SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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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 September 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 NINE MONTH PERIODS
ENDED SEPTEMBER 25, 1999 and SEPTEMBER 30, 2000
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of December 25, 1999 and September 30, 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations
For the Fiscal Three and Nine Month Periods Ended
September 25, 1999 and September 30, 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For the Fiscal Nine Month Periods Ended
September 25, 1999 and September 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 24
2
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS December 25, 1999 September 30, 2000
----------------- ------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 663 $ 646
Accounts receivable, less allowance for doubtful accounts of
$1,087 at December 25, 1999 and $1,084 at September 30, 2000 9,448 13,866
Inventories 24,159 25,753
Prepaid expenses and other current assets 1,756 1,857
-------- --------
Total current assets 36,026 42,122
Property, plant and equipment - net of accumulated depreciation
and amortization of $9,366 at December 25, 1999 and $10,027 at
September 30, 2000 10,747 9,561
Other assets 1,115 1,000
-------- --------
Total assets $ 47,888 $ 52,683
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving line of credit $ 10,041 $ 22,024
Current portion of long-term debt 600
Accounts payable 7,316 7,373
Accrued expenses 10,434 8,607
-------- --------
Total current liabilities 27,791 38,604
-------- --------
Long-term debt, net of current maturities 11,500 10,850
Accrued dividends 65 1,091
Accrued retirement costs 2,658 2,658
-------- --------
Total long-term liabilities 14,223 14,599
-------- --------
Total liabilities 42,014 53,203
-------- --------
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 September 30, 2000, less 1,083 shares held by
subsidiary at December 25, 1999 and September 30, 2000 739 739
Additional paid-in capital 39,853 39,852
Notes receivable from stock sale (1,361) (1,361)
Accumulated deficit (45,532) (51,925)
Accumulated other comprehensive loss (3,035) (3,035)
-------- --------
Total Stockholders' Equity 5,874 (520)
======== ========
Total Liabilities and Stockholders' Equity $ 47,888 $ 52,683
======== ========
</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 Nine Months Ended
------------------------- ------------------------
September 25, 1999 September 30, 2000 September 25, 1999 September 30, 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 21,173 $ 21,392 $ 68,840 $ 62,894
Cost of goods sold 14,947 14,741 47,977 44,022
------------ ------------ ------------ ------------
Gross profit 6,226 6,651 20,863 18,872
Selling, general and administrative expenses 8,544 7,907 27,245 22,538
Non-recurring income (665)
Interest expense 985 908 2,374 2,346
------------ ------------ ------------ ------------
9,529 8,815 29,619 24,219
Loss before income tax provision (3,303) (2,164) (8,756) (5,347)
Provision for income taxes 45 135 20
------------ ------------ ------------ ------------
Net loss (3,348) (2,164) (8,891) (5,367)
Preferred dividends 271 342 812 1,026
------------ ------------ ------------ ------------
Net loss applicable to Common Stock ($3,619) ($2,506) ($9,703) ($6,393)
============ ============ ============ ============
Basic and diluted loss per share:
Net loss per share ($0.17) ($0.03) ($0.46) ($0.09)
============ ============ ============ ============
Weighted average number of common shares
outstanding basic and diluted 21,022,000 73,987,000 20,966,000 73,986,000
============ ============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Fiscal Nine Months Ended
September 25, 1999 September 30, 2000
------------------ ------------------
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($ 8,891) ($ 5,367)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,401 1,559
Stock grants issued 94 --
Provision for doubtful accounts receivable 173 30
Net loss on sale of property, plant and equipment 13 167
Net gain on sale of trademark -- (365)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 353 (4,448)
Decrease (increase) in inventories 1,605 (1,594)
Decrease (increase) in prepaid expenses and other assets 412 (148)
(Decrease) increase in accounts payable (1,202) 57
Decrease in accrued expenses (2,597) (2,015)
-------- --------
Net cash used in operating activities (8,639) (12,124)
-------- --------
Cash Flows From Investing Activites:
Capital expenditures (2,510) (483)
Proceeds from sale of trademark -- 600
Proceeds from sale of property, plant and equipment -- 108
-------- --------
Net cash used in investing activities (2,510) 225
-------- --------
Cash Flows From Financing Activities:
Net borrowings under revolving line of credit 12,110 11,983
Repayments of long-term debt (1,610) (50)
Proceeds from term loans 943 --
Expenses related to recapitalization -- (1)
Financing costs incurred (131) (50)
-------- --------
Net cash provided by financing activities 11,312 11,882
-------- --------
Net increase in Cash and Cash Equivalents 163 (17)
Cash and Cash Equivalents, Beginning of Period 546 663
-------- --------
Cash and Cash Equivalents, End of period $ 709 $ 646
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 2,288 $ 2,163
Income taxes paid 94 19
</TABLE>
Non-Cash Activities
The Company issued a stock grant of 100,000 shares valued at $.9375 per
share to the CFO in January 1999.
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
the close of the transaction. (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 nine months ended
September 30, 2000 as compared to the prior year fiscal nine months ended
September 25, 1999. At September 30, 2000 availability under the Company's
Revolving Credit Facility was approximately $2,100. Pursuant to certain
amendments to the Loan and Security Agreement executed in November 2000,
the Lender has provided the Company with additional borrowing capacity of
varying amounts through December 31, 2001, based on the Company's
forecasted monthly business plans through fiscal year 2001, to a maximum
of $2,750 (the "Overadvance"). (Refer to Note 3.) The adequacy of the
Overadvance to fund the Company's operations is contingent on the Company
meeting its business plan through December 2001. Failure of the Company to
meet its business plan could adversely affect the Company's liquidity as
well as its ability to meet its debt covenants.
The Company is currently seeking to place the remaining $4,790 of
the convertible preferred stock referred to above on the same terms and
conditions as the December offering. 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").
6
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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 September 30,
2000, as well as its results of operations and its cash flows for the fiscal
three and nine month periods ended September 25, 1999 and September 30, 2000.
The fiscal nine months ended September 30, 2000 consisted of forty weeks and the
fiscal nine months ended September 25, 1999 consisted of thirty-nine 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.
INVENTORIES
Inventories are stated at the lower cost or market on a first-in,
first-out basis. Inventories consisted of the following:
December 25, September 30,
1999 2000
(Unaudited)
------------ -------------
Finished goods $13,978 $15,899
Raw materials 4,365 3,687
Work-in-process 5,339 5,248
Packaging materials 477 919
------- -------
$24,159 $25,753
======= =======
7
<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)
INCOME (LOSS) PER COMMON SHARE
For the nine months ended September 25, 1999 and September 30, 2000, basic
and diluted net loss per share was computed based on weighted average common and
common equivalent shares outstanding of 20,966,000 and 73,986,000, 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 September 30, 2000, the Company had the following common shares and common
share equivalents outstanding:
Common Shares 73,986,537
Preferred Stock 49,064,516
Warrants/Options 39,003,209
-----------
Total Shares and Share Equivalents Outstanding 162,054,262
===========
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 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. In addition, in connection with certain amendments to the Loan and
Security Agreement in August 2000, in the event the Company's undrawn
availability is less than $5,000 for any month through November 2001, the
Company is required to make a principal payment on the Term Loan Facility in the
amount of $50. The Company paid $50 for each of the three months during the
quarter ended September 30, 2000.
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 amended in November 2000 (the
"November Amendments") to stipulate that, among other things, (i) the Company
must maintain a tangible net worth of not less than a net deficit of $(4,800) as
of the end of August 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 any month of less than $0
after giving effect to the Overadvance referred to below. At September 30, 2000,
the Company's tangible net worth was approximately ($815). Availability at
September 30, 2000 was approximately $2,100. Pursuant to the November
Amendments, the Lender has provided the Company with additional borrowing
capacity of varying amounts through December 31, 2001, based on the Company's
forecasted monthly business plans through fiscal year 2001, to a maximum of
$2,750 (the "Overadvance"). The maximum borrowings under the Revolving Credit
Facility were $22,100 during the fiscal nine months ended September 30, 2000.
8
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. BANK FINANCING (CONTINUED)
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 (1/2%) percent and is payable monthly. Interest may
also accrue, at the election of the Company, 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 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.
9
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES (CONTINUED)
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 nine months ended September 30, 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 manufacture, assemblage, sale, marketing and
distribution, advertising and promotion of legwear in the United States and
Canada. Ridgeview, Inc. previously held the license.
10
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. NEW LICENSES (CONTINUED)
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.
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, were resolved through arbitration. The results of such
arbitration were not material to the Company's financial condition, results of
operations, liquidity, or business.
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 segment.
11
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. SEGMENT DISCLOSURE (CONTINUED)
For the fiscal nine months ended September 30, 2000, Danskin was allocated
$2,500 and Pennaco was allocated $1,276. For the fiscal nine months ended
September 25, 1999, Danskin was allocated $2,892 and Pennaco was allocated
$1,478. The Company does not allocate interest expense to the divisions.
Financial information by segment for the fiscal nine-month periods
ended September 30, 2000 and September 25, 1999 is summarized below:
DANSKIN PENNACO TOTAL
September 25, 1999
Net Revenues $ 48,221 $ 20,619 $ 68,840
Operating Loss (4,124) (2,258) (6,382)
September 30, 2000
Net Revenues $ 44,032 $ 18,862 $ 62,894
Operating Loss (2,177) (1,489) (3,666)
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.
12
<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. These actions resulted in improved financial results during the fiscal
nine months ended September 30, 2000 as compared to the prior year fiscal nine
months ended September 25, 1999. At September 30, 2000, availability under the
Company's Revolving Credit Facility was approximately $2,100. Pursuant to
certain amendments to the Company's Loan and Security Agreement, as discussed
below, the Company has additional borrowing capacity of varying amounts through
December 31, 2001, based on the Company's forcasted monthly business plans
through fiscal year 2001, to a maximum of $2,750. The adequacy of the
overadvance to fund the Company's operations is contingent on the Company
meeting its business plan through December 2001. Failure of the Company to meet
its business plan could adversely affect the Company's liquidity as well as its
ability to meet its debt covenants.
The fiscal nine months ended September 30, 2000 consisted of forty weeks
and the fiscal nine months ended September 25, 1999 consisted of thirty-nine
weeks. The fiscal three months ended September 30, 2000 and September 25, 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.
13
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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)
RESULTS OF OPERATIONS
COMPARISON OF THE FISCAL THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000
WITH THE FISCAL THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 25, 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 $21,392 for the fiscal three months ended
September 30, 2000, an increase of $219, or 1.0% from the prior year fiscal
three months ended September 25, 1999. Net revenues for the nine months ended
September 30, 2000 amounted to $62,894 a decrease of $5,946 or 8.6% from the
prior year nine months ended September 25, 1999. Danskin Activewear net
revenues, which include the Company's retail operations, amounted to $14,233 for
the fiscal three months ended September 25, 2000, a decrease of $1,516 or 9.6%,
from $15,749 in the prior year fiscal three months ended September 25, 1999.
Activewear revenues amounted to $44,032 for the nine months ended September 25,
2000, a decrease of $4,189 or 8.7%, from $48,221 in the prior year nine month
period. Revenues for the fiscal three and nine month period ended September 30,
2000 decreased primarily due to lower volumes in the discontinued packables line
and private label businesses, 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 $4,157 for the fiscal
three-month period ended September 30, 2000, compared to $5,038 for the prior
year fiscal period, and were $10,670 for the nine month period ended September
30, 2000 compared to $12,601 for the same prior year period. Comparable retail
store sales increased 0.5% for the three months ended September 30, 2000 and
declined 1.0% for the nine months ended September 30, 2000. The overall
year-to-date 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, 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, as of September 30,
2000, the Company has twelve fewer stores than as of September 25, 1999, as the
Company has closed 13 stores and opened 1 new store over the past year.
14
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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)
Pennaco legwear revenues amounted to $7,159 for the fiscal three months
ended September 30, 2000, an increase of $1,735 or 32.0% from the prior year
fiscal three month period. Revenues amounted to $18,862 for the nine months
ended September 30, 2000, a decline of $1,757 or 8.5%, from the nine month
period ended September 25, 1999. The fiscal three month revenue increase over
the prior fiscal three month period is primarily attributable to the incremental
sales generated from the Ellen Tracy(R) and Evan Picone(R) brands, as discussed
below, since May 2000. These increases were partially offset by lower sales in
Round the Clock(R) and the Givenchy(R) brands, as well as, lower levels of
closeouts and irregulars compared to the three month period ended September 25,
1999. The decline in legwear revenues for the nine month period ended September
30, 2000 versus the nine month period ended September 25, 1999 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 2Value Pack Program,
reduced sales in 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 during the fiscal nine month period ended
September 25, 1999 and generated pipeline orders of $1,600, which were not
duplicated in the fiscal nine month period ended September 30, 2000. These sales
decreases were partially offset by sales of $3,818 and $2,712 of Evan Picone(R)
and of Ellen Tracy(R) products in the fiscal nine month and three month periods
ended September 30, 2000, respectively.
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 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 $15,000 on an annualized basis. Sales of product under these
licenses began during the second fiscal quarter 2000. Total sales for the
Evan-Picone(R) and the Ellen Tracy(R) labels for the nine period ended September
30, 2000 were $3,818.
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.
15
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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)
GROSS PROFIT:
Gross profit increased by $425 to $6,651 for the fiscal three months ended
September 30, 2000 compared to $6,226 for the fiscal third quarter ended
September 25, 1999. Gross profit decreased by $1,991, or 9.5%, to $18,872 for
the nine months ended September 30, 2000 from $20,863 for the nine months ended
September 30, 1999. Gross profit, as a percentage of net revenues, increased to
31.1% in the fiscal three month period ended September 30, 2000 from 29.4% for
the fiscal three months ended September 25, 1999. For the fiscal nine month
period ending September 30, 2000, gross profit decreased slightly to 30.0%
compared to 30.3% for the nine month period ended September 25, 1999. Despite
improvements made in margins, the margins for the fiscal three and nine month
period ended September 30, 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 35.8% for the fiscal three months ended September 30, 2000 from 33.7% for the
fiscal three months ended September 25, 1999, and decreased to 33.0% for the
nine months ended September 30, 2000 from 33.8% for the nine months ended
September 25, 1999. The fiscal three month improvement in margin is mainly due
to an improved mix of high margin Danskin brand sales and retail store sales
versus the discontinued packables line and low margin private label programs.
The fiscal nine 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. The capital constraints experienced during fiscal 1999 resulted in an
increased cost of inventory and 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 September 30,
2000 was 56.2% compared to 51.2% for the fiscal three month period ended
September 25, 1999 and 54.9% for the nine months ended September 30, 2000 from
52.3% for the nine months ended September 25, 1999. The improvement is
principally attributable to better inventory controls and a mix of higher margin
product.
Pennaco legwear gross profit, as a percentage of net revenue, increased to
21.7% in the fiscal three months ended September 30, 2000 from 16.8% in the
prior fiscal three month period ended September 25, 1999 due primarily to
realization of higher margins in the Evan Picone(R) and Ellen Tracy(R) labels,
decreased customer markdown allowances, partially offset by lower margins for
Givenchy and private label business. Higher manufacturing cost per unit
attributable to lower production levels have generated lower margins for
Givenchy and private label programs. For the fiscal nine month period ended
September 30, 2000 gross profit was 23.1% compared to 22.2% in the prior fiscal
nine month period. The improved gross profit level is due principally to the
favorable margin impact from the Evan Picone(R) and Ellen Tracy(R) labels, price
increases for the Round the Clock(R) brand, partially offset by higher
manufacturing costs per unit attributable to lower production levels. 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(R) and Ellen Tracy(R) 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.
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)
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 has also streamlined retail operations to
reduce operating costs.
Selling, general and administrative expenses, which include retail store
operating costs including rents, decreased $637, or 7.5%, to $7,907 or 37.0% of
net revenues, in the fiscal three months ended September 30, 2000, from
$8,544, or 40.4% of net revenues for the fiscal three months ended September 25,
1999. For the fiscal nine month period ended September 30, 2000, selling,
general and administrative expenses were $22,538 a decrease of $4,707 or 17.3%
compared to $27,245 for the nine months ended September 25, 1999. Selling,
general and administrative expenses, as a percent of net revenues, was 35.8% for
the fiscal nine month period ended September 30, 2000 versus 39.6% for the
fiscal nine month period ended September 25, 1999. The significant decreases
were realized in sales promotion and advertising, reduced retail store expenses
due to closing and downsizing, selling expenses and administrative expenses.
Selling, general and administrative expenses, excluding retail store operations,
decreased $2,682, or 15.6%, to $14,560, or 27.7% of net revenues for the fiscal
nine months ended September 30, 2000, from $17,242 or 30.7% of net revenues for
the fiscal nine months ended September 25, 1999.
INTEREST EXPENSE:
Interest expense amounted to $908 for the fiscal three months ended
September 30, 2000 and $985 for the prior fiscal three month period ended
September 25, 1999. Interest expense for the fiscal nine month period ended
September 30, 2000 was $2,346 compared to $2,374 for the nine month period ended
September 25, 1999. The Company's effective interest rate was 11.4% and 10.8%
for the three months ended September 30, 2000 and September 25, 1999,
respectively, and 11.3% and 9.8% for the nine months ended September 30, 2000
and September 25, 1999, respectively.
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 nine months ended September 30, 2000 and September 25, 1999. The
Company's net deferred tax balance was $0 at both September 30, 2000 and
December 25, 1999.
NET LOSS:
As a result of the foregoing, the net loss was $2,506 for the fiscal three
months ended September 30, 2000, an improvement of $1,113 compared to the net
loss of $3,619 for the fiscal three months ended September 25, 1999. For the
nine months ended September 30, 2000, the net loss was $6,393, an improvement of
$3,310 compared to a net loss of $9,703 for the prior year fiscal period.
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)
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 $3,485 to $12,124 for fiscal
nine months ended September 30, 2000, from a use of cash in operations of $8,639
for the fiscal nine months ended September 25, 1999, principally attributable to
decreases in accrued expenses and increases in accounts receivable and
inventories (which included the purchase of Ellen Tracy(R) and Evan Picone(R)
inventory from Ridgeview, Inc.) and increased shelf stock to support the
Company's quick response programs. The maximum borrowings under the revolving
line of credit was $22,100 during the fiscal nine months ended September 30,
2000. Availability were $2,100 as of September 30, 2000.
Working capital was $3,518 at September 30, 2000 compared to $8,235 at
December 25, 1999. The change in working capital is primarily attributable to an
increase of $11,983 in the revolving line of credit to fund the net loss,
increases in inventory levels 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 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").
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)
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. In
addition, in connection with certain amendments to the Loan and Security
Agreement in August 2000, in the event the Company's undrawn availability is
less than $5,000 for any month through November 2001, the Company is required to
make a principal payment on the Term Loan Facility in the amount of $50. The
Company paid $50 for each of the three months during the quarter ended September
30, 2000. 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 Loan and Security Agreement was amended in November 2000 (the
"November Amendments") to stipulate that, among other things, (i) the Company
must maintain a tangible net worth of not less than a net deficit of $(4,800) as
of the end of August 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 any month of less
than $0 after taking into account the Overadvance discussed below. At September
30, 2000, the Company's tangible net worth was approximately ($815).
Availability at September 30, 2000 was approximately $2,100. Pursuant to the
November Amendments, the Lender has provided the Company with additional
borrowing capacity of varying amounts through December 31, 2001, based on the
Company's forecasted business plans through fiscal year 2001,
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)
to a maximum of $2,750 (the "Overadvance"). The maximum borrowings under the
Revolving Credit Facility was $22,100 during the fiscal nine months ended
September 30, 2000. The adequacy of the Overadvance to fund the Company's
operations is contingent upon the Company meeting its monthly business plan
through December 2001. Failure of the Company to meet its business plan could
adversely affect the Company's liquidity as well as its ability to meet its debt
covenants.
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 cash generated from operations, existing
credit lines, including the Overadvance as discussed previously, and 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.
20
<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 as discussed herein.
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, contingent on future
financing, 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 the Company has 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 community site 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.
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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)
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 Notes 1
and 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.
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.
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<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)
CERTAIN STATEMENTS CONTAINED IN THE DISCUSSION HEREIN, 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 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 HEREIN
, 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
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 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.
November 14, 2000 By: /s/ CAROL J. HOCHMAN
-------------------------------------
Carol J. Hochman
Chief Executive Officer
November 14, 2000 By: /s/ JOHN A. SARTO
-------------------------------------
John A. Sarto
EVP, Chief Financial Officer
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