-Picone(R) and Ellen Tracy(R). (Refer to Note 7 for a
discussion of Evan Picone(R) and Ellen Tracy (R) licenses). 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
10
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
segment. For the fiscal six months ended July 1, 2000, Danskin was allocated
$1,581 and Pennaco was allocated $799. For the fiscal six months ended June 26,
1999, Danskin was allocated $1,949 and Pennaco was allocated $993. The Company
does not allocate interest expense to the divisions.
Financial information by segment for the fiscal six-month periods ended
July 1, 2000 and June 26, 1999 is summarized below:
<TABLE>
<CAPTION>
DANSKIN PENNACO TOTAL
<S> <C> <C> <C>
June 26, 1999
Net Revenues $ 32,472 $ 15,195 $ 47,667
Operating Loss (3,007) (1,059) (4,066)
July 1, 2000
Net Revenues $ 29,799 $ 11,703 $ 41,502
Operating Loss (1,480) (930) (2,410)
</TABLE>
10. COMMON STOCK
Bid quotations for the Company's Common Stock may be obtained from the
"pink sheets" published by the National Quotation Bureau and the Common Stock is
traded in the over-the-counter market.
11
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
During fiscal year 1999, capital constraints impacted all aspects of
Danskin, Inc.'s businesses. This included, among others: the Company's ability
to purchase piece goods; its ability to fulfill customers' orders resulting in
both a decline in potential revenues, as a substantial percentage of orders were
either shipped late and/or only partially fulfilled, and declines in orders as a
result of inadequate and/or mismatched inventory; poor reporting systems and the
absence of an integrated and focused retail strategy.
The Company has taken a number of positive steps. In June 1999, the
then Chief Executive Officer was terminated and was replaced by Carol Hochman.
During the second half of fiscal 1999, Carol Hochman, and a number of new senior
executives, addressed the aforementioned operational issues. In this regard, in
December 1999, the Company raised $19,250 of new capital ($15,210 from the sale
of Series E Preferred Stock, and $4,040 in the term loan portion of the
Company's secured credit facility). In addition, during this time period, new
management has undertaken a "right-sizing" reorganization of the Company's
personnel and manufacturing infrastructures, eliminated substantial operating
costs and changed its approach to merchandising and selling, eliminating
unprofitable SKUs, emphasizing high quality businesses, and instituting a
replenishment and forecasting capability to improve fulfillment and maximize
revenue.
Based on the aforementioned infusion of new capital, which resulted in
$10,000 in undrawn availability at close, and new management's "right-sizing"
actions, the Company believes it will have sufficient liquidity in year 2000 to
operate the business in the normal course. (See Liquidity and Capital
Resources.) As described above, new management has taken positive steps in
improving business processes, which it believes will improve ongoing
profitability for the Company. As described below, these actions resulted in
improved operating results during the fiscal six month period ended July 1,
2000.
The fiscal six months ended July 1, 2000 consisted of twenty-seven
weeks and the fiscal six months ended June 26, 1999 consisted of twenty-six
weeks. The fiscal three months ended July 1, 2000 and June 26, 1999 consisted of
thirteen weeks each.
The following discussion provides an assessment of the Company's
results of operations, capital resources and liquidity which should be read in
conjunction with the Consolidated Condensed Financial Statements, related notes
and other information included in this quarterly report on Form 10-Q (operating
data includes operating data for the Company's retail activities) and with the
Annual Report on Form 10-K for the fiscal year ended December 25, 1999.
RESULTS OF OPERATIONS
COMPARISON OF THE FISCAL THREE AND SIX MONTH PERIODS ENDED JULY 1, 2000 WITH THE
FISCAL THREE AND SIX MONTH PERIODS ENDED JUNE 26, 1999.
NET REVENUES:
In the operating plan for fiscal year 2000, which management views as a
transition year, the Company has undertaken steps to eliminate unprofitable
business and products and cut infrastructure to maximize financial results and
minimize risk. In addition, the Company has taken steps to increase volume in
the specialty store class of trade, increase retail store profitability and is
positioned to take advantage of consolidation opportunities in the hosiery
industry.
Net revenues amounted to $20,471 for the fiscal three months ended July
1, 2000, a decrease of $3,055, or 13.0% from the prior year fiscal three months
ended June 26, 1999. Net revenues for the six months ended July 1, 2000 amounted
to $41,502, a decrease of $6,165 or 12.9% from the prior year six
12
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DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
months ended June 26, 1999. Danskin Activewear net revenues, which include the
Company's retail operations, amounted to $14,487 for the fiscal three months
ended July 1, 2000, a decrease of $1,378 or 8.7%, from $15,865 in the prior year
fiscal three months ended June 26, 1999. Activewear revenues amounted to $29,799
for the six months ended July 1, 2000, a decrease of $2,673 or 8.2%, from
$32,472 in the prior year six month period. Revenues for the fiscal three and
six month period ended July 1, 2000 decreased primarily due to lower volumes in
Danskin basic replenishment business, the packables line and private label
programs, as well as, fewer retail and outlet stores, offset in part by the
extra week in the first quarter of fiscal 2000 as compared to the first quarter
of fiscal 1999.
The Company's marketing of activewear wholesale products continues to
address the trend toward casual wear and emphasizes fashion and dancewear
product offerings complementing the Company's basic replenishment products. In
addition, the Company continues to work with its major retail partners to
increase the percentage of orders of basic product placed via electronic
re-order/fulfillment programs (Electronic Data Interchange "EDI") in an effort
to drive its replenishment business, to increase open-to-buy-levels and to seek
out new customers and new channels of distribution.
Sales in the Company's retail stores were $3,160 for the fiscal
three-month period ended July 1, 2000, compared to $3,668 for the prior year
fiscal period, and were $6,513 for the six month period ended July 1, 2000
compared to $7,563 for the same prior year period. Comparable retail store sales
increased 2.0% for the three months ended July 1, 2000 and declined 1.9% for the
six months ended July 1, 2000. The decline in retail store sales is largely
attributable to the impact of the aforementioned capital constraints encountered
during the fiscal year 1999, resulting in inventory imbalances and promotional
requirements, all of which have been addressed by management, offset by the
extra week in the first quarter of fiscal 2000 as compared to the first quarter
of fiscal 1999. To address these declines, and to enhance the performance of its
retail stores, the Company continues to improve store product offerings, as it
now has the capital resources to do so, to renegotiate existing leases to
achieve optimum store size, to streamline store operations to reduce operating
costs and to set up an automatic stock replenishment system. In addition, the
Company is continuing to take steps necessary to evaluate certain unprofitable
or under-performing locations. In this regard, in the fiscal period ended July
1, 2000, the Company has eleven fewer stores than the fiscal period ended June
26, 1999. In addition, the Company has closed 14 stores and opened 3 new stores
over the past year.
Pennaco legwear revenues amounted to $5,984 for the fiscal three months
ended July 1, 2000, a decline of $1,677, or 21.9% from the prior year fiscal
three month period. Revenues amounted to $11,703 for the six months ended July
1, 2000, a decline of $3,492, or 23.0%, from the six month period ended June 26,
1999. The decline in legwear revenues versus the prior fiscal year period
reflects weakness in the sheer hosiery market, and in particular, on sales of
basic "everyday" sheer hosiery, decreased sales in Round the Clock(R) Take 2
Value Pack Program, decreased continuity programs with chain stores, reduced
sales of the Danskin sock program and lower sales levels of closeouts and
irregulars. This was offset by the extra week in the first quarter of fiscal
2000 compared to the first quarter of fiscal 1999. The Round the Clock(R) Take 2
Value Pack Program was launched in the fiscal six month period ended June 26,
1999 and generated pipeline orders of $1,600, which were not duplicated in the
fiscal six month period ended July 1, 2000. These sales decreases were partially
offset by the initial shipments of $1,106 of Evan Picone and of Ellen Tracy
products in the fiscal three month period ended July 1, 2000.
Management believes that the Company is positioned to take advantage of
consolidation opportunities in the hosiery industry. In this regard, effective
May 5, 2000, the Company reached an agreement with Ellen Tracy, Inc. pursuant to
which Pennaco was granted a license for the manufacture and sale of legwear
including sheer hosiery, sheer knee highs, tights, socks and trouser socks under
the Ellen Tracy(R) name. The agreement provides that Pennaco shall have the
exclusive right and license to use the
13
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Ellen Tracy(R)trademark in connection with the manufacture, assemblage, sale,
marketing and distribution, advertising and promotion of legwear in the United
States and Canada. The license was previously held by Ridgeview, Inc.
In a separate transaction, Pennaco has obtained an exclusive license
for the manufacture and sale of sheer hosiery and knee highs under the
Evan-Picone(R) name. The agreement provides that Pennaco shall have the
exclusive right and license to use the Evan-Picone(R) trademark in connection
with the manufacture, assemblage, sale, marketing and distribution, advertising
and promotion of sheer hosiery in the United States and Canada. The license was
previously held by Ridgeview, Inc.
The Company presently anticipates that together, the sales of product
under the Evan-Picone and Ellen Tracy labels will generate revenue of
approximately $20,000 on an annualized basis. Sales of product under these
licenses began during the second fiscal quarter 2000. Total sales for
Evan-Picone and the Ellen Tracy label for the second fiscal quarter 2000 were
$1,106.
Management believes that opportunities exist for margin and revenue
improvement for market right products and programs in niche and
occasion-oriented sheer hosiery and through expanded distribution. Accordingly,
the Company has initiated a program of product development focused on these
product segments and is focusing on expanding distribution into new wholesale
accounts. In addition, opportunities exist for niche products and in the growing
specialty, and dot.com channel segments, as well as in a more focused strategy
by new management since the Ralph Lauren Hosiery license was abandoned.
Substantial product development and research resources were committed to this
license in 1999 that will be more effectively deployed on the opportunities
outlined above. Among new niche products being offered is Passion Privee(R),
which has been well received.
GROSS PROFIT:
Gross profit decreased by $465 to $6,052 for the fiscal three months
ended July 1, 2000 compared to $6,517 for the fiscal second quarter ended June
26, 1999. Gross profit decreased by $2,416, or 16.5%, to $12,221 for the six
months ended July 1, 2000 from $14,637 for the six months ended June 26, 1999.
Gross profit, as a percentage of net revenues, increased to 29.6% in the fiscal
three month period ended July 1, 2000 from 27.7% for the fiscal three months
ended June 26, 1999. For the fiscal six month period ending July 1, 2000, gross
profit decreased to 29.4% compared to 30.7% for the six month period ended June
26, 1999. Margins for the fiscal three and six month period ended July 1, 2000
were adversely affected as a result of the capital constraints experienced
during fiscal 1999, which resulted in an increased cost of inventory and an
aggressive program to dispose of excess and aging inventory.
Danskin activewear gross profit, as a percentage of net revenue,
increased to 31.6% for the fiscal three months ended July 1, 2000 from 30.0% for
the fiscal three months ended June 26, 1999, and decreased to 31.6% for the six
months ended June 2000 from 33.8% for the six months ended June 1999. The fiscal
three month improvement in margin is mainly due to higher mix of high margin
Danskin brand sales, improved margins in closeout sales and higher margins in
the Company's retail stores. The fiscal six month period decreases were
primarily a result of the impact of the aforementioned capital constraints
experienced during fiscal 1999, a greater mix of closeout sales and a lower mix
of high margin Danskin brand basic products. As previously discussed margins for
fiscal 2000 were adversely affected as a result of the capital constraints
experienced during fiscal 1999, which resulted in an increased cost of
inventory. The closeout sales are the result of an aggressive inventory
reduction program instituted to improve the quality of inventory and reduce
carry costs. The Company's retail stores gross profit, as a percent of net
revenues, for the fiscal three month period ended July 1, 2000 was 55.4%
compared to 53.1% for the fiscal
14
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
three month period ended June 26, 1999 and 54.1% for the six months ended July
1, 2000 from 53.0% for the six months ended June 1999.
Pennaco legwear gross profit, as a percentage of net revenue, increased to 24.6%
in the fiscal three months ended July 1, 2000 from 23.0% in the prior fiscal
three month period ended June 26, 1999 due primarily to realization of higher
margins in the Evan Picone(R) and Ellen Tracy labels, partially offset by lower
margins for Givenchy and private label customers. Higher manufacturing cost per
unit attributable to lower production levels and increased promotional
allowances to meet competitive pressure have generated lower margins for
Givenchy and private label programs. For the fiscal six month period ended July
1, 2000 gross profits were 24.0% compared to 24.2% in the prior fiscal six month
period. The slightly lower gross profit level is driven principally by increased
manufacturing unit cost due to reduced production volume levels projected for
Year 2000 offset by favorable margin impact from the Evan Picone and Ellen Tracy
labels. As previously discussed, the Company is positioned to take advantage of
consolidation in the hosiery industry and has obtained licenses for the sale of
product under the Evan-Picone and Ellen Tracy Labels. In addition to the
aforementioned product development programs, the Company has also initiated a
program to phase out unprofitable styles within its existing lines at Pennaco,
implemented cost improvement programs, and price increases on
Round-the-Clock(R), which, to date, have not been negatively received by
customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Under new management, the Company has undergone a thorough review of
its selling, general and administrative expenses and has reduced expenses and
the infrastructure to right-size the organization. This encompassed
implementation of a cost-savings strategy to control all expenses and streamline
processes to increase efficiencies. The result is accountability and improved
business processes as well as significant head count reductions at all
divisions. As indicated previously, the Company is also streamlining retail
operations to reduce operating costs.
Selling, general and administrative expenses, which include retail
store operating costs including rents, decreased $1,172, or 13.9%, to $7,230 or
35.3% of net revenues, in the fiscal three months ended July 1, 2000, from
$8,402, or 35.7% of net revenues for the fiscal three months ended June 26,
1999. For the fiscal six month period ended July 1, 2000, selling, general and
administrative expenses were $14,631 a decrease of $4,072 or 21.8% compared to
$18,703 for the six months ended June 26, 1999. Selling, general and
administrative expenses, as a percent of net revenues, was 35.3% for the fiscal
six month period ended July 1, 2000 versus 39.2% for the fiscal six month period
ended June 26, 1999. The significant decreases were realized in sales promotion
and advertising, selling expenses and administrative expenses. Selling, general
and administrative expenses, excluding retail store operations, decreased
$2,844, or 23.3%, to $9,346, or 26.7% of net revenues for the fiscal six months
ended July 1, 2000, from $12,190, or 30.4% of net revenues for the fiscal six
months ended June 26, 1999.
INTEREST EXPENSE:
Interest expense amounted to $750 for the fiscal three months ended
July 1, 2000 and $745 for the prior fiscal three month period ended June 26,
1999. Interest expense for the fiscal six month period ended July 1, 2000 was
$1,438 compared to $1,389 for the six month period ended June 26, 1999. The
Company's effective interest rate was 11.0% and 9.2% for the three months ended
July 1, 2000 and June 26, 1999, respectively, and 11.2% and 9.2% for the six
months ended July 1, 2000 and June 26, 1999, respectively.
15
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
fiscal six months ended July 1, 2000 and June 26, 1999. The Company's net
deferred tax balance was $0 at both July 1, 2000 and December 25, 1999.
NET LOSS:
As a result of the foregoing, the net loss was $1,610 for the fiscal
three months ended July 1, 2000, an improvement of $1,336 compared to the net
loss of $2,946 for the fiscal three months ended June 26, 1999. For the six
months ended July 1, 2000, the net loss was $3,887, and improvement of $2,199
compared to a net loss of $6,086 for the prior year fiscal period.
YEAR 2000 READINESS DISCLOSURE
Prior to the end of fiscal 1999, the Company engaged an outside consultant to
test and verify that the Company's information systems were year 2000 compliant.
In addition, the Company assessed and remediated its non-information systems.
The Company's information systems and non-information systems tested and
verified as year 2000 compliant. Moreover, the Company has not experienced any
significant operational problems posed by year 2000 issues. The Company has a
high degree of confidence that its systems will continue to be reliable from a
year 2000 perspective. However, there can be no guarantees that year 2000
issues, whether at the Company, its suppliers or its customers, will not have an
adverse impact on the Company's operations in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity and capital requirements relate to the
funding of working capital needs, primarily inventory, accounts receivable,
capital investments in operating facilities, machinery and equipment, and
principal and interest payments on indebtedness. The Company's primary sources
of liquidity have been from bank financing, issuance of convertible securities,
vendor credit terms and internally generated funds.
Net cash flow used in operations increased by $1,868 to $9,231 for
fiscal six months ended July 1, 2000, from a use of cash in operations of
$7,363 for the fiscal six months ended June 26, 1999, principally
attributable to decreases in accounts payable and accrued expenses, and
increases in accounts receivable and inventories (which included the purchase
of Ellen Tracy-Registered Trademark- and Evan Picone-Registered Trademark-
inventory from Ridgeview, Inc.) The maximum borrowings under the revolving
line of credit was $19,078 during the fiscal six months ended July 1, 2000.
Availability was $4,500 as of July 1, 2000.
Working capital was $5,776 at July 1, 2000 compared to $8,235 at
December 25, 1999. The change in working capital is primarily attributable to an
increase of $9,037 in the revolving line of credit to fund the net loss and
capital expenditures.
As reflected in the Consolidated Condensed Financial Statements, the
Company (i) completed in December 1999 an equity private placement offering of
$15,210 of an authorized $20,000 issuance of convertible preferred stock, and a
refinancing of the term loan portion of its secured credit facility which
resulted in approximately $10,000 of undrawn availability under such facility at
the closing of the transaction, (ii) implemented a cost savings strategy
Company-wide which has resulted in, and the
16
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Company believes will continue to produce, significant reductions in the
Company's infrastructure expenses, and (iii) taken actions to increase the
revenue of each of its operating segments. The Company is currently seeking
to place the remaining $4,790 of such convertible preferred stock on the same
terms and conditions as the December offering and has engaged an investment
banker to promote the placement. The Company presently anticipates that the
proceeds from such sale, if successful, will be used to finance the Company's
Internet efforts and for general working capital purposes. (Refer to "Item 2.
Management Discussion and Analysis, Strategic Outlook").
Specifically, in December 1999, the Company issued $15,210 stated value
of 9% Series E Senior Step-Up Convertible Preferred Stock (the "Series E
Stock"). The 3,042 shares of Series E Stock are convertible into Common Stock,
at the option of the holder, at an initial conversion rate of 16,129 shares of
Common Stock for each share of Series E Stock so converted, subject to
adjustment in certain circumstances. The terms of the Series E Stock also
provide that, at any time after the fifth anniversary of the date of its
issuance, the Series E Stock may, at the election of the Company, 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 E Stock), plus (y) all accrued and unpaid dividends on such
shares of Series E Stock to the date of redemption. Until the fifth anniversary
of the date of its issuance, the Series E Stock has a 9% annual dividend rate,
provided that the Company may at its sole option pay a portion of such dividend
equal to up to 2% per annum in shares of common stock of the Company; provided
however, that the Company has an obligation with respect to the holders of the
Series E Stock to cause the common stock of the Company to be listed on the
Nasdaq Small Cap Market or the Nasdaq National Market as promptly as feasible
following the issuance of the Series E Stock. If the Company does not achieve
such listing, within eighteen (18) calendar months following the issuance date
of the Series E Stock, dividends shall accrue prospectively at a rate of 14% per
annum, payable in cash only, until such time such listing is effected.
Notwithstanding the above, from and after the fifth anniversary of the date of
issuance, dividends accrue on the Series E Stock at a rate of 14% per annum,
payable only in cash.
In addition, in connection with the Company's issuance of the Series E
Stock, the Company's loan and security agreement (the "Loan and Security
Agreement") with Century Business Credit Corporation ("CBCC or the "Lender") was
amended to, among other things, (i) increase the amount available under the term
loan portion of the facility to $11,500, providing the Company with $4,040 in
additional capital, (ii) provide for interest only payments being required
through December 2001, providing the Company with $4,600 of additional
liquidity, and (iii) extend the maturity date of the entire facility from
October 8, 2002 to December 8, 2004.
Pursuant to and in accordance with its terms, the Loan and Security
Agreement provides the Company with a term loan facility in the aggregate
principal amount of $11,500 (the "Term Loan Facility") and a revolving credit
facility, including a provision for the issuance of letters of credit (the
"Revolving Credit Facility") generally in an amount not to exceed the lesser of
(a) $45,000 less the aggregate outstanding principal balance under the Term Loan
Facility, or (b) a formula amount based upon the Company's available inventory
and accounts receivable levels, minus certain discretionary reserves. The Term
Loan Facility is payable, with respect to principal, in equal consecutive
monthly installments of $192 commencing on the first day of December 2001. 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
17
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
worth covenant is calculated by subtracting from total assets all intangible
assets and total liabilities. The Loan and Security Agreement was
re-finalized in August 2000 to stipulate that (i) the Company must maintain a
tangible net worth of not less than $0 as of the end of May 2000, and as of
the end of each month thereafter, and (ii) that it shall be an Event of
Default if the Company fails to maintain average undrawn availability under
the Loan and Security Agreement for the month of August 2000, and for any
month thereafter, of less than $1,000. At July 1, 2000, the Company's
tangible net worth was approximately $1,700. Availability at July 1, 2000 was
approximately $4,500. The maximum borrowings under the Revolving Credit
Facility was $19,078 during the fiscal six months ended July 1, 2000.
Interest on the Company's obligations and under the Loan and Security
Agreement generally accrues at a rate per annum equal to the sum of the Prime
Rate plus one half of one (1/2%) percent and is payable monthly. Interest may
also accrue at a rate per annum equal to the sum of the Eurodollar Rate, as
defined in the Loan and Security Agreement, plus two and three quarters percent
(2 3/4%).
Simultaneously with the Company's issuance of the Series E Stock, the
holders of the Company's Series D Redeemable Cumulative Convertible Preferred
Stock (the "Series D Stock") agreed to convert such Series D Stock into Common
Stock of the Company in accordance with the terms and conditions of the Series D
Stock. The holders of the 2,400 shares of Series D Stock issued by the Company
converted such preferred stock into Common Stock at the stated conversion rate
of 16,666.66 shares of Common Stock for each share of the Series D Stock so
converted. In addition, the Series D Stock had an 8% annual dividend rate,
payment of which was deferred through December 31, 1999. Danskin Investors
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 could be paid, at the option of the Company, in cash or in additional
Common Stock of the Company. The Company elected to pay such accrued but unpaid
dividends in Common Stock. Therefore, as a result of the conversion of the
Series D Stock, the Company issued 46,924,000 shares of Common Stock in respect
of the Series D Stock and all accrued but unpaid dividends through the effective
date of the conversion.
The Company expects to finance its short term growth, working capital
requirements, capital expenditures, management information systems upgrades and
debt service requirements principally from the additional capital and liquidity
provided by the sale of Series E Stock and the refinancing of its secured term
debt, as discussed above, along with vendor arrangements.
The Company expects to finance its long-term growth, working capital
requirements, capital expenditures, management information systems upgrades, and
debt service requirements through a combination of cash provided from operations
and bank credit lines. The Company may need additional financing, however, for
the acquisition or development of any new business or programs, including the
development of its strategy to develop Danskin.com as a content and commerce
site for active women.
STRATEGIC OUTLOOK
As previously discussed, in the operating plan for fiscal year 2000,
which management views as a transition year, the Company has undertaken steps to
eliminate unprofitable business and products and cut infrastructure to maximize
financial results and minimize risk. In addition, the Company has taken steps to
increase volume in the specialty store class of trade, increase retail store
profitability and is positioned to take advantage of consolidation opportunities
in the hosiery industry.
18
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company's business strategy is to capitalize on and enhance the
consumer recognition of Brand Danskin(R) by continuing to develop new and
innovative activewear and legwear products that reflect a woman's active
lifestyle, and to offer those products to the consumer in traditional and
non-traditional channels of distribution.
The Company continues to pursue a "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, 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 super sheer products, value oriented
multipacks, plus size offerings, trouser socks and tights. Most recently, the
Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco
was granted a license for the manufacture and sale of legwear including sheer
hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen
Tracy(R) name. In a separate transaction, Pennaco also recently obtained an
exclusive license for the manufacture and sale of sheer hosiery and knee highs
under the Evan-Picone(R) name. (Refer to Note 7).
The Company's business strategy with respect to the Pennaco division is
to continue to develop market right products and programs, exploiting its
significant manufacturing expertise, and the diversity of its product offerings,
to achieve strategic alliances with its key retail partners to enable it to
maintain its industry position in a contracting sheer hosiery market.
The Company has developed, and intends to implement, a robust Internet
strategy in the near future. The strategy is predicated upon the strong
recognition of Brand Danskin(R) among women, and its lifestyle credibility among
women in the dance and physical activity arenas. According to research we have
obtained, this segment of the female population has the potential to capture the
focused attention of substantially more that half of all U.S. women. The Company
believes that Brand Danskin's(R) high recognition and credibility presents a
unique opportunity to create and implement a lifestyle Internet site focused on
content and contextual commerce relevant to dance and physical activity.
Phase I of Danskin.com would be the development of a content-rich
community site focused on dance, women's lifestyles, athletics and other
activities, offering subject specific information and support, chat rooms,
e-mail, and a full line of Danskin(R) products. The site will enable women to
access news and information on a variety of participatory activities - running,
walking, dance, yoga, hiking, spinning and all types of fitness - plus a
national calendar of events, the opportunity to register for events online and
may offer hotlinks to related sites.
The Company will also use the Danskin.com portal to expand the internet
presence of and access to the Danskin Women's Triathalon Series, the most
popular multi-sport series in the world exclusively for women. The six-city
series reaches over 140 million through media exposure, community involvement
and participant's inspiration stories. Danskin sponsors "grass roots' programs
in each market to enhance the experience for participants. The `Mentor Mentee'
program allows first-time entrants to receive support and advice from past
participants and through `Team Survivor,' Danskin provides free specialized
coaching and training for breast cancer survivors. Danskin.com will allow the
Company to expand the reach and marketing impact of the Triathlon.
19
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In addition to its own events, the Company would offer approved
sponsors, who share the Company's credibility in the women's active lifestyle
arena, the ability to post news of their events for women to participate in or
attend, providing schedules and on-line registration.
Phase I will also include the development of a business-to-business
site for dance and specialty stores seeking Danskin(R) product. The Company
recently introduced a new In-Stock program to address the needs of its retail
partners and the dance community. With this new program, Danskin guarantees
availability of key products on a yearly basis, with two-week turnaround for
shipment. The In-Stock program will enable Danskin to increase its offerings to
retailers and consumers who require products that can be re-ordered for
theatrical productions and team uniforms. The combination of the In-Stock
program and a business-to-business Internet site, Danskin anticipates
significantly increased business opportunity with its retail partners that
specialize in outfitting schools and dance troupes that rely on Danskin's
quality, fit and style.
Phase II of the Danskin.com strategy contemplates the creation of a
majority owned subsidiary to be called Danskin.com, Inc., which would host
vendor commerce offerings from a variety of branded vendors each selling its
product line on Danskin.com. Under this model Danskin.com would realize revenue
in a similar fashion as traditional franchisors, being paid "rent" for the
location, royalties for sales made under the Danskin.com mark, and a
contribution toward content production and marketing measured by a percent of
sales revenue generated at the Danskin.com site.
It is the Company's intention to finance Phase I of Danskin.com with
the proceeds of a second closing on the sale of the Series E Stock (Refer to
Note 4 of the Notes to Consolidated Condensed Financial Statements), following
`proof of concept' resulting from successful implementation of Phase I, to seek
strategic and/or venture capital partners/investors for Phase II of Danskin.com
and to finance the growth and marketing of Danskin.com beyond Phase I with the
proceeds of such investment. If successful through the first two phases of its
strategy, it is the Company's intention to undertake a public offering of
Danskin.com. Although the Company's Internet strategy has been received with
interest by several investment bankers and potential investors, there can be no
assurance that the Company or Danskin.com will successfully raise sufficient
funds to implement its strategy, or that if implemented, that its strategy will
be successful.
In addition to the foregoing, the Company is seeking to increase its
presence at retail by exploring various licensing opportunities for Brand
Danskin(R)as well as seeking to increase its presence in international markets.
Based on the foregoing and the previously discussed infusion of new
capital and new management's "right-sizing" actions, the Company believes it
will be able to implement its strategy.
There can be no assurances that the Company will be able to implement
these strategies, or that if implemented, that such strategies will be
successful. In addition, there can be no assurance that the Company would not be
adversely affected by adverse changes in general economic conditions, the
financial condition of the apparel industry or retail industry, or adverse
changes in retailer or consumer acceptance of the Company's products as a result
of fashion trends or otherwise. Moreover, the retail environment remains
intensely competitive and highly promotional and there can be no assurance that
the Company would not be adversely affected by pricing changes of the Company's
competitors.
CERTAIN STATEMENTS CONTAINED IN THE DISCUSSION BELOW, INCLUDING,
WITHOUT LIMITATION, STATEMENTS WITH RESPECT TO THE COMPANY'S ANTICIPATED RESULTS
OF OPERATIONS OR LEVEL OF BUSINESS FOR FISCAL YEAR 2000 OR ANY OTHER FUTURE
PERIOD, SHALL BE DEEMED FORWARD-LOOKING STATEMENTS WITHIN THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS A NUMBER
OF FACTORS AFFECTING THE COMPANY'S BUSINESS AND OPERATIONS COULD CAUSE ACTUAL
RESULTS TO DIFFER
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES AND CERTAIN ASSUMPTIONS, REFERRED TO BELOW, ARE
INDICATED BY WORDS OR PHRASES SUCH AS "ANTICIPATES," "ESTIMATES," "PROJECTS,"
"MANAGEMENT EXPECTS," "THE COMPANY BELIEVES," "IS OR REMAINS OPTIMISTIC," OR
"CURRENTLY ENVISIONS" AND SIMILAR WORDS OR PHRASES. THESE FACTORS INCLUDE,
AMONG OTHERS, CHANGES IN THE REGIONAL AND GLOBAL ECONOMIC CONDITIONS; RISKS
ASSOCIATED WITH CHANGES IN THE COMPETITIVE MARKETPLACE, INCLUDING THE LEVEL
OF CONSUMER CONFIDENCE AND SPENDING, AND THE FINANCIAL CONDITION OF THE
APPAREL INDUSTRY AND THE RETAIL INDUSTRY, AS WELL AS ADVERSE CHANGES IN
RETAILER OR CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS AS A RESULT OF
FASHION TRENDS OR OTHERWISE AND THE INTRODUCTION OF NEW PRODUCTS OR PRICING
CHANGES BY THE COMPANY'S COMPETITORS; RISKS ASSOCIATED WITH THE COMPANY'S
DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE DEPARTMENT STORE AND
SPORTING GOODS STORE CUSTOMERS, INCLUDING RISKS RELATED TO CUSTOMER
REQUIREMENTS FOR VENDOR MARGIN SUPPORT, AND THOSE RELATED TO EXTENDING CREDIT
TO CUSTOMERS; RISKS ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS AND OTHER
OWNERSHIP CHANGES IN THE RETAIL INDUSTRY; UNCERTAINTIES RELATING TO THE
COMPANY'S ABILITY TO IMPLEMENT ITS GROWTH STRATEGIES; AND RISKS ASSOCIATED
WITH CHANGES IN SOCIAL, POLITICAL, ECONOMIC AND OTHER CONDITIONS AFFECTING
FOREIGN SOURCING.
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DANSKIN, INC. AND SUBSIDIARIES
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
plus1/2%) 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 8 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.
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 15, 2000 By: /s/ CAROL J. HOCHMAN
-----------------------------
Carol J. Hochman
Chief Executive Officer
August 15, 2000 By: /s/ JOHN A. SARTO
-----------------------------
John A. Sarto
EVP, Chief Financial Officer
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