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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 25, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
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 Identification No.)
incorporation or organization)
530 Seventh Avenue, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 764-4630
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share, and associated rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this Form 10-K [ ].
As of March 1, 2000, the aggregate market value of the Common Stock
held by non-affiliates of the registrant was $9,690,971. Such aggregate market
value was computed by reference to the closing price of the Common Stock as
quoted by the National Quotation Bureau on such date.
As of March 1, 2000, there were 73,984,795 shares of the registrant's
Common Stock outstanding, excluding 1,083 shares held by a subsidiary.
Unless the context indicates otherwise, the term "Company" refers to
Danskin, Inc. and, where appropriate, one or more of its subsidiaries.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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DANSKIN, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
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PART I
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. BUSINESS
During fiscal 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.
A number of positive steps have been taken by the Company. 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 operational issues. In this
regard, in December 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 (stock keeping units), emphasizing high quality businesses,
and instituting a replenishment and forecasting capability to improve
fulfillment and maximize revenue.
The Company incurred a net loss of $[20,986] for the fiscal year ended
December 25, 1999. Fiscal 1999 results were adversely impacted by non-cash
charges pertaining to issuance of warrants and employee stock grants amounting
to $2,489. Based on the aforementioned infusion of new capital, which resulted
in $10,000 in undrawn availability at close in December, 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 Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.)
The Company designs, manufactures and markets several leading brands of
women's activewear, dancewear and legwear. Danskin(R), Zen Sport from
Danskin(TM), and Round-the-Clock(R) are the Company's principal proprietary
brands. The Company also manufactures the Givenchy(R) women's legwear brand
pursuant to a license agreement. In addition to its branded merchandise, the
Company manufactures and markets private label merchandise, principally legwear,
for many major retailers, including most full line department stores. The
Company currently operates as two divisions: Danskin Division for activewear and
Pennaco for legwear.
Danskin(R) is a leading brand of women's activewear, legwear, and
dancewear in the United States, enjoying a brand awareness factor of over 80%
among American women. According to the Fairchild 100 Study, Danskin ranks 4th,
behind Nike, Reebok, and Adidas, in consumer perception for the Activewear
Category. The Company manufactures and sells activewear, dancewear and legwear
to girls and women under the Danskin(R) label and to large-size women under the
Danskin Plus(R) label. Although known for its design of seasonal fashion
offerings and its wide range of colors, currently approximately 77% of the
Danskin Division's net revenues are attributable to basic styles, with black
being the most popular color. The Company currently licenses the Danskin(R)
brand to manufacturers of women's underwear, children's socks and cycling wear.
The Danskin Division currently produces approximately 45% of its activewear
products at its plant in York, Pennsylvania and is one of the only major
suppliers of branded women's activewear with substantial domestic manufacturing
capacity. The Company believes that its domestic manufacturing allows it to
respond to customer orders quickly and also allows its designers to respond
quickly to market trends.
The Company's Danskin Division operates one full-priced store and 34
outlet stores in 19 different states. The Company's outlet stores, in addition
to offering in-line merchandise, provide a distribution channel for irregulars
and excess inventory.
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Pennaco hosiery is widely recognized for its quality, fit and
innovation. Pennaco is one of the oldest manufacturers of hosiery in the United
States and the second largest supplier of sheer hosiery to domestic, full line
department stores and apparel specialty stores, as well as being a leading
supplier of private label hosiery to these stores. The Company markets
Round-the-Clock(R), which has been in the market since 1919, as well as the
Givenchy(R) licensed brand of hosiery.
STRATEGY
The Company's market includes products intended for women's activewear,
dancewear and legwear. The Company has developed a diversified portfolio of
quality branded and private label products that can be offered to consumers at
varying price points through its various channels of distribution. The Company's
objectives are: (i) expand its portfolio of products in order to become a
complete activewear and legwear resource by capitalizing on the strong name
recognition of its proprietary and licensed brands, (ii) expand its distribution
channels both domestically and internationally, and (iii) reduce SKU's to
eliminate unprofitable products and focus the line for a more compelling
presentation to retailers and consumers. As previously mentioned, the Company
has substantially reduced SKUs heading into year 2000.
Key elements of the Company's strategy include the following:
EXPANSION OF DANSKIN(R) PRODUCT LINES
In 1999, the Company introduced a variety of new activewear products
and innovations, while continuing to drive the design and refinement of its
existing lines.
To round out the Danskin(R) product offerings, the Company introduced
Sports bras made from Supplex(R) Lycra(R) performance fabric with an innovative
power mesh lining. This unique lining is contour seamed for extra comfort and
support. The Sports bra line responds to the consumer's need for a performance
bra that provides flattering support for a wide variety of activities.
The Company believes that innovative product is the key to the success
and longevity of the Danskin(R) brand. The first company to bring Supplex(R)
Lycra(R) performance fabric to the market, Danskin has expanded its Supplex(R)
Lycra (R) fabric line by offering new fabric innovations. Supplex(R) Rib and
Heathered Supplex(R) are textured fabrics that combine style with technology,
while Woven Supplex(R) offers the benefit of Supplex(R) fabric in off the body
silhouettes.
The Company also continues to capitalize on the successful introduction
of Dry Zone(TM), a revolutionary new moisture management fabric designed to
regulate body temperature in multi-climate conditions. This fabric combines
technical innovation with comfort and style, offering the Danskin consumer an
alternative performance fabric.
To continue to move Brand Danskin(R) beyond its traditional stretch
bodywear platform, the Company introduced Zen Sport from Danskin(TM) in the fall
of 1999. The Zen Sport from Danskin(TM) collection strikes a balance between
active and casual wear, with apparel made from environmentally safe materials.
Zen Sport from Danskin(TM) responds to a woman's need for clothing that is
suited to low impact activities such as yoga, meditation and stretch exercises,
satisfying the need for comfort while reinventing the way we define workout
wear.
In addition, the Company has hired a new Vice President-General Manager
for Brand Danskin, and has undertaken steps to expand its specialty store
penetration and improve fulfillment of customer orders.
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INTERNATIONAL SALES EXPANSION
The Company believes that the Danskin(R) brand enjoys strong
recognition in many foreign markets, and that the Company has not taken full
advantage of this opportunity. As previously discussed, during 1999, capital
constraints severely impacted all aspects of the Company's businesses.
However, with new capital, the Company has targeted international markets
as a potentially significant source of growth in fiscal 2000 and beyond.
The Company has undertaken a review of each of its existing distributor
agreements, and has recently entered into distribution agreements for each of
Russia, Mexico and Greece. Export net sales over the past three full fiscal
years were $6,300 for Fiscal 1997, $5,900 for fiscal 1998 and $4,800 for
fiscal 1999.
LICENSING OF DANSKIN(R) NAME
The Company currently licenses the Danskin(R) brand to manufacturers of
women's and girls underwear, children's socks, girls sleepwear and women's
cycling wear. The Company believes that there is an opportunity to license the
Danskin(R) name for additional product categories, including such categories as
swimwear, body care products, eyewear, dance shoes and bags. The Company
believes that selective licensing enhances the value of its brands, by expanding
the opportunities for retail purchases of its brands, affording cross-marketing
and merchandising opportunities and providing additional product categories for
sale in Company-owned stores. The Company is presently in negotiations for the
license of children's sleepwear in the United States and dance shoes in Europe,
and is in discussions with a number of additional potential licensees for
various product categories.
STORE STRATEGY
Recognizing that the Company's retail stores provide a platform for
capitalizing on the strong brand awareness enjoyed by Danskin, provide a channel
of distribution where the Company can showcase its products, and act as a
laboratory for product innovation, the Company has taken steps to revitalize its
retail operations, including the hiring of a dedicated management team,
including a merchandiser, closing under-performing locations, downsizing certain
locations, remerchandising the stores, installing a point of sale system in all
locations to provide critical inventory and sales information and implementing
visual merchandising programs in all locations to achieve a consistent and
identifiable retail impression and presence.
OUTLET STORES. During 1999, capital constraints severely impacted the
retail operations of the Company. New management has taken steps to evaluate the
performance of its retail outlet locations and intends to limit the number of
new outlet stores it opens. The Company's efforts are designed to transform its
outlet stores to smaller, efficient specialty outlet stores, which represent the
overall Danskin(R) product line. In order to achieve this, the Company has
downsized certain locations, changed the stores' merchandise mix and fulfillment
practices to provide for the automatic replenishment of basic product as
determined by model stock levels, allowed for the purchase of in-line seasonal
merchandise, and has implemented focused store merchandising and imaging
programs that improve the stores' overall product presentation with a focus on
improved presentation of key items. This effort is supported by the hiring of
the division's first merchandisor during the fourth quarter of fiscal 1999.
FULL PRICE RETAIL STORES. The Company presently operates one full-price
retail store under the Danskin(R) name on Columbus Avenue in New York City.
During fiscal 1999, the Company closed its full-price stores in Santa Monica,
California and in the South Beach section of Miami, Florida. The Company also
determined not to proceed in the immediate future with its planned opening of a
full-price store in the SoHo section of New York City. The Company and the
landlord for the SoHo location entered into a mutual termination agreement with
respect to such location.
The Company continues to believe that the recognition of the Danskin(R)
brand, along with the brand's reputation for fit, comfort and durability provide
the Company with an opportunity to successfully open full price Danskin(R)
stores in freestanding metropolitan and upscale mall locations. Such stores
would offer the Danskin(R) consumer a wider assortment of Danskin(R) merchandise
by carrying an
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inventory representative of the entire Danskin line consisting of approximately
1,500 SKU's, contrasted with only approximately 150 SKU's maintained at any
one time by even the largest retailer of Danskin(R) products. In addition to
expanding a channel of distribution for the Company's products, the Company
believes that these stores are an effective form of consumer advertising and
help "showcase" the full assortment of its product offerings. While new
management believes that there are ample opportunities for selective national
expansion of its full price retail strategy, it is presently focusing on, and
has made substantial progress under its "right-sizing" initiatives, improving
the operations and performance of its current retail store base, developing a
formula which it can then successfully apply to additional store locations.
E-COMMERCE. The Company continues to pursue a number of stategies
for the marketing and distribution of its activewear and legwear products
over the Internet. The Company's ".com" strategy is discussed below. In
addition to its planned Internet activities, the Company has joined forces
with a number of e-commerce partners for the distribution of its legwear and
activewear products, and anticipates that such ventures will have a positive
effect on the Company's legwear revenues while providing critical exposure
for its proprietary and licensed brands. The Company believes that the
Internet will also provide it with a distribution channel that will allow it
to offer the full complement of its legwear and activewear product lines,
while reaching a broader audience than is presently available to it in any
existing channel of distribution.
ESTABLISHMENT OF PENNACO AS A COMPLETE LEGWEAR RESOURCE
Despite the aforementioned capital constraints encountered during 1999,
Pennaco continues to be the number two hosiery resource (behind Sara Lee
Corporation) in most domestic, full line department stores, and enjoys a
reputation for the fit and sheer quality of its products, private label
offerings, reliable shipping performance and brand diversity. The Company is
also a major supplier of private label sheer hosiery sold by these department
stores. Recently, the Company established an Internet strategy, selling to key,
activewear, e-commerce sites, such as, Lucy.com and Global Sports Interactive,
where Danskin was ranked as the #2 women's brand. With the benefit of the
capital infusion and with the focus on developing market right products and
programs, the Company has developed initiatives for each of its legwear brands
to take advantage of the opportunities for niche products and in growing
specialty and dot.com channels of distribution.
PRODUCTS
ACTIVEWEAR
The Company designs, manufactures and markets several leading brands of
women's and girl's activewear (including bodywear, cover-ups and outerwear),
performance legwear and dancewear under the Danskin(R), Danskin Girl(TM), and
Zen Sport from Danksin(TM) labels.
Danskin realizes approximately 77% of activewear revenues from basic
styles, with black being the single most popular color. Activewear products are
generally designed in four seasonal fashion groupings, with a monthly
introduction of new styles or colors. Under new management's "right-sizing"
initiatives, and in an effort to improve margins and minimize operating
complexity, the Company has made significant progress in eliminating low-volume
and unprofitable SKU's from its product offerings. The total number of SKU's for
activewear, per season, is approximately 5,600. Danskin(R) activewear products
sell at retail prices ranging from $8.50 to $84.00.
LEGWEAR
Pennaco is one of the oldest manufacturers of hosiery in the United
States and is the second largest supplier of women's sheer hosiery and legwear
to domestic, full line department stores and apparel specialty stores and the
major supplier of private label hosiery to these stores. Approximately 35% of
the Company's annual legwear revenues consist of sales of its private label
merchandise. Pennaco hosiery is widely recognized for its quality, fit and
innovation. Through its proprietary brand, Round-the-Clock(R), the Company was
the first manufacturer to introduce multiple sizes and colors in pantyhose, and
was a pioneer in the application of spandex (Lycra(R)) yarns to hosiery.
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The Company also manufactures and sells the Givenchy(R) licensed brand
of hosiery, which represented approximately 29% of legwear revenues for the
fiscal year ended December 25, 1999. Givenchy(R) has been a leading brand since
its introduction by Pennaco in 1979. Effective January 1, 1999, the Company
renewed the Givenchy(R) license agreement for an additional three years, subject
to renewal under certain circumstances. The Givenchy(R) license agreement covers
the United States, Canada and Mexico and expires on December 31, 2001.
Givenchy(R) sheer hosiery retails in a price range of $4.50 to $13.00.
Although the Company is required to maintain a high number of legwear
SKU's because of the complex packaging requirements of its private label
customers, it knits only 73 styles. Product is held in an undyed state and is
dyed, finished and packaged in accordance with forecasted demand. Over the past
year, the Company has aggressively reduced both the number of legwear styles and
SKU's it produces.
MARKET SEGMENTATION
ACTIVEWEAR
The Company sells its activewear products to approximately 3,033
accounts, representing over 5,000 stores. These products are targeted towards
different segments of the wholesale market. Danskin(R) and Danskin Plus(R)
(activewear for the large sized woman) products are marketed to major sporting
goods stores, such as The Sports Authority, Academy, Garts and Oshman's Sporting
Goods, full line department stores, including Saks, Dillard's, Nordstrom, Lord &
Taylor, Federated Department Stores (including Bloomingdale's, Bloomingdale's by
Mail and Macy's) and Belk Stores, and many smaller sporting goods and specialty
stores. The Company continues to re-evaluate its product offerings to gain
additional penetration in the activewear market in department stores.
LEGWEAR
The Company sells its legwear products to approximately 750 accounts,
representing over 2,000 stores. The customer base for its legwear consists
primarily of full line department stores and apparel specialty stores, including
Federated Department Stores (including Macy's and Bloomingdale's), May Co.
stores (including Kaufmans, Filenes, Hecht, Famous Barr, Robinson May, Foleys,
Meier and Frank and Lord & Taylor), Dillards, Dayton Hudson - Marshall Field's,
Nordstrom, Saks Fifth Avenue, and Talbot's (including its catalog).
The Company provides a diversity of legwear products to its customer
base at each price/quality level, and seeks market niches for product expansion.
Within the legwear market, the market is divided principally by retail price
points, with designer brands such as Givenchy(R) occupying the upper price point
positions with generally higher gross margins, non-designer brands, such as
Round-the-Clock(R), occupying the middle price point positions and private label
products at varied price points, depending upon the retailer's brand image.
STORE OPERATIONS
FULL PRICE RETAIL
The Company has operated a full price retail store under the Danskin(R)
name on Columbus Avenue in New York City since November 1994. The store covers
approximately 3,000 square feet and is designed exclusively for women, offering
a wide assortment of Danskin(R) products. The Company is presently undertaking a
refurbishment of its Columbus Avenue location, which it anticipates being
completed in the second quarter. The Company believes that the full price store
concept will be applicable in other major metropolitan areas and in selected
upscale mall locations in the United States. However, it is presently focusing
on improving the operations and performance of its current retail store base,
developing a formula, which it can then successfully apply to additional store
locations.
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OUTLETS
The Company currently operates 34 outlet stores located in 19 different
states, situated in areas where the Company believes they generally do not
compete with the Company's principal channels of distribution. They range in
size from approximately 1,800 to 8,000 square feet, with the average being
approximately 4,000 square feet. These stores traditionally have provided a
channel of distribution for closeout merchandise. The Company has taken steps
that have improved inventory turns and margins for its outlet stores. See
"--Strategy -- Store Strategy -- Outlet Stores."
OPERATIONS
ACTIVEWEAR
The Company manufactures over 45% of its activewear products at its
275,000 square foot plant in York, Pennsylvania and is one of the only major
suppliers of branded women's activewear with substantial domestic
manufacturing capacity. The Company believes that manufacturing domestically
allows it to respond to customer orders quickly and also allows its designers
to respond quickly to market trends, thus enabling the Company to defer
authorization of fabric cutting until product samples have been seen by
buyers. In addition, York is operating principally as a bottoms source, which
has longer, more efficient runs, and is the focal point for product
development. In order to complement the York plant, the Company has acquired
a sewing facility in Mexico, operating under NAFTA, that currently produces
activewear products with lower costs. This facility provides the activewear
plant with expansion opportunities, while retaining the quick response and
flexibility afforded by being a domestic manufacturer. In addition, as the
Company progresses in its strategy of diversification of its activewear
product offerings, it expects to source an increasing proportion of total
production through offshore contractors. To help ensure the success of this
effort, the Company has recently hired an executive, whose primary
responsibility is determining the most effective means and location for
producing the Company's activewear products. In addition, new management,
under its "right-sizing" initiatives, has made significant progress in
evaluating processes, plant layout, and reducing headcount, which will result
in efficiencies.
The York plant has a dyeing facility, which enables the Company to hold
basic garments in an undyed state and then to dye them when customer orders are
received, thereby minimizing inventory risk and inventory levels. Distribution
of activewear is made from the Company's distribution center in York,
Pennsylvania.
LEGWEAR
The Company manufactures its hosiery in its 281,000 square foot
facility in Grenada, Mississippi. The new management has also made progress in
increasing plant efficiency through its "right-sizing" efforts in Pennaco.
Specifically, significant headcount reductions have been instituted to date and
plant layout is in the process of being revamped. The plant operates over 412
high-speed knitting machines, including 42 newly acquired state of the art
machines, which enable the Company to be a market leader in innovation and
quality. The plant also has a state-of-the-art dyeing facility that has helped
make Pennaco a recognized leader in the industry for its fashion and color
offerings. Legwear distribution facilities are also located in Grenada,
Mississippi.
The Company continues to process a substantial and increasing portion
of its customer orders through EDI programs, which permit the electronic receipt
of purchase orders and, in some cases, the electronic transmission of invoices.
In addition, the Company has an established a "Quick Response Program" for
certain high volume styles, which has enhanced its EDI replenishment
capabilities and has enabled it to ship products within three to five days of
receiving an order.
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SALES
The Company's domestic sales force presently consists of approximately
17 sales people; 6 of whom are responsible for marketing the Company's
activewear product lines and 11 of whom are responsible for marketing the
Company's legwear product lines to department stores, apparel specialty stores,
sporting goods retailers and smaller specialty stores. The Company has an inside
Sales and Customer Service Departments that supplement area coverage and provide
assistance to accounts. The Company periodically reviews the structure of its
sales force and makes adjustments based on the Company's needs.
The activewear sales force is headed up by the Vice President, General
Manager of Brand Danskin(R). Reporting to the Vice President, General Manager
are three sales Vice Presidents. Each Vice President is responsible for a
distinct customer class of trade. Our major classes of trade distinctions are as
follows: Sporting Goods, Department Stores and Specialty Stores. The Company
employs a direct sales force responsible for the Sporting Goods and Department
Store classes of trade. The Specialty Store class of trade is handled by an
independent sales force. Currently, Danskin has contracts with eight independent
representatives, who are currently fielding sixteen field representatives. In
addition, Danskin employs a sales person solely responsible for our private
label and closeout businesses. Sales account executives are compensated on a
straight salary basis, and independent sales representatives are compensated on
a commission basis.
The Pennaco sales force is comprised of Company employees whose
responsibilities are structured around the Division's major accounts. To drive
the Division's revenue, the Company has, among other steps, recently adjusted
the compensation structure for the Pennaco sales force to be comprised of a
combination of base salary and commission.
The Company emphasizes its commitment to customer service through a
staff of approximately 50 area representatives, located throughout the country,
whose principal responsibility is field merchandising of legwear products in
department stores. These representatives are present in the stores during peak
consumer traffic periods; they merchandise the selling fixtures, instruct store
personnel about effective selling, conduct seminars, interact directly with
consumers and are available to support in-store events and promotions, all with
the goal of maximizing sales of the Company's products. To a lesser extent, they
also merchandise the Company's activewear products in department stores and
certain sporting goods stores.
Export sales are generally made to international distributors, with the
exception of Canada, where the Company utilizes independent sales
representatives to market Danskin(R) activewear directly. The Canadian sales
force is managed by a Company employee.
MARKETING
The overall marketing strategy for activewear is a two-tiered program
developed to satisfy the needs of the consumer while maximizing the presence and
support of the Danskin brand at retail. The strategy combines consumer trends
and purchasing habits with a grass roots marketing campaign grounded in
providing product information to the consumer.
Responding to the 1998 SGMA/Sports Apparel Monitor stating that 83% of
women purchase an individual item rather than a complete outfit, the Company
developed an item-driven merchandising strategy presented at retail in color
multipliers. Retailers who have embraced the new merchandising strategy, added
excitement and interest to their in-store presentation by offering key items in
a variety of colors. The Company is in the process of supplementing its efforts
with informational hang tags and signage. Due to this strategic repositioning,
the Company has experienced a number of success stories with recent increases at
The Sports Authority's and Nordstrom's, and new account openings with Kohl's and
Footlocker Canada.
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The Company responded to the movement towards low impact and meditative
activities by introducing Zen Sport by Danskin, a yoga-inspired collection of
active lifestyle apparel. The Company continues to experience ongoing success
with an expansion to all doors at Saks Fifth Avenue due to their strong
sell-throughs, and new account opening with Bloomingdales for Spring 2000.
The Company's marketing strategy for hosiery is predicated on
providing innovative products that respond to changing fashion and consumer
trends. Feminine and lingerie-inspired fashion trends caused the Company to
introduce Passion Privee, a collection of hosiery that indulges the senses
with beautiful legs and lace accents. Nordstrom is among the top retailers
who have experienced favorable sell-throughs. With the latest footwear trends
of strappy sandals, the Company responded with an introduction of an
innovative, patent-pending non-slip sole pantyhose under its
Round-The-Clock(R) label.
For both legwear and activewear, the Company continues to promote and
market its products through aggressive in-store promotions, co-op advertising,
consumer sampling opportunities, and publicity. In addition, the Company is
working closely with the stores in visual merchandising programs keyed to the
Company's vision of either a complete legwear resource or an active lifestyle
brand.
One of the Company's primary marketing vehicles for activewear is
its ownership and title sponsorship of the Danskin Women's Triathlon Series,
an annual seven city series distance triathlon competitions for female
amateur athletes. The Company uses the Series as a promotional event for both
retailers and consumers, offering seminars at retail stores for participants
prior to the race event in each location. The Company further evidences its
support of women's programs by donating a percentage of the triathlon entry
fee to the Susan G. Komen Breast Cancer Foundation.
SEASONALITY
The Company's business achieves seasonally higher financial performance
in its September fiscal quarter, principally as a result of "back-to-school"
purchases. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Seasonality."
SUPPLIERS
The Company's raw materials consist principally of piece goods and yarn
that are purchased by the Company from a number of domestic and foreign textile
mills and converters. The Company obtains Lycra(R) from DuPont. Although from
time to time there have been shortages of Lycra(R); such shortages have not
adversely affected the Company. The Company does not have long-term formal
arrangements with any of its suppliers. Due to capital constraints encountered
during 1999, the Company was unable to adequately satisfy its raw material
requirements. New management is in the process of negotiating with suppliers to
re-instate favorable credit terms which it has historically enjoyed. Based on
the capital infusion and progress made to date, the Company anticipates that it
will adequately be able to satisfy its ongoing raw material requirements.
TRADEMARKS
The Company owns and utilizes a variety of trademarks, the principal
ones being Danskin(R), Zen Sport from Danskin(TM), Danskin Girl(TM), Parklane(R)
and Round-the-Clock(R). The Danskin(R) trademark is owned by the Company
worldwide, except in Japan, and is registered with the United States Patent and
Trademark Office and in most other major jurisdictions of the world. In Japan,
the trademark is owned by the Company's former licensee, Goldwin, Inc.
Certain of the Company's other trademarks are registered with the
United States Patent and Trademark Office and in some foreign jurisdictions as
well. The Company regards its trademarks and other proprietary rights as
valuable assets and believes that they have significant value in the marketing
of its products. The Company actively protects its trademarks against
infringement.
10
<PAGE>
REGULATION
The Company is subject to various federal, state and local
environmental laws and regulations limiting the discharge, storage, handling and
disposal of a variety of substances, particularly the federal Water Pollution
Control Act, the Clean Air Act of 1970 (as amended in 1990), the Resource
Conservation and Recovery Act (including amendments relating to underground
tanks) and the federal "Superfund" program. The Company cannot with certainty
assess at this time the impact upon its operations or capital expenditure
requirements of future emission standards and enforcement practices under the
1990 amendments to the Clean Air Act.
In connection with the refinancing of its bank loan agreement, in the
fourth quarter of fiscal year ended December 27, 1997, the Company engaged an
independent environmental consulting firm to conduct assessments of
environmental conditions at the Company's manufacturing and distribution
facilities in York, Pennsylvania and Grenada, Mississippi. No material
environmental problems were discovered in these assessments.
The Company also is subject to federal, state and local laws and
regulations relating to workplace safety and worker health, including those
promulgated under the Occupational Safety and Health Act ("OSHA"). As part of
its OSHA compliance efforts, the Company requires all personnel working in high
noise areas and those working in certain areas with high concentrations of dust
to wear protective equipment.
The Company believes that it currently is in compliance in all material
respects with existing OSHA standards and environmental laws and regulations.
The Company does not believe that there is a substantial likelihood that further
OSHA or environmental compliance will require substantial expenditures or
materially affect its operations or competitive position.
EMPLOYEES
As of March 1, 2000, the Company employed approximately 1,071 persons,
of whom 635 were employed at Danskin, 399 were employed at Pennaco and the
remainder was employed at the Company's executive offices. At such date, 844 of
the Company's employees were paid on an hourly basis, and the remainders were
salaried employees. Although there have been attempts to organize certain of its
employees in the past, none are currently represented by a union, and employee
relations are generally considered to be good.
COMPETITION
The apparel industry is highly competitive. Many of the Company's
competitors are larger and have greater financial, distribution, marketing and
other resources, and better established brand names, than the Company. The
Danskin(R) brand competes with products sold by an array of smaller and larger
companies, including Nike, Reebok, Adidas, Fila, Champion, Authentic Fitness and
Weekend Exercise Company. Legwear products compete with products sold by a
number of other established manufacturers and marketers, the largest of which is
the Hanes division of Sara Lee Corporation, while other significant competitors
include Kayser-Roth Corp. and Ithaca Industries, Inc. The Company does not
market its legwear either in the mass-market channels of distribution or in food
or drug stores.
STATEMENTS CONTAINED HEREIN AND IN THE FUTURE FILINGS BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES,
AND IN ORAL STATEMENTS MADE BY OR WITH THE APPROVAL OF AUTHORIZED PERSONNEL THAT
RELATED TO THE COMPANY'S FUTURE PERFORMANCE, INCLUDING, WITHOUT LIMITATION,
STATEMENTS WITH RESPECT TO THE COMPANY'S ANTICIPATED RESULTS OF OPERATIONS OR
LEVEL OF BUSINESS FOR 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 BELOW, ARE INDICATED BY
WORDS OR
11
<PAGE>
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.
ITEM 2. PROPERTIES
The Company leases its principal executive offices and showroom located
at 530 Seventh Avenue in New York City. Such lease provides for an average
annual base rent of $736,000 and expires in December 2008.
The Danskin plant is located in York, Pennsylvania and contains office
space, inventory storage space and a shop area where a significant portion of
the Company's activewear products are manufactured. This facility is owned by
the Company. Danskin also leases a distribution facility in York, Pennsylvania.
Such lease provides for annual rent of $511,000 and expires in September 2000.
The Pennaco mill is located in Grenada, Mississippi and contains office
space and inventory storage space where substantially all the hosiery products
manufactured by the Company are produced. The Company leases this facility from
the city of Grenada for a nominal rent through the year 2065. The distribution
center is also leased from the City of Grenada for annual rent of $333,000,
under a lease that expires in December 2008.
The Company also has committed to lease space for 35 retail stores at
annual rents ranging from $34,000 to $343,000 under leases expiring during the
fiscal year ending 2000 through fiscal 2004. Nine outlet store leases expire in
2000. The Company continually reviews the operations and profitability of its
retail locations and will make lease renewal determinations based upon such
review. The Company may, based upon such review, attempt to negotiate additional
lease terminations.
The Company believes that its facilities provide adequate levels of
capacity for current levels of production as well as for reasonable levels of
additional growth. None of the Company's properties is leased from any
affiliated entity.
Substantially all of the Company's properties and other assets are
pledged to Century Business Credit Corporation (CBCC) to secure the Company's
obligations under the Loan and Security Agreement with CBCC. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and Note 12 in the Notes to
Consolidated Financial Statements.
ITEM 3. 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.
12
<PAGE>
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, in the aggregate, have a material
adverse impact on the financial condition, results of operations, liquidity or
business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 1999, shareholders holding a majority of the voting
stock of the Company, voted to amend the Company's Certificate of
Incorporation to increase the number of shares authorized thereunder to
250,000,000 shares.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Bid quotations for the Company's Common Stock may be obtained from the
National Quotation Bureau, and the Common Stock is traded in the
over-the-counter market. The following table presents the quarterly high and low
bid quotations during the last two fiscal years. Since June 1997, the Common
Stock has traded solely in the over-the-counter market. The quotations set forth
below, therefor, reflect the inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 26, 1998
Three-month period ended March $2.250 $0.480
Three-month period ended June 2.750 1.375
Three-month period ended September 2.125 1.000
Three-month period ended December 1.687 0.687
FISCAL YEAR ENDED DECEMBER 25, 1999
Three-month period ended March $1.310 $0.562
Three-month period ended June 1.250 0.625
Three-month period ended September 0.812 0.270
Three-month period ended December 1.062 0.240
</TABLE>
As of December 25, 1999, the number of stockholders of record of the
Company's Common Stock was approximately 200.
The Company has not declared any cash dividends with respect to the Common
Stock subsequent to the effective date of its initial public offering, August
19, 1992. The Company's Loan and Security Agreement with CBCC prohibits the
payment of dividends without the lender's consent.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Commencing with the nine months ended December 30, 1995, the Company
changed its fiscal year to the last Saturday in December. The following
selected consolidated operating data for the fiscal year ended March
1995, the fiscal nine months ended December 30, 1995, and the five fiscal
twelve months ended December 30, 1995, December 28, 1996, December 27,
1997 December 26, 1998, and December 25, 1999, and the financial
position for each of the periods then ending, have been derived from the
consolidated financial statements of the Company. The twelve month period
ended December 30, 1995 is herein referred to as the "Twelve Months 1995"
and the nine-month period ended December 30, 1995 is referred to as "Nine
Months 1995". The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements, including the
Notes thereto, of the Company, appearing elsewhere in this Annual Report
on Form 10-K.
15
<PAGE>
<TABLE>
<CAPTION>
FISCAL NINE
FISCAL YEAR MONTHS ENDED TWELVE
ENDED MARCH DECEMBER MONTHS ENDED
(in thousands, except per share amounts) ----------- ------------ ------------
1995 1995 1995
----------- ------------ ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues
Danskin $ 74,608 $ 56,732 $ 76,337
Pennaco 53,510 37,055 49,601
--------- --------- ---------
Total 128,118 93,787 125,938
Cost of goods sold
Danskin 45,979 35,028 47,244
Pennaco 41,367 27,153 36,874
--------- --------- ---------
Total 87,346 62,181 84,118
Gross profit
Danskin 28,629 21,704 29,093
Pennaco 12,143 9,902 12,727
--------- --------- ---------
40,772 31,606 41,820
Selling, general and administrative expenses 44,077 29,851 41,895
Non-recurring charges (1) 4,143 1,100 3,598
Interest expense 3,928 3,699 4,943
--------- --------- ---------
(Loss) before (benefit from) provision for
income taxes, cumulative effect of a
change in accounting method
and extraordinary item (11,376) (3,044) (8,616)
(Benefit from) provision for income taxes (2) (1,719) 178 (20)
--------- --------- ---------
(Loss) before cumulative effect of a change in
accounting method and extraordinary item (9,657) (3,222) (8,596)
Extraordinary item (3) -- -- --
--------- --------- ---------
Net (loss) income (9,657) (3,222) (8,596)
========= ========= =========
Preferred Stock dividend -- -- --
--------- --------- ---------
Losses applicable to Common Stock ($ 9,657) ($ 3,222) ($ 8,596)
========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net loss per share before extraordinary item (4) ($ 1.51) ($ 0.50) ($ 1.34)
Net income per share for extraordinary item (3) -- -- --
Net loss per share after extraordinary item (1.51) (0.50) (1.34)
========= ========= =========
Weighted average number of common
shares outstanding 6,396 6,415 6,415
========= ========= =========
Working Capital $ 17,618 $ 25,656 $ 25,656
Total assets 77,741 67,742 67,742
Long-term debt (excludes current obligations) 24,399 36,666 36,666
Total debt (6) 45,725 41,101 41,101
Total stockholders' equity (deficit) 5,195 1,519 1,519
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER
------------------------------------------------------
1996 1997 1998 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues
Danskin $ 80,608 $ 81,158 $ 73,468 $ 60,643
Pennaco 47,537 40,828 35,273 27,327
--------- --------- --------- ---------
Total 128,145 40,828 108,741 87,970
Cost of goods sold
Danskin 49,056 52,314 44,805 43,902
Pennaco 34,554 29,508 23,623 21,387
--------- --------- --------- ---------
Total 83,610 81,822 68,428 65,289
Gross profit
Danskin 31,552 28,844 28,663 16,741
Pennaco 12,983 11,320 11,650 5,940
--------- --------- --------- ---------
44,535 40,164 40,313 22,681
Selling, general and administrative expenses 42,026 40,174 42,112 36,312
Non-recurring charges (1) -- 300 2,419 795
Interest expense 4,721 4,278 2,513 5,462
--------- --------- --------- ---------
(Loss) before (benefit from) provision for
income taxes, cumulative effect of a
change in accounting method
and extraordinary item (2,212) (4,588) (6,731) (19,888)
(Benefit from) provision for income taxes (2) 2,777 245 190 20
--------- --------- --------- ---------
(Loss) before cumulative effect of a change in
accounting method and extraordinary item (4,989) (4,833) (6,921) (19,908)
Extraordinary item (3) -- 5,245 -- --
--------- --------- --------- ---------
Net (loss) income (4,989) 412 (6,921) (19,908)
========= ========= ========= =========
Preferred Stock dividend 202 425 1,114 1,078
--------- --------- --------- ---------
Losses applicable to Common Stock ($ 5,191) ($ 13) ($ 8,035) ($ 20,986)
========= ========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net loss per share before extraordinary item (4) ($ 0.80) ($ 0.66) ($ 0.50) ($ 0.89)
Net income per share for extraordinary item (3) -- $ 0.66 -- --
Net loss per share after extraordinary item (0.80) (0.00) (0.50) (0.89)
========= ========= ========= =========
Weighted average number of common
shares outstanding 6,513 7,942 16,168 23,493
========= ========= ========= =========
Working Capital $ 24,559 $ 19,070 $ 6,545 $ 8,235
Total assets 66,940 55,022 57,706 47,888
Long-term debt (excludes current obligations) 31,589 9,667 6,674 11,500
Total debt (5) 41,558 21,539 24,703 21,541
Total stockholders' equity (deficit) 801 1,681 (3,900) 5,874
</TABLE>
17
<PAGE>
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE NUMBERS)
(1) Non-recurring charges for the fiscal 1999 were $795. These charges
consisted of an additional provision for remaining lease obligations for
the former corporate office at 111 West 40th Street in New York City, and
establishment of a reserve against an outstanding amount owed the Company
for the sale of a trademark. Non-recurring charges of $2,419 for the
fiscal year ended December 26, 1998 consisted of costs related to certain
executive employee severance costs, provision established for the
remaining net lease obligation for the former corporate office on 111 W.
40th Street in New York City and write-offs of non-operating assets,
offset by the recognition of the Sea & Ski Receivable and the gain on the
sale of the Reading, PA outlet store. Non-recurring charges of $300 for
the fiscal year ended December 27, 1997 consisted of certain executive
employee severance costs. Non-recurring charges were $1,100 for the nine
months ended December 30, 1995 and consisted of losses on certain license
arrangements and certain executive employee severance costs.
Non-recurring charges were $4,143 (net of $700 in related party interest
income) for the fiscal year ended March 25, 1995. The non-recurring
charges included costs associated with the potential acquisition of
affiliated entities, a reserve for additional amounts due from Esmark,
Inc. ("Esmark"), the Company's former parent, an accrual for certain
executive compensation costs and costs associated with certain
litigation, and the write-off of certain non-operating long-term assets.
(2) Fiscal year ended December 28, 1996 included a $4,500 increase in the
deferred tax valuation allowance, which reduced the net deferred tax
asset to zero.
(3) The recognized gain of $5,245 represents the difference between (a) the
recorded value of the Company's obligations under the term loan portion
of its secured credit facility with First Union and (b) the fair value of
the securities issued to Danskin Investors in connection with such
refinancing and a recapitalization, less the write-off of deferred
finance charges relating to the First Union Loan Agreement and the costs
incurred in connection with such recapitalization and refinancing. This
gain was applied against the Company's net operating loss carry forward,
available after offset may be subject to limitation under the change of
control provisions of the Internal Revenue Code. See "Risk Factors --
"Management's Discussion and Analysis of Financial Condition and Results
of Operations", and Notes 12 and 18 in the Notes to Consolidated
Financial Statements.
(4) In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings Per
Share," which requires presentation of basic earnings per share (EPS) and
diluted earnings per share and requires the restatement of EPS for all
prior periods reported. The Company has adopted this statement as of
December 27, 1997.
In September 1997, (i) the Board of Directors declared a stock dividend
on the Common Stock equal to one share of Common Stock for each 11.99
shares of Common Stock held of record as of the close of business on
September 22, 1997 (these shares were retroactively applied in the
accompanying financial statements for the earnings per share calculation)
and (ii) the Board of Directors redeemed the rights issued pursuant to
the Rights Agreement, dated as of June 5, 1996, between the Company and
First Union, as rights agent, for $.01 per right in cash to holders of
Common Stock held of record as of the close of business on September 22,
1997. Also in September 1997, 1,630,000 Stock Options were granted to
certain key personnel, 1,050,000 of which were exercisable immediately.
(5) In December 1999, in connection with the Company's issuance of Series
E Stock, and the elimination of the Additional Collateral Amount and
the Overadvance Amount, the Loan and Security Agreement was amended
(the "December Amendment") 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 revolving credit
obligations totaled $10,041 as of December 25, 1999. See Note 12 to
Consolidated Financial Statements.
Effective October 8, 1997, the Company entered into the Loan and Security
Agreement with CBCC, which provides for loans to the Company maturing on
December 8, 2004, thereby refinancing all amounts owing First Union.
Proceeds of the Loan and Security Agreement were used to pay all of the
Company's indebtedness to First Union and to establish working capital
lines of credit. In connection with the closing of the Loan and Security
Agreement, the Company paid CBCC a facility fee equal to $300. At the
closing, two terms loans were advanced to the Company in accordance with
the terms of the Term Loan Facility in the aggregate principal amount of
$10,000. See Note 12 in the Notes to Consolidated Financial Statements.
Bank debt obligations totaled $45,725 as of March 25, 1995, with
revolving credit obligations totaling $31,325 and term obligations
totaling $14,400. Effective June 22, 1995, the Company amended the First
Union Loan Agreement, pursuant to which an additional $8,000 in term loan
refinancing was obtained reducing revolving credit obligations to a
balance of $22,000 and increasing term loan obligations to $22,000. In
addition, the maturity date of all obligations to First Union was
extended from August 1996 to March 2002. Total First Union debt
obligations as of December 28, 1996 and December 30, 1995 amounted to
$41,558 and $36,101, respectively, including revolving credit balances of
$20,000 and $14,100, respectively, and term loan obligations of $21,600
and $22,000, respectively. Total debt obligations as of December 28, 1996
included $5,000 of convertible subordinated debentures. Total revolving
credit availability in excess of utilization under the terms
18
<PAGE>
of the First Union Loan Agreement amounted to $3,500 and $8,500 as of
December 28, 1996 and December 30, 1995, respectively, and $2,000 at
March 25, 1995. See Note 12 in the Notes to Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of Danskin, Inc. (the
"Company") results of operations, capital resources and liquidity which should
be read in conjunction with the Consolidated Financial Statements and notes
thereto included elsewhere in this report. The operating results of the periods
presented were not significantly affected by inflation. The consolidated
financial statements include the accounts of the Company and its two divisions,
Danskin and Pennaco.
RECENT EVENTS
During fiscal 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.
A number of positive steps have been taken by the Company. 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.
The Company incurred a net loss of $20,986 for the fiscal year ended December
25, 1999. Fiscal 1999 results were adversely impacted by non-cash charges
pertaining to warrants issued and employee stock grants amounting to $2,489.
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, although new management has taken positive
steps in improving business processes, which it believes will improve ongoing
profitability for the Company, the capital constraints and the timing of the
arrival of new management occurred too late in the year to significantly
positively impact 1999.
FISCAL YEAR END
The Company's fiscal year ends on the last Saturday in December.
19
<PAGE>
RESULTS OF OPERATIONS
(COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 25, 1999 WITH THE FISCAL YEAR
ENDED DECEMBER 26, 1998) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET REVENUES
Net revenues for the fiscal year ended 1999 amounted to $87,970, a decrease of
$20,771, or 19.1% from $108,741 for the fiscal year ended 1998. Danskin
activewear net revenues, which includes the Company's retail operations,
decreased $12,825, to $60,643, or 17.5%, in fiscal 1999 from $73,468 in fiscal
1998. Revenues were adversely impacted by capital insufficiency during the
entire year, and, in particular, severe capital constraints during the second
half of the year, which, among other things, adversely impacted the Company's
ability to purchase piece goods. In addition, in June 1999, the then Chief
Executive Officer was terminated and was replaced by Carol Hochman. Capital
constraints impacted all aspects of Danskin's business and, in particular,
Danskin's ability to fulfill customers' orders. This resulted 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 a
poor fulfillment record. Revenues were also negatively impacted by the absence
of a focused and integrated merchandising and selling strategy. Retail revenues
declined as a result of inadequate and/or mismatched inventory, poor reporting
systems and the absence of an integrated and focused retail strategy.
During the second half of fiscal 1999, new management addressed the foregoing
issues and in December, 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 which resulted in $10,000 in
undrawn availability at close) (See Liquidity and Capital Resources.) Several
new members of management were recruited to the Company, including a new
Executive Vice President and Chief Financial Officer, Vice President and
General Manager, Brand Danskin, Vice President and General Manager, Pennaco,
Vice President, Manufacturing and Production, Vice President Sporting Goods,
Brand Danskin, and a Director of Planning and Forecasting.
The Company's marketing of activewear wholesale products continues to address
the trend toward casual wear and emphasizes fashion and dancewear product
offerings complementing the Company's basic replenishment products. The Company
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 which, in many cases, were reduced by
the decline in fulfillment rate in fiscal 1999, and to seek out new customers
and new channels of distribution.
In addition to the recent management additions, senior management has undertaken
a "right-sizing" reorganization of the Company's personnel and manufacturing
infrastructure, eliminated substantial operating costs and changed its approach
to merchandising and selling, eliminating unprofitable SKU's, emphasizing high
quality businesses, and instituting a replenishment and forecasting capability
to maximize the replenishment business. As a further step, and to drive the
volume in the specialty store class of trade, the Company recently converted to
an independent commissioned sales representative strategy for such channel, and
has contracted with independent, fully commissioned sales representatives and
agents. The Company believes that this strategy will allow it to more
effectively service and grow its specialty store account base resulting in
increased revenues.
Sales in the Company's retail stores were $16,900 for fiscal 1999, a decrease of
$3,307 or 16.4% from 1998 sales of $20,207. Comparable retail store sales
declined 17.5% for 1999. The decline in retail store sales is attributable to
the aforementioned capital constraints encountered during the year, inadequate
retail strategy, inventory and reporting systems. 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 underperforming locations.
20
<PAGE>
Pennaco legwear revenues amounted to $27,327 for fiscal 1999, a decline of
$7,946, or 22.5%, from the prior fiscal year sales of $35,273. The decline in
legwear revenues versus the prior fiscal year reflects the negative impact of
the previously discussed capital constraints, an ongoing weakness in the
sheer hosiery market, and in particular, sales of basic "everyday" sheer
hosiery, as well as the expiration of the Anne Klein(R) legwear license at
December 31, 1998, which contributed $1,636 in net revenues for 1998, and the
adverse impact of going from single pack to TakeTwo value pack for
Round-the-Clock(R). In addition, Pennaco did not hire a Vice President,
General Manager, until midyear, fiscal 1999. 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 was $22,681 or 25.8% of net revenues for fiscal 1999, a decline of
$17,632 from the fiscal 1998 gross profit of $40,313 or 37.1% of net revenues.
However, as a result of the capital constraints, margins were largely impacted
by poor credit terms from vendors, incomplete vendor shipments, inefficient
production starts and stops, as well as the resultant, aforementioned, poor
fulfillment record. New management has instituted improved business processes
and accountability Company-wide.
Danskin activewear gross profit, as a percentage of net revenues, decreased to
27.6% for fiscal 1999 versus 39.0% of net revenues for fiscal 1998. The fiscal
year decrease was largely a result of capital constraints and the absence of a
focused and integrated merchandising and sales strategy, which contributed to a
sub-optimum sales mix, increased sales of closeout inventory, unfavorable
manufacturing variances, higher product development and design costs, as well as
markdowns taken in the Company's retail/outlet stores to stimulate sales and
reduce inventory and increased reserves for obsolescence. In addition, as a
result of the capital constraints, margins were negatively impacted by poor
credit terms from vendors, incomplete vendor shipments, inefficient production
stops and starts and dilution on customer accounts, principally due to late
shipments, short shipments and cancellations. The Company has initiated a
program to phase out unprofitable styles within its existing lines.
Pennaco legwear gross profit, as a percentage of net revenue, decreased to 21.7%
in fiscal 1999 from 33.0% for prior year 1998. The lower gross profit level is
driven, principally, by the higher sales mix of lower margin Round-the-Clock (R)
Take Two value pack product and legwear continuity programs, coupled with the
decline in revenues impacting higher margin products and certain operating
inefficiencies due to capital inadequacy and the related lower production
volume. Customer markdown allowances for the liquidation of the
Round-the-Clock(R) single packs in the stores contributed to the reduction in
Pennaco margins. In addition to the aforementioned product development programs,
the Company has also initiated a program to phase out unprofitable styles within
its existing lines 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 ADMINISTRATION 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 in the process
of streamlining retail operations to reduce operating costs. Selling, general
and administrative expenses, which include retail store operating costs
including rents, decreased $5,800, or 13.8 %, to
21
<PAGE>
$36,312, or 41.3% of net revenues in fiscal 1999 compared to $42,112 or 38.7% of
net revenues for fiscal 1998. Selling, general and administration expenses,
excluding retail store operating costs, decreased $8,450, or 27.2%, to $22,617,
or 31.8% of net revenues, for fiscal 1999, from $31,067, or 35.1% of net
revenues, for fiscal 1998. The decrease in expenses for 1999 was principally a
result of a reduction in advertising, selling and administrative functions.
INTEREST EXPENSE
Interest expense amounted to $5,462 for fiscal 1999 and $2,513 for fiscal 1998.
Interest expense for fiscal 1999 includes the amortization of warrants issued in
connection with the bridge financing amounting to $2,055. Refer to Note 17.
The Company's effective interest rate, excluding the warrants, was 10.4% for
fiscal 1999 versus 9.8% for fiscal 1998. The increase in interest is due to
higher levels of debt during fiscal 1999 and higher interest rates due to the
delay in the capital financing.
NON-RECURRING CHARGES
Non-recurring charges for the fiscal 1999 were $795. These charges consisted of
an additional provision for remaining lease obligations for the former corporate
office at 111 West 40th Street in New York City, and establishment of a reserve
against an outstanding amount owed the Company for the sale of a trademark.
INCOME TAX PROVISION
The Company's income tax provision (benefit) rates differed from the Federal
statutory rates due to the net loss in 1999 and 1998 and reflects a provision
for minimum state taxes. No benefit has been recorded for generated net
operating losses during 1999 and 1998. The Company's net deferred tax balance
was $0 at both fiscal 1999 and 1998.
NET (LOSS)
As a result of the foregoing, the net loss was $19,908 for fiscal 1999; a
decline of $12,987 compared to the net loss of $6,921 for fiscal 1998. Fiscal
1999 results were adversely impacted by non-cash charges pertaining to
warrants issued and employee stock grants amounting to $2,489.
(COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 26, 1998 WITH THE FISCAL YEAR
ENDED DECEMBER 27, 1997)
NET REVENUES
Net revenues for the fiscal year ended 1998 amounted to $108,741, a decrease of
$13,245, or 10.9%, from $121,986 for the fiscal year ended 1997.
Danskin activewear net revenues, which includes the Company's retail operations,
decreased $7,690, to $73,468, or 9.5%, in fiscal 1998 from $81,158 in fiscal
1997. The Company's wholesale business decreased $8,014 or 13.1% over fiscal
1997. The major decreases for net revenues were principally attributable to a
decline in the Company's Private Label business, the discontinuance of the
licensed SHAPE(R) activewear product line, and the elimination of the Dance
France(R) business. Comparable retail store sales increased 4.6%. In its retail
stores, the Company continued its efforts to improve store product offerings,
renegotiate existing leases and streamline store operations. Marketing of
activewear wholesale products continues to address the trends towards casual
wear, and to emphasize fashion and dancewear product offerings.
Pennaco legwear net revenues declined $5,555, or 13.6%, to $35,273 for fiscal
1998 from $40,828 for fiscal 1997. The decline in legwear revenues reflects a
confirmed weak sheer hosiery market in the department store class of trade,
targeted SKU reductions designed to eliminate low margin and slow
22
<PAGE>
turning styles, and to a lesser extent, a decline in the Company's private label
business and the termination of the Anne Klein (R) legwear license.
GROSS PROFIT
Gross profit increased $149, or .4%, to $40,313 for the twelve months ended
December 26, 1998 from the same prior year period. Gross profit as a percentage
of net revenues increased to 37.1% for the twelve months ended December 26, 1998
from 32.9% for the same prior year period.
Gross margins for activewear were 39.0% for fiscal 1998 as compared to 35.6% for
the same prior year period. This increase was primarily attributable to improved
mix of sales of Danskin branded product versus lower margin private label
merchandise, selective price increases, lower manufacturing costs and an
improved mix of product in the Company's outlet stores.
Pennaco legwear gross profit improved to 33.0% for fiscal 1998 as compared to
27.7% for the same prior year period. This increase of 5.3% was mainly due to
realization of selected price increases, reduction of costs in the manufacturing
facility and the elimination of certain lower margin programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal 1998, selling, general and administrative expenses, which include
retail store operating costs, increased $1,938, or 4.8%, to $42,112, or 38.7% of
net revenues, compared to $40,174, or 32.9% of net revenues for fiscal 1997.
Selling, general and administrative expenses, excluding retail store operating
costs, increased $2,845, or 10.1% to $31,067, or 35.1% of net revenues, for
fiscal 1998, from $28,222, or 27.6% of net revenues, for the same prior year
period. The increase for fiscal 1998 was principally a result of increased
advertising for the Danskin brand and the new Packables business, higher
compensation expense, including one-time charges of $1,000 relating to changes
in senior management, and professional services, offset, in part, by reduced
selling and marketing expenses.
INTEREST EXPENSE
Interest expense amounted to $2,513 for fiscal 1998 and $4,278 for fiscal 1997,
due primarily to a lower effective interest rate and lower levels of debt. The
Company's effective interest rate was 9.8% and 11.1% for 1998 and fiscal 1997,
respectively. The effective interest rate decrease over the prior year is
primarily due to lower amortization of deferred financing costs and lower
interest rates associated with the refinancing with Century Business Credit
Corporation.
NON-RECURRING CHARGES
Non-recurring charges were $2,419 for the fiscal year ended December 26, 1998.
These charges consisted of severance costs related to the resignation and
termination of former executives of the Company, a provision established for the
remaining net lease obligation for the former corporate office at 111 W. 40th
Street in New York City and write-offs of non-operating assets, offset by the
reversal of a reserve against an outstanding amount owed the Company for the
sale of a trademark, and the gain on the sale of the Reading, PA outlet store.
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 and the effect of
state taxes for both fiscal 1998 and fiscal 1997. No benefit has been recorded
for operating losses generated in 1998 and 1997. Fiscal 1997 was also affected
by the Alternative Minimum Tax. The Company's net deferred tax balance was $0 at
both December 26, 1998 and December 27, 1997.
23
<PAGE>
NET (LOSS)
As a result of the foregoing, and as a result of the extraordinary gain in
fiscal 1997 discussed below, the net loss was $6,921 for the fiscal 1998, a
decline of $7,333 from the $412 net income for fiscal 1997.
SEASONALITY
In the fiscal years ended December 1999 and December 1998, the Spring and Fall
season, shipped in the first and third quarter, respectively, continued to
generally represent the best volume period for activewear and legwear.
The following table summarizes the net revenues, operating (loss) income before
non-recurring charges, interest and taxes and net (loss) income of the Company
before preferred stock dividends, for each of the fiscal March, June, September
and December quarters in the last two fiscal years:
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTERS ENDED
(DOLLARS IN THOUSANDS)
MARCH JUNE SEPTEMBER DECEMBER
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
1999
Net Revenues $ 24,141 $ 23,526 $ 21,173 $ 19,130
Income (loss) before
non-recurring charges, interest and taxes (2,181) (1,885) (2,318) (7,247)
Net (loss) (2,870) (2,675) (3,348) (11,015)(1)
1998
Net Revenues $ 28,251 $ 26,444 $ 27,959 $ 26,087
(Loss) Income before
non-recurring charges, interest and taxes (174) 334 (674) (1,285)
Net (loss) (1,757) (319) (1,862) (2,983)
</TABLE>
(1) The loss for the fiscal quarter ended December 25, 1999 was adversely
impacted by non-cash charges pertaining to warrants issued and employee stock
grants amounting to $2,395.
INFLATION
The Company does not believe that the relatively moderate levels of inflation
which have been experienced in the United States, Canada and Western Europe in
recent years have had a significant effect on its net revenues.
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.
24
<PAGE>
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 $6,841 to $8,314 for fiscal 1999,
from a use of cash in operations of $1,473 in fiscal 1998, principally
attributable to the increased operating loss in fiscal 1999, decreases in
accounts payable and accrued expenses, offset by decreases in inventories,
accounts receivable and prepaid expenses.
Working capital was $8,235 at December 25, 1999 compared to $6,545 at
December 26, 1998. The increase in working capital is primarily attributable
to $15,210 in proceeds from the sale of preferred stock in the fourth quarter
and an increase of $4,040 in the term loan portion of the Company's secured
credit facility. (Refer to Notes 12 and 13 of the Consolidated Financial
Statements for a discussion of the sale of preferred stock and the
refinancing of the term loan potion of the Company's secured credit
agreement). Excluding the $19,250 generated by such activities, net
borrowings from the revolving line of credit were $13,262, which were
primarily used to fund operations, investments in capital expenditures and
payment of term loans, financing costs and recapitalization expenses.
As reflected in the Consolidated Financial Statements, the Company has incurred
losses for each of the periods presented. However, the Company (i) recently
completed an equity private placement offering of $15,210 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.
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
(the "December Amendment") 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,
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
The December Amendment also imposed an additional Event of Default which
stipulates that 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
(i) less than $3,000 and shall not have increased the undrawn availability above
$3,000 within thirty (30) days of such occurrence, or (ii) less than $2,000.
Availability at December 25, 1999 was approximately $9,200.
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 worth covenant is
calculated by subtracting from total assets all intangible assets and total
liabilities. The tangible net worth covenant stipulates that the Company must
maintain a tangible net worth of not less than $2,000 as of the end of December
1999, and as of the end of each month thereafter. At December 25, 1999, the
Company's tangible net worth was approximately $5,600.
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%).
In connection with the execution of the December Amendment, the Company paid
CBCC a $75 amendment fee and issued 550,000 warrants to CBCC to purchase an
aggregate of 550,000 shares of Common Stock of the Company at $.27 per share.
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") issued by the Company pursuant to the terms of a
certain Securities Purchase Agreement, dated September 22, 1997 (the "1997
Securities Purchase Agreement"), entered into by the Company and Danskin
Investors, LLC ("Danskin Investors"), and in connection with the refinancing
of the Company's obligations to First Union National Bank, (Refer to Note 12
to the Consolidated Financial Statements), 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.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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
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. The Company's
business strategy with respect to the Pennaco division is 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.
Internet Strategy- 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-Registered Trademark(registered)
among women, and its lifestyle credibility among women in the dance and
physical activity arenas. The Company believes that Brand Danskin-Registered
Trademark(registered)'s 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. The
strategy contemplates the creation of a majority owned subsidiary to be
called Danskin.com, which would host vendor commerce offerings from a variety
of branded vendors each selling its product line on Danskin.com on an
exclusive basis. 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. The strategy also
contemplates that the start-up phase of Danskin.com will be financed by the
Company.
It is the company's intention to seek strategic and/or venture capital
partners/investors shortly after the start-up phase, and to finance growth
and marketing of Danskin.com with the proceeds of such investment in
Danskin.com. If successful through the foregoing first two phases of the
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, which resulted in $10,000 in undrawn availability at close, and new
management's "right-sizing" actions, the Company believes it will be able to
implement its strategy.
27
<PAGE>
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 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 SOUCRING.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required pursuant to Item 8
begin on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the
Company's directors and executive officers:
<TABLE>
<CAPTION>
Year Term as Director
Name Age Position Expires
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Donald Schupak (1)(3)(4).............. 56 Chairman of the Board 1998
Carol J. Hochman (1).................. 49 President, Chief Executive Officer 1999
and Director
John A. Sarto......................... 48 Executive Vice President and
Chief Financial Officer
Margaret B. Pritchard................. 37 Secretary, General Counsel and
Senior Vice President, Business
Development
Andrew J. Astrachan (1)(4)............ 40 Director 1997
David Chu............................. 45 Director 1999
Michael Hsieh (2)(3).................. 41 Director 1998
James P. Jalil (1)(2)................. 51 Director 1997
Nina McLemore (4)..................... 54 Director 1999
Henry T. Mortimer, Jr.(2)............. 57 Director 1997
Larry B. Shelton (2).................. 65 Director 1998
</TABLE>
- --------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Member of the Nominating Committee.
The business experience, principal occupations and employment, as well
as the periods of service, of each of the directors and executive officers of
the Company during at least the last five years, are set forth below.
29
<PAGE>
DIRECTORS
CLASS II (TERMS TO EXPIRE IN 1997)
Directors in Class II will continue to serve as directors until they are
proposed for reelection at the next annual meeting of stockholders.
ANDREW J. ASTRACHAN, age 40, has been a director of the Company since
September 1997. He is the President and founder of Onyx Partners, Inc., an
investment bank. From 1985 to 1990, Mr. Astrachan was employed at Drexel,
Burnham & Lambert. Prior to that, he was a Vice President at Salomon Brothers
Inc. from 1981 to 1985.
JAMES P. JALIL, age 51, has been a director of the Company since
September 1997. He has been a senior corporate partner with the law firm of
Shustak Jalil & Heller since 1992. Prior to that, Mr. Jalil was a corporate
partner at Lane & Mittendorf from 1982 to 1992.
HENRY T. MORTIMER, JR., age 57, has been a director of the Company since
August 1992. He has been the Managing Director of Financial Security Assurance,
Inc., a financial guarantee insurance company. Previously, he was a Senior Vice
President of E.F. Hutton & Co., Inc. in its investment banking department. In
addition, he is currently a director of Tipiak, S.A., a French food
manufacturing company and a director of Financial Security Assurance (UK)
Limited.
CLASS III (TERMS TO EXPIRE IN 1998)
DONALD SCHUPAK, age 56, has been a director of the Company since October
16, 1996 and became the Chairman of the Board of Directors on March 27, 1997. He
is the Chairman of the Board of Directors of Learn2.com, a public Internet
company that develops and markets e-learning products and services. He is also
the Chief Executive Officer of the Schupak Group, an organization that provides
strategic planning, management consulting and corporate finance services to a
variety of clients. Mr. Schupak founded the Schupak Group in 1980. From
September 1988 through September 1990, he served as Chairman, Chief Executive
Officer and President of Horn & Hardart Company N/K/A Hanover Direct. From 1971
through 1980, Mr. Schupak was actively engaged in the practice of law with
Schupak, Rosenfeld & Fischbein, a New York City law firm founded by Mr. Schupak.
LARRY B. SHELTON, age 65, has been a director of the Company since
October 1994. He is the President of Shelton & Associates, a management
consulting firm specializing in the apparel industry. In 1991, he retired as
President and Chief Operating Officer of Genesco, Inc., an apparel manufacturing
company, having served in that organization for over 35 years in various
management capacities. He has long been active in the apparel industry, having
served as Chairman of the Board of The American Apparel Manufacturing
Association and as a board member of The Clothing Manufacturers Association.
MICHAEL HSIEH, age 41, has been the President of LF International, Inc.,
a venture capital company, since 1986 and a director of Li & Fung (BVI) Ltd.
since 1992. He was previously with R.H. Chapell Co., a San Francisco venture
capital firm, and with Merrill Lynch Capital Markets Group.
CLASS I (TERMS TO EXPIRE IN 1999)
CAROL J. HOCHMAN, age 49, became the Chief Executive Officer of the
Company in June 1999. Prior to joining the Company, Ms. Hochman served as the
Group President for Accessories at Liz Claiborne, Inc. Prior to Liz Claiborne,
Ms. Hochman spent six years in the International Division of May Department
Stores.
30
<PAGE>
DAVID CHU, age 45, is the President, Chief Executive Officer and chief
designer of Nautica International, Inc., an apparel licensed product company he
founded in 1983. He is a member of the Counsel of Fashion Designers of America
(CFDA) and a director of the Educational Foundation for the Fashion Industries
(an advisory body to the Fashion Institute of Technology). In addition, Mr. Chu
is a trustee of The Asia Society and The China Institute.
NINA MCLEMORE, age 54, has been a director of the Company since
September 1997 and became the Vice Chairperson of the Board on December 10,
1997. She is a Senior Managing Partner of Regent Capital Partners, L.P., a
private investment firm. She previously served as a member of the Executive
Committee of Liz Claiborne, Inc. from 1989 to 1993 and was responsible for
acquisitions, start-ups and new business opportunities in 1993. Prior to that,
Ms. McLemore was President of Liz Claiborne Accessories from 1980 to 1992. She
serves as a Director for Santa Monica Amusements, Inc., Talton Holdings, Inc.,
and Evercom, Inc.
OFFICERS
JOHN A. SARTO has been the Executive Vice President and Chief Financial
Officer of the Company since January 2000, having previously acted as an
internal financial consultant since July 1999. Prior to joining Danskin, Mr.
Sarto was Senior Engagement Manager for the Schupak Group, the merchant banking
and consulting firm headed by the Company's Chairman, Donald Schupak from
December 1998. From 1994 to 1997, Mr. Sarto was the Chief Financial Officer at
SLM International, Inc. where he was brought in to help restructure the troubled
Canadian sporting goods/toy company. From 1988 to 1993, Mr. Sarto was the Chief
Financial Officer at Brook Group Ltd., a multi-billion dollar, diversified
holding company. Prior to that, Mr. Sarto was Vice President, Corporate
Controller of Mastercard International from 1987 to 1988. Mr. Sarto is a
Certified Public Accountant.
MARGARET B. PRITCHARD has been the Senior Vice President, Business
Development of the Company since June 1, 1997. Ms. Pritchard has also been the
General Counsel of the Company since October 1, 1997, having previously served
as the Company's Assistant General Counsel since June 1, 1997. She was appointed
Secretary of the Company by the Board of Directors on December 10, 1997. Prior
to joining the Company, Ms. Pritchard was an associate with the law firm of
Fried, Frank, Harris, Shriver & Jacobson in New York.
Under Section 16(a) of the Securities and Exchange Act of 1934, the
Company's directors, executive officers and holders of more than 10% of the
Common Stock are required to report their initial ownership of the Company's
equity securities and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established, and the Company is required to disclose any failure to file
by these dates with respect to Fiscal 1999. Based on written representations
of its directors and executive officers and copies of reports they have filed
with the Securities and Exchange Commission, the only late reports filed for
Fiscal 1999 were Forms 3, 4, and 5 for directors and executives relating to
stock option grants.
BOARD OF DIRECTORS AND BOARD COMMITTEES
The Board of Directors formally met four times in 1999. In addition, the
Board of Directors, and individual members of the Board, met numerous times
throughout fiscal 1999 to monitor the Company's activities and operations, in
light of the management changes and capital constraints experienced by the
Company.
The Board of Directors has an Executive Committee, an Audit Committee, a
Compensation Committee and a Nominating Committee.
The Executive Committee is generally empowered to act on behalf of the
Board of Directors when the Board is not convened in meeting. The members of the
Executive Committee consist of Donald Schupak, Carol J. Hochman, James P. Jalil
and Andrew J. Astrachan. The Executive Committee held
31
<PAGE>
numerous meetings during fiscal 1999, in light of the management changes and
capital constraints experienced by the Company.
The Audit Committee is generally responsible for recommending the
appointment of the Company's independent auditors and overseeing the accounting
and internal audit functions of the Company, including reviewing, with the
Company's independent auditors, (i) the general scope of their audit services
and the annual results of their audit, (ii) the reports and recommendations made
to the Audit Committee by the independent auditors, and (iii) the Company's
internal control structure. The members of the Audit Committee consist of Larry
B. Shelton, Henry T. Mortimer, Michael Hsieh and James P. Jalil. The Audit
Committee held two meetings during 1999.
The Compensation Committee is generally responsible for reviewing and
making recommendations to the Board of Directors concerning remuneration of the
Company's key employees, including executive officers. The Compensation
Committee also grants stock options pursuant to the Stock Option Plan. The
members of the Compensation Committee consist of Donald Schupak and Michael
Hsieh. The Compensation Committee did not meet during 1999.
The Nominating Committee is generally responsible for recommending
appropriate individuals to serve as members of the Board of Directors. The
members of the Nominating Committee consist of Donald Schupak, Andrew J.
Astrachan and Nina McLemore. The Nominating Committee did not meet during 1999.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
earned during the last three fiscal years by the Company's Chief Executive
Officer and each other executive officer of the Company (each, a "named
executive officer"). The Company had five executive officers during the fiscal
year ended December 25,1999 ("fiscal 1999"). In June 1999, Ms. Volker was
replaced as Chief Executive Officer. Ms. Hobbs resigned her position as SVP
Marketing effective June 1999. Ms. Landman resigned her position as President,
Pennaco Division effective July 1999.
32
<PAGE>
<TABLE>
<CAPTION>
Other Annual Stock All Other
Fiscal Salary Bonus Compensation Options Compensation
Name and Principal Position Year ($) ($) ($) (#) ($)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carol J. Hochman (1) 1999 237,020 86,500 -- 5,040,000 232,452 (2)
President,
Chief Executive Officer
M. Catherine Volker (3) 1999 173,077 -- -- -- 2,500 (4)
Chief Executive Officer 1998 310,896 337,500 (5) 2,550,000 448,000 (4)
Beverly Eichel (6) 1999 - 187,596 (7)
Chief Financial Officer 1998 250,000 -- -- 60,156 (7)
1997 250,000 37,500 -- 680,000 4,026
Debbie Hobbs (8) 1999 99,231 20,000 -- -- 1,570 (9)
1998 133,659 30,000 -- 225,000 2,550 (9)
Denise Landman (10) 1999 127,770 -- 652 (11)
1998 127,723 50,000 225,000 676 (11)
Margaret B. Pritchard 1999 203,077 -- -- 550,000 2,036 (12)
1998 184,615 75,000 -- 125,000 1,173 (12)
1997 127,692 -- -- 100,000 -
Mary Ann Domuracki (13) 1999 -- -- -- -- 92,984 (14)
1998 80,769 -- -- -- 336,439 (14)
1997 350,000 37,500 -- 1,020,000 4,436 (14)
</TABLE>
--------------------
(1) Ms. Hochman became Chief Executive Officer of the Company effective June
1999.
(2) Amounts shown as "Other Compensation" for Ms. Hochman include (i) $230,000
atrributable to a stock grant, and (ii) a $2,452 contribution by the
Company in 1999 as the 25% matching contribution for the first 4% of
earnings contributed by Ms. Hochman to the Company's Savings Plan, a tax
qualified plan covering full-time salaried employees over the age of 21
(the "Savings Plan"). The Savings Plan allows participants to elect to make
contributions, on a pre-tax basis, from 1% to 15% of their compensation,
subject to applicable Internal Revenue Code limitations, and the Company is
required to make a matching contribution equal to 25% of the participant's
contributions up to 4% of such compensation. A participant becomes 33%
vested in the matching contributions after three years of service, 66 2/3%
after four years of service and 100% after five years of service.
(3) Ms. Volker was replaced as Chief Executive Officer in June 1999.
(4) Amounts shown as "Other Compensation" for Ms. Volker include (i) $445,000
attributable to a stock grant, and (ii) a $2,500 contribution by the
Company in each of 1999 and 1998.
(5) Amounts shown as "Bonus" include a sign-on bonus in the amount of $150,000
which was paid to Ms. Volker in connection with the execution of her
employment agreement, and $187,500 which was paid to Ms. Volker in respect
of fiscal 1998 in accordance with the terms of such agreement.
(6) Ms. Eichel resigned her position as Chief Financial Officer of the Company
effective September 1998.
(7) Amounts shown as "Other Compensation" for Ms. Eichel include (x) in 1999,
(i) $187,500 in severance in accodance with the terms of her employment
agrement, and (ii) a $96 matching contribution to the Savings Plan; (y) in
1998, (i) a $2,500 matching contribution to the Savings Plan, (ii) vacation
and deferred compensation totaling $54,647, (iii) a premium paid by the
Company in respect of a life insurance policy for the benefit of Ms. Eichel
the amount of $1,145, and (iv) a premium paid by the Compant with respect
to a long term disability policy for the benefit of Ms. Eichel in the
amount of $1,864; and (z) in 1997, (i) premiums paid by the Company in
respect of a life insurance policy for the benefit of Ms. Eichel in the
amount of $1,060, (ii) a $2,375 matching contribution to theSavings Plan,
and (iii) a discretionary profit sharing contribution of $591 made by the
Company in shares of Common Stock (314 shares).
(8) Ms. Hobbs resigned her position as Senior Vice President Marketing
effective June, 1999.
(9) Amounts shown as "Other Compensation" for Ms. Hobbs include, (x) for 1999,
a $1,570 matching contribution to the Saving Plan, and (y) for 1998, (i)
$670 attributable to COBRA payments made by the Company for the benefit of
Ms. Hobbs, and (ii) $1,880 matching contribution to the Savings Plan.
(10) Ms. Landman resigned her position as President, Pennaco Division effective
July, 1999.
(11) Amounts shown as other compensation for Ms. Landman include a $652 and a
$676 matching contribution to the Savings Plan in 1999 and 1998,
respectively.
(12) Amounts shown as other compensation for Ms. Pritchard include a $2,036 and
a $1,173 matching contribution to the Savings Plan in 1999 and 1998,
respectively.
(13) Ms. Domuracki was replaced as Chief Executive Officer of the Company on
March 2, 1998.
(14) Amounts shown as "Other Compensation" for Ms. Domuracki include (x) for
1999, (i) $91,539 in severance in accordance with the terms of her
employment agreement; and (ii) a $1,445 matching contribution to the
Savings Plan; (y) in 1998, (i) $269,231 in severance in accordance with the
terms of her employment agreement;(ii) vacation and deferred compensation
totaling $89,840, (iii) premiums paid by the Company in respect of life and
long term disability policies for the benefit of Ms. Domuracki in the
amount of $1,650, and $5,718, respectively, and (v) a $2,500 matching
contribution to the Savings Plan; and (z) in 1997,(I) premiums paid by the
Company in respect of life insurance policies for the benefit of Ms.
Domuracki in the amount of $1,470, (ii) a $2,375 matching contribution to
the Savings Plan, and (iii) a discretionary profit sharing contribution of
$591 made by the Company in shares of Common Stock (314 shares).
33
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table shows information for Fiscal Year 1999 respecting
stock option grants to each named executive officer.
<TABLE>
<CAPTION>
Individual Grants Grant Date Values
------------------------------------------------ ------------------------------------
Number of Securities Percent of Total Options
Underlying Options Granted to Employees in Exercise Expiration Present Value
Name Granted Fiscal Year Price Date Grant Date (2)
- ---------------------- --------------------- ------------------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
M. Catherine Volker 0 0% N/A N/A --
Beverly Eichel 0 0% N/A N/A --
Debbie Hobbs 0 0% N/A N/A --
Denise Landman 0 0% N/A N/A --
Margaret B. Pritchard 550,000 (1) 5% $0.27 12/8/09 $77,000
Mary Ann Domuracki 0 0% N/A N/A --
</TABLE>
(1) Pursuant to the terms of a Stock Option Agreement between the Company and
Ms. Pritchard, dated December 8, 1999, Ms. Pritchard was granted 550,000 options
to purchase Common Stock at a per share price of $.27, 50,000 of which were
exercisable immediately. The options are, under certain circumstances,
exercisable through December 8, 2009.
(2) The present values on the grant date are calculated under the Black-Scholes
valuation model. The Black- Scholes valuation model is a mathematical formula
used to value options, and considers historical stock price volatility, the
exercise period of the option and interest rates. The Black-Scholes valuation
model was chosen in accordance with Securities and Exchange Commission rules;
however, this model should not be construed as an endorsement of its accuracy at
valuing options. The real value of the options in this table depends upon the
actual performance of the Common Stock during the applicable period.
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
The following table shows information for fiscal 1999 respecting stock
options for each named executive officer.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-
SHARES ACQUIRED VALUE UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
NAME ON EXERCISE REALIZED AT FISCAL YEAR END (1) FISCAL YEAR END (2)($)
- ------------------------ --------------- -------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
M. Catherine Volker --- $0 0 $0
Beverly Eichel --- $0 120000 $0
Debbie Hobbs --- $0 0 $0
Denise Landman --- $0 0 $0
Margaret B. Pritchard --- $0 775,000 $22,000
Mary Ann Domuracki --- $0 0 $0
</TABLE>
(1) 267,916 options are presently exercisable.
34
<PAGE>
(2) The value of an unexercised option at December 25, 1999 is determined by
subtracting the exercise price of such option from the market value of a share
of Common Stock on December 25, 1999, as published by the National Quotation
Bureau.
EMPLOYMENT AGREEMENTS
CAROL J. HOCHMAN. Effective June, 1999, the Company reached an
agreement with Caol J Hochman concerning the terms and conditions of her
employment by the Company as President and Chief Executive Officer of the
Company through June 30, 2004, subject to earlier termination for death,
resignation or removal. Ms. Hochman's annual base salary is $425,000. She is
entitled to receive an annual performance bonus of up to 100% of her base
salary as determined by the Board of Directors, in its sole discretion, based
on such quantitative and qualitative initiatives as indentified by the Board
upon consultation with Ms. Hochman and upon approval of the budget for the
respective fiscal year. The performance bonus for fiscal year ended December
25, 1999 was $86,500. Under Ms. Hochman's agreement, if she resigns her
employment for `good reason' (as defined), if the Company terminates her
employment without `cause' (as defined), or she resigns by reason of a
`change of control' (as defined), the Company will be obligated to continue
her base salary payments for a period of (y) two years if such termination
occurs within the first 24 months of employment, or (z) one year if such
termination occurs after the first 24 months of employment, and she will be
entitled to a performance bonus in an amount equal to, depending upon the
circumstance of her resignation or termination, fifty percent (50%) to
one-hundred percent (100%) of the previous year's performance bonus.
In accordance with the terms of her employment agreement, effective
December 8, 1999, Ms. Hochman received a grant of one million shares of Common
Stock of the Company.
In addition, on December 8, 1999, and in accordance with the terms of
her employment arrangement, Ms. Hochman purchased 5,404,000 shares of common
Stock of the Company for $0.27 per share. Ms. Hochman executed a seven year
promissory note in favor of the Company in the original principal amount of
$1,360,800. The Promissory Notes bear interest at 7% per annum payable annually.
JOHN A. SARTO. As of July 8, 1999, the Company entered into an
employment agreement with John A. Sarto, employing him as an internal financial
consultant through Janaury 2000, and thereafter, as Executive Vice President,
Chief Financial Officer of the Company through July 1, 2002, subject to earlier
termination for death, resignation or removal. Mr. Sarto's annual base salary is
$275,000. He is entitled to receive an annual performance bonus of up to 75% of
his base salary as determined by the Board of Directors, in its sole discretion,
based on such quantitative and qualitative initiatives as identified by the
Board upon consultation with Mr. Sarto and upon approval of the budget for the
respective fiscal year. The performance bonus for fiscal year ended December 25,
1999 was $53,000. Under Mr. Sarto's agreement, if he resigns his employment for
`good reason' (as defined), if the Company terminates his employment without
`cause' (as defined), or he resigns by reason of a `change of control' (as
defined), the Company will be obligated to continue his base salary payments for
a period of (x) six months if such termination occurs within the first 12 months
of employment, (y) one year if such termination occurs after the first 12 months
of employment, and (z) two years if such termination occurs after twenty-four
months following the commencement of employment, and, in each case, he will be
entitled to a pro rata portion of his performance bonus.
In accordance with the terms of his employment agreement, Mr. Sarto
received options to purchase 1,582,400 shares of Common Stock of the Company for
$0.27. Two hundred and twenty five thousand of such options vested on the date
of grant. Of the balance of the options, 50% vest 25% a year, and 50% vest in
accordance with a performance based vesting schedule.
MARGARET B. PRITCHARD. As of October 26, 1999, the Company entered
into an employment agreement with Margaret B. Pritchard, employing her as Senior
Vice President, General Counsel of the Company from October 26, 1999 through
October 31, 2002, subject to earlier termination for death, resignation or
removal. Ms. Pritchard's annual base salary is $220,000. She is entitled to
receive an annual performance bonus of up to 50% of her base salary as
determined by the Board of Directors, in its sole discretion, based on such
quantitative and qualitative initiatives as identified by the Board upon
consultation with Ms. Pritchard and upon approval of the budget for the
respective fiscal year. Under Ms.
35
<PAGE>
Pritchard's agreement, if she resigns her employment for `good reason' (as
defined), if the Company terminates her employment without `cause' (as defined),
or she resigns by reason of a `change of control' (as defined), the Company will
be obligated to continue her base salary payments for a period eighteen months
She will be entitled to a pro rata portion of his performance bonus.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All of the members of the Compensation Committee are non-employee directors
of the Company and are not former officers of the Company or its subsidiaries.
No executive officer of the Company serves as a member of the Board of Directors
or on the compensation committee of a corporation for which any of the Company's
directors serving on the Compensation Committee or on the Board of Directors of
the Company is an executive officer.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company are not compensated for serving
as directors. Directors who are not employees of the Company receive an annual
retainer fee of $12,000 plus fees of $1,000 per day for attendance at meetings
of the Board of Directors and $500 per day for attendance at meetings of its
committees. Each of the directors appointed by Danskin Investors has agreed to
waive receipt of such amount until such time as they, as a group, direct the
Company to the contrary. All non-employee directors of the Company are
reimbursed for out-of-pocket expenses. In addition, each non-employee director
receives, upon such person's initial election as a director, a grant of an
option to purchase 50,000 shares of the Common Stock under the Stock Option Plan
at fair market value, exercisable in three equal installments on the first,
second and third anniversaries of the grant date. Although Mr. Schupak does not
receive a salary from the Company, the Company provides for a payment of $10,000
per month to an entity designated by Mr. Schupak to defray his office overhead,
and he is entitled to reimbursement of reasonable travel and other expenses
incidental to the performance of his duties.
CERTAIN TRANSACTIONS
On September 22, 1997, in connection with the Company's refinancing of its
secured debt and the issuance of Series D Preferred Stock, Donald Schupak (the
Chairman of the Board of the Company) purchased from the Company, the Schupak
Warrant for the purchase of 5,372,315 shares of Common Stock, subject to
adjustment, at an exercise price of $.30 a share, subject to adjustment. In
consideration of the sale of the Schupak Warrant, Mr. Schupak paid the Company
the Warrant Price comprised of (x) $20,000 in cash and (y) the Schupak
Promissory Note in the amount of $80,000. The outstanding principal balance of
the Schupak Promissory Note bears interest at a rate of 6.55% per annum, to be
paid annually on the anniversary of the Contribution Closing Date. The Schupak
Warrant may be exercised, in whole at any time or in part from time to time,
commencing on the date of effectiveness of an amendment to the Company's Amended
and Restated Certificate of Incorporation increasing the number of its
authorized shares to 100,000,000 and prior to 5:00 p.m., Eastern Standard Time,
on September 22, 2004. In addition, each of David Chu and Nina McLemore,
directors of the Company, purchased from the Company, for $14,815 and $29,607
respectively, a warrant for the purchase of 795,900 shares of Common Stock and
1,591,797 shares of Common Stock, respectively, at an exercise price of $.30 per
share.
In accordance with the terms of her employment agreement, effective
December 8, 1999, Ms. Hochman received a grant of one million shares of Common
Stock of the Company. In addition, Ms. Hochman purchased 5,040,000 shares of
common Stock of the Company for $0.27 per share. Ms. Hochman executed a seven
year promissory note in favor of the Company, in the original principal amount
of $1,361. The Promissory Notes bear interest at 7% per annum, payable
annually.
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 1, 2000,
regarding the beneficial ownership of the Common Stock by (i) each person
known to the Company to beneficially own more than 5% of the Common Stock;
(ii) each director and each named executive officer; and (iii) all executive
officers and directors of the Company as a group. A person is a beneficial
owner if he or she has or shares voting power or investment power. On March
1, 1999, there were outstanding 73,985,878 shares of Common Stock (including
1,083 shares held by a subsidiary of the Company) and 3,042 shares of Series
E Preferred Stock.
BENEFICIAL OWNERSHIP OF SECURITIES.
<TABLE>
<CAPTION>
BENEFICIAL OWNERESHIP
--------------------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE OF BENEFICIAL PERCENT OF OUTSTANDING VOTING
OF BENEFICIAL OWNER OWNERSHIP SECURITIES
------------------- ------------------------------- -----------------------------
<S> <C> <C>
Danskin Investors, LLC. (1) 62,898,470 Common Stock 47.40%
9595 Wilshire Boulevard - Series E Preferred Stock 0%
Beverly Hills, CA 90121
S.G. Cowan (2) 9,677,419 Common Stock 7.86%
32 Old Slip 600 Series E Preferred Stock 19.72%
New York, NY 10004
Charles Dolan (2) 6,451,612 Common Stock 5.24%
c/o Cable Vision 400 Series E Preferred Stock 13.15%
1111 Stewart Avuenue
Bethpage, NY 11714
Donald Schupak (3) 5,948,315 Common Stock 4.61%
- Series E Preferred Stock 0%
David Chu (4) 645,597 Common Stock 0.52%
40 Series E Preferred Stock 1%
Nina McLemore (5) 801,730 Common Stock 0.65%
- Series E Preferred Stock 0%
Carol J. Hochman 6,040,000 Common Stock 4.91%
- Series E Preferred Stock 0%
Margaret B. Pritchard (6) 147,916 Common Stock 0.12%
- Series E Preferred Stock 0%
Henry T Mortimer, Jr.(6) 27,500 Common Stock 0.02%
- Series E Preferred Stock 0%
Larry B. Shelton (6) 27,500 Common Stock 0.02%
- Series E Preferred Stock 0
Andrew J. Astrachan(4) 1,104,494 Common Stock 0.90%
40 Series E Preferred Stock 1%
Michael Hsieh (6) 23,333 Common Stock 0.02%
- Series E Preferred Stock 0%
James P. Jalil (6) 23,333 Common Stock 0.02%
- Series E Preferred Stock 0%
Cathy Volker 897,459 Common Stock 0.73%
- Series E Preferred Stock 0%
Beverly Eichel (6) 120,000 Common Stock 0.10%
- Series E Preferred Stock
Mary Ann Domuracki - Common Stock 0%
- Series E Preferred Stock 0%
Debbie Hobbs - Common Stock 0%
- Series E Preferred Stock 0%
Denise Landman - Common Stock 0%
- Series E Preferred Stock 0%
All directors and executive 15,807,177 Common Stock 12%
officers as a group (7) 80 Series E Preferred Stock 2.6%
(15)
</TABLE>
- ----------
*For purpose of this calculation, the outstanding voting securities of the
Company include 73,985,878 shares of Common Stock presently issued and
49,064,516 shares of Common Stock issuable upon the conversion of the Series E
Preferred Stock that the holders of the Series E Preferred Stock are entitled to
vote.
(1) The amount shown as Common Stock includes Common Stock and a presently
exercisable warrant.
(2) The amount shown as Common Stock includes those shares of Common Stock
issuable upon conversion of the Series E Preferred Stock. Each share of
Series E Preferred Stock entitles the holder thereof to one vote per share
for each share of Common Stock that would be issued upon conversion of a
share of Series E Preferred Stock (16,129 votes per share).
(3) Includes 5,808,315 shares of Common Stock underlying presently exercisable
warrants and 20,000 shares of Common Stock underlyingpresently exercisable
options.
(4) The amount shown as Common Stock includes those shares of Common Stock
issuable upon convesion of the Series E Preferred Stock and presently
exercisable warrants and presently exercisable stock options.
(5) The amount shown as Common Stock includes presently exercisable stock
options and warrants.
(6) The amount shown as Common Stock includes presently exercisable stock
options.
(7) The amount shown as Common Stock includes presently exercisable options
presently exercisable warrants and shares of Common Stock issuable upon a
convesion of the Series E Preferred Stock
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's issuance of a warrant to Mr. Schupak,
Mr. Schupak executed a seven-year promissory note in favor of the Company in the
original principal amount of $80,000. The promissory note bears interest at
6.55% per annum payable annually.
On December 8, 1999, and in accordance with the terms of her employment
arrangement, Ms. Hochman purchased 5,040,000 shares of Common Stock of the
Company for $0.27 per share. Ms. Hochman executed a seven year promissory note
in favor of the Company in the original principal amount of $1,361. The
Promissory Notes bear interest at 7% per annum payable annually.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
1. Financial Statements
2. Financial Statement Schedules
The financial statements and financial statement schedules included in
this Annual Report on Form 10-K are listed in the accompanying Index to the
Financial Statements on Page F-1 of this Form 10-K.
All other schedules have been omitted because the required information
is shown in the Consolidated Financial Statements or Notes thereto or they are
not applicable.
3. Exhibits
The Exhibits designated by an asterisk are management contracts and
compensatory plans and arrangements required to be filed as Exhibits to this
Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1.1 Amended and Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to Exhibit to the
Registration Statement of the Registrant on Form S-1 (Reg. No.
33-49274)(the "Registration Statement").)
3.1.2 Certificate of Correction, dated July 9, 1992, of the Amended
and Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1.2 to Amendment No. 1
to the Registration Statement ("Amendment No. 1").)
3.1.3 Certificate of Amendment, dated the 27th day of January, 1998
to the Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Amended and Restated Certificate of Incorporation of the
Registrant dated as of January 27, 1998.
4.1 Form of Certificate for Common Stock of the Registrant.
(Incorporated by reference to Exhibit 4.1 to Amendment No. 1.)
4.2 Securities Purchase Agreement, dated as of September 22, 1997,
between the Registrant and Danskin Investors, LLC.
(Incorporated by reference to Registrant's Form 8-K dated
September 22, 1997.)
4.2.1 Form of Warrant Issued to Danskin Investors, LLC.
(Incorporated by reference to Registrant's Form 8-K dated
September 22, 1997.)
4.2.2 Certificate of Designations of Series C Cumulative Convertible
Preferred Stock. (Incorporated by reference to the
Registrant's Form 8-K dated September 22, 1997.)
4.2.3 Certificate of Designations of Series D Cumulative Convertible
Preferred Stock. (Incorporated by reference to the
Registrant's Form 8-K dated September 22, 1997.)
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
4.2.3A Certificate of Amendment to Certificate of Designations,
Preferences and Rights of Series D Cumulative Preferred Stock
of Danskin, Inc. (Incorporated by reference to the
Registrant's Form 8-K dated December 21, 1999).
4.2.4 Promissory Notes of the Registrant's in favor of Danskin
Investors, LLC. (Incorporated by reference to the Registrant's
Form 8-K dated September 22, 1997.)
5.1 Cetificate of Designations, Preferences and Rights of 9%
Series E Senior Step Up Convertible Preferred Stock of
Danskin, Inc. (Incorporated by reference to the Registrant's
Form 8-K dated December 21, 1999).
10.1.1 Tax Refund Agreement, dated July 22, 1986, by and among
Danpen, Inc., Beatrice Companies, Inc. and Esmark, Inc.
(Incorporated by reference to Exhibit 10.1.1 to the
Registration Statement.)
10.1.2 Supplemental Tax Refund Agreement, dated March 15, 1990, among
Beatrice Companies, Inc., Esmark, Inc., Danpen, Inc. and the
Registrant. (Incorporated by reference to Exhibit 10.1.2 to
the Registration Statement.)
10.5.1 Lease Agreement, dated October 16, 1986, between the
Registrant and Robert H. Arnow, relating to leasehold interest
at 111 West 40th Street, New York, New York, as amended, and
related agreement. (Incorporated by reference to Exhibit
10.5.1 to the Registration Statement.)
10.5.4 Lease Agreement, dated March 22, 1996, between the City of
Grenada, Mississippi and the Registrant. (Incorporated by
reference to Exhibit 10.5.4 to the Registrant's Form 10-Q for
the fiscal quarter ended September 28, 1996.)
10.5.5 Agreements in connection with Industrial Revenue Bond for
property located at 1261 South Commerce Street, Grenada,
Mississippi, between the City of Grenada, Mississippi and the
Registrant (as assignee of International Playtex, Inc.).
(Incorporated by reference to Exhibit 10.5.5 to Amendment No.
1.)
10.5.7 Agreement between the Pennaco division and the City of
Grenada, Mississippi, relating to the issuance by the City of
Grenada of $1,500,000 principal amount of bonds to finance the
construction of a distribution center to be owned by the City
of Grenada and leased to the Pennaco division. (Incorporated
by reference to Exhibit 10.5.7 to Amendment No. 2 to the
Registration Statement ("Amendment No. 2").)
10.5.11 Lease Agreement between Paul Klinge A/S and the Registrant.
(Incorporated by reference to Exhibit 10.5.11 to Amendment No.
2.)
10.5.12 Addendum to Lease between Henrik Klinge and the Registrant
dated August 23, 1996. (Incorporated by reference to Exhibit
10.5.12 to the Registrant's Form 10-Q for the fiscal quarter
ended September 28, 1996.)
*10.6.2B Employment Agreement dated April 1, 1996 between the
Registrant and Edwin W. Dean. (Incorporated by reference to
Exhibit 10.6.2B to the Registrant's Form 10-Q for the fiscal
quarter ended March 30, 1996.)
*10.6.3A Amended Employment Agreement, dated April 1, 1994, between the
Registrant and Mary Ann Domuracki. (Incorporated by reference
to Exhibit 10.6.3A to the Registrant's Form 10-Q for the
fiscal quarter ended June 25, 1994.)
39
<PAGE>
*10.6.3B Amendment One, effective November 1, 1994, to the amended
Employment Agreement, dated April 1, 1994, between the
Registrant and Mary Ann Domuracki. (Incorporated by reference
to Exhibit 10.6.3B to the Registrant's Form 10-Q for the
fiscal quarter ended September 24, 1994.)
*10.6.3C Amendment Two, effective January 1, 1995, to the amended
Employment Agreement, dated August 1, 1994, between the
Registrant and Mary Ann Domuracki. (Incorporated by reference
to Exhibit 10.6.3C to the Registrant's Form 10-Q for the
fiscal quarter ended December 24, 1994.)
*10.6.3D Amendment Three, effective April 1, 1996, to the amended
Employment Agreement, dated August 1, 1994, between the
Registrant and Mary Ann Domuracki. (Incorporated by reference
to Exhibit 10.6.3D to the Registrant's Form 10-Q for the
fiscal quarter ended September 28, 1996.)
*10.6.3E Amendment Four, effective as of November 1, 1996, to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and MaryAnn Domuracki.
*10.6.4F Amendment Five, effective as of September 22, 1997, to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Mary Ann Domuracki.
*10.6.4A.1 Employment Agreement, dated August 1, 1994, between the
Registrant and Beverly Eichel. (Incorporated by reference to
Exhibit 10.6.4A.1 to the Registrant's Form 10-K for the fiscal
year ended March 25, 1995.)
*10.6.4B Amendment One, effective November 1, 1994, to the Employment
Agreement, dated August 1, 1994, between the Registrant and
Beverly Eichel. (Incorporated by reference to Exhibit 10.6.4B
to the Registrant's Form 10-Q for the fiscal quarter ended
September 24, 1994.)
*10.6.4C Amendment Two, effective January 1, 1995, to the amended
Employment Agreement, dated August 1, 1994, between the
Registrant and Beverly Eichel. (Incorporated by reference to
Exhibit 10.6.4C to the Registrant's Form 10-Q for the fiscal
quarter ended December 24, 1994.)
*10.6.4D Amendment Three, effective April 1, 1996, to the amended
Employment Agreement, dated August 1, 1994, between the
Registrant and Beverly Eichel. (Incorporated by reference to
Exhibit 10.6.4D to the Registrant's Form 10-Q for the fiscal
quarter ended September 28, 1996.)
*10.6.4E Amendment Four effective as of November 1, 1996 to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Beverly Eichel. (Incorporated by reference to
Exhibit 10.6.4E to the Registrant's Form 10Q for the fiscal
quarter ended March 29, 1997.)
*10.6.4F Amendment Five effective as of September 22, 1997 to Amended
Employment Agreement dated as of August 1, 1994 between the
Registrant and Beverly Eichel.
*10.6.5 Employment Agreement, dated February 2, 1998, between the
Registrant and Catherine Volker.
*10.6.6 Stock Option Plan and Agreement, dated February 2, 1998,
between the Registrant and Catherine Volker.
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
*10.8.1 1992 Stock Option Plan of the Registrant, together with form
of Non-Qualified Stock Option Agreement. (Incorporated by
reference to Exhibit 10.8.1 to the Registration Statement.)
*10.8.1A Amendment No. 1 to the 1992 Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 10.8.1A to the
Registrant's Form 10-K for the fiscal year ended March 27,
1993.)
*10.8.2 Savings Plan of the Registrant, as amended. (Incorporated by
reference to Exhibit 4.1 to the Registration Statement of the
Registrant on Form S-8 (Reg. No. 33-53852).)
10.10.1A Renewal license agreement dated December 29, 1993 between
Givenchy and the Registrant. (Incorporated by reference to
Exhibit 10.10.1A to the Registrant's Form 10-Q for the fiscal
quarter ended December 25, 1994.)
10.10.2B Renewal license agreement dated January 26, 1996 between Anne
Klein & Company and the Pennaco Division of Danskin, Inc.
(Incorporated by reference to Exhibit 10.10.2A to the
Registrant's Form 10-Q for the fiscal quarter ended March 30,
1996.)
10.10.3 License agreement, dated as of October 1, 1994, between
SsangYong (U.S.A.), Inc. and the Registrant. (Incorporated by
reference to Exhibit 10.10.3 to the Registrant's Form 10-Q for
the fiscal quarter ended September 24, 1994.)
10.10.5 License agreement, dated June 1, 1995, between Canari Cycle
Wear, a Division of Kassach Marketing and the Registrant.
(Incorporated by reference to Exhibit 10.10.5 to the
Registrant's Form 10-K for the fiscal year ended March 25,
1995.)
10.10.6 License Agreement dated November 1, 1996, between Wundies,
Inc. and the Registrant. (Incorporated by reference to Exhibit
10.10.6 to the Registant's Form 10Q for the fiscal
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99.1 Press release dated December 9, 1999. (Incorporated by
reference to Exhibit 99.1 to the Registant's Form 8K dated
December 21, 1999.)
</TABLE>
- ---------------
## Filed herewith
(b) Reports on Form 8-K
Form 8-K dated December 21, 1999
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 24, 2000 DANSKIN, INC.
By : /s/ Carol J. Hochman
-----------------------------------
Carol J. Hochman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Form 10-K has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
- --------- ------------------------ ----
<S> <C> <C>
/s/ Carol J. Hochman
- ------------------------------- Chief Executive Officer March 24, 2000
Carol J. Hochman
/s/ Donald Schupak
- ------------------------------- Chairman of the Board March 24, 2000
Donald Schupak
/s/ John A. Sarto EVP, and Chief March 24, 2000
- ------------------------------ Financial Officer
John A. Sarto
/s/ Andrew J. Astrachan Director March 24, 2000
- ------------------------------
Andrew J. Astrachan
/s/ David Chu
- ------------------------------- Director March 24, 2000
David Chu
/s/ Michael Hsieh
- ------------------------------- Director March 24, 2000
Michael Hsieh
/s/ James P. Jalil
- ------------------------------- Director March 24, 2000
James P. Jalil
/s/ Nina McLemore
- ------------------------------- Director March 24, 2000
Nina McLemore.
</TABLE>
42
<PAGE>
SIGNATURES (CONTINUED)
<TABLE>
<S> <C> <C>
/s/ Henry T. Mortimer, Jr.
- ------------------------------- Director March 24, 2000
Henry T. Mortimer, Jr.
/s/ Larry Shelton
- ------------------------------- Director March 24, 2000
Larry Shelton
</TABLE>
43
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 26, 1998 and December 25, 1999 F-3
Consolidated Statements of Operations for the fiscal years ended December 27, 1997,
December 26, 1998, and December 25, 1999 F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended
December 27, 1997, December 26, 1998 and December 25, 1999 F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 27, 1997, December 26, 1998 and December 25, 1999 F-6
Notes to Consolidated Financial Statements F-7 to F-27
Supplemental Financial Information:
Unaudited Selected Quarterly Financial Information S-1
Financial Statement Schedule:
Schedule II Schedule of Valuation and Qualifying Accounts S-2
</TABLE>
F-1
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Danskin, Inc.:
We have audited the accompanying consolidated balance sheets of Danskin, Inc. (a
Delaware Corporation) and Subsidiaries (the "Company") as of December 25, 1999
and December 26, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of three fiscal years in the period
ended December 25, 1999. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Danskin, Inc. and Subsidiaries
as of December 25, 1999 and December 26, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended December 25, 1999 in conformity with generally accepted accounting
principles in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
March 3, 2000
F-2
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 26, 1998 DECEMBER 25, 1999
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $546 $663
Accounts receivable, less allowance for doubtful accounts of
$1,021 at December 26, 1998 and $1,087 at December 25, 1999 13,518 9,448
Inventories 30,386 24,159
Prepaid expenses and other current assets 2,256 1,756
------- -------
Total current assets 46,706 36,026
Property, plant and equipment - net of accumulated depreciation and
amortization of $8,807 at December 26, 1998 and $9,366 at
December 25, 1999 9,773 10,747
Other assets 1,227 1,115
------- -------
Total assets $57,706 $47,888
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $16,029 $10,041
Current portion of long-term debt 2,000 -
Accounts payable 8,440 7,316
Accrued expenses 13,692 10,434
------- -------
Total current liabilities 40,161 27,791
------- -------
Long-term debt, net of current maturities 6,674 11,500
Accrued dividends 1,176 65
Accrued retirement costs 2,301 2,658
------- -------
Total long-term liabilities 10,151 14,223
------- -------
Total liabilities 50,312 42,014
------- -------
Commitments and contingencies
Series D Cumulative Convertible Preferred Stock, 2,400 shares
Liquidation Value of $12,000 11,294 -
Stockholders' (Deficit) Equity
Series E Cumulative Convertible Preferred Stock, 3,042 shares
Liquidation Value of $15,210 15,210
Common Stock, $.01 par value, 100,000,000 shares authorized,
20,916,693 shares issued at December 26, 1998 and 73,985,878 shares
issued at December 25, 1999, less 1,083 shares held by
subsidiary at December 26, 1998 and December 25, 1999 209 739
Additional paid-in capital 23,483 39,853
Notes receivable from stock sale - (1,361)
Accumulated deficit (24,546) (45,532)
Accumulated other comprehensive loss (3,046) (3,035)
------- -------
Total Stockholders' (Deficit) Equity (3,900) 5,874
------- -------
Total Liabilities and Stockholders' Equity $57,706 $47,888
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
F-3
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 27, DECEMBER 26, DECEMBER 25,
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Net revenues $121,986 $108,741 $87,970
Cost of goods sold 81,822 68,428 65,289
--------- ---------- ----------
Gross profit 40,164 40,313 22,681
Selling, general and administrative expenses 40,174 42,112 36,312
Non-recurring charges 300 2,419 795
Interest expense 4,278 2,513 5,462
--------- ---------- ----------
44,752 47,044 42,569
Loss before income tax provision and (4,588) (6,731) (19,888)
extraordinary item
Provision for income taxes 245 190 20
--- --- --
Net loss before extraordinary item (4,833) (6,921) (19,908)
Extraordinary gain from early retirement of debt 5,245 - -
--------- ---------- ----------
Net income (loss) 412 (6,921) (19,908)
Preferred dividends 425 1,114 1,078
--------- ---------- ----------
Net loss applicable to Common Stock ($13) ($8,035) ($20,986)
========= ========== ==========
Basic and diluted net income (loss) per share:
Net income per share before extraordinary item ($0.66) ($0.50) ($0.89)
Net income per share for extraordinary item $0.66 - -
Net income (loss) per share after
extraordinary item $0.00 ($0.50) ($0.89)
========= ========== ==========
Weighted average number of common shares
outstanding 7,942,000 16,168,000 23,493,000
========= ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
F-4
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED COMMON COMMON ADDITIONAL
PREFERRED STOCK STOCK STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance, December 28, 1996 1,000 6,046,255 $61 $19,665
Comprehensive Income
Net income
Accumulated translation adjustment
Minimum pension liabililty adjustment
Total comprehensive income
Preferred stock dividend 56,689 1 124
Reversal of accrued preferred stock
dividend -1996
Common Stock dividend 511,171 5 148
Purchase and retirement of Common Stock (9,415) (20)
Sales and contribution of Common Stock 32,293 60
to Employee Savings Plan
Exchange of 10% Cumulative Preferred Stock (1,000) 3,333,333 33 (33)
for shares of Common Stock
Preferred stock dividend 102,881 1 124
Series D preferred dividend
Warrants 359
Rights Redemption (61)
------ ------ ------ ------ -------
Balance, December 27, 1997 - - 10,073,207 $101 $20,366
Comprehensive loss
Net loss
Minimum pension liabililty adjustment
Total comprehensive loss
Preferred stock dividend
Sales and contribution of Common Stock 92,403 1 49
to Employee Savings Plan
Employee Stock Grant 750,000 7 439
Private Offering 7,864,336 79 2,281
Rights Offering 2,135,664 21 319
Warrants Issued 29
------ ------ ------ ------ -------
Balance, December 26, 1998 - - 20,915,610 $209 $23,483
Comprehensive loss
Net loss
Minimum pension liabililty adjustment
Total comprehensive loss
Preferred stock dividend
Issuance of Series E Preferred Stock 3,042 15,210 (437)
Conversion of Series D Preferred Stock 40,000,000 400 11,006
Common Stock issued for Series D dividends 6,924,000 69 2,008
Common Stock option exercises 5,185 4
Employee Stock Grant 1,100,000 11 313
Warrants Issued 2,165
Stock sale 5,040,000 50 1,311
------ ------ ------ ------ -------
Balance, December 25, 1999 3,042 $ 15,210 73,984,795 $739 $39,853
====== ====== ====== ====== =======
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE OTHER
FROM ACCUMULATED COMPREHENSIVE
STOCK SALE DEFICIT INCOME (LOSS) TOTAL
---------- ------- ------------- -----
<S> <C> <C> <C> <C>
Balance, December 28, 1996 ($16,345) ($2,580) $801
Comprehensive Income
Net income 412 412
Accumulated translation adjustment 15 15
Minimum pension liabililty adjustment 290 290
-----
Total comprehensive income 717
-----
Preferred stock dividend (125)
Reversal of accrued preferred stock 41
dividend -1996 41
Common Stock dividend (153)
Purchase and retirement of Common Stock (20)
Sales and contribution of Common Stock 60
to Employee Savings Plan
Exchange of 10% Cumulative Preferred Stock
for shares of Common Stock
Preferred stock dividend (125)
Series D preferred dividend (216) (216)
Warrants 359
Rights Redemption (61)
---------- ------- ------------- -----
Balance, December 27, 1997 ($16,511) ($2,275) $1,681
Comprehensive loss
Net loss (6,921) (6,921)
Minimum pension liabililty adjustment (771) (771)
-----
Total comprehensive loss (7,692)
-----
Preferred stock dividend (1,114) (1,114)
Sales and contribution of Common Stock 50
to Employee Savings Plan
Employee Stock Grant 446
Private Offering 2,360
Rights Offering 340
Warrants Issued 29
---------- ------- ------------- -----
Balance, December 26, 1998 ($24,546) ($3,046) ($3,900)
Comprehensive loss
Net loss (19,908) (19,908)
Minimum pension liabililty adjustment 11 11
-----
Total comprehensive loss (19,897)
-----
Preferred stock dividend (1,078) (1,078)
Issuance of Series E Preferred Stock 14,773
Conversion of Series D Preferred Stock 11,406
Common Stock issued for Series D dividends 2,077
Common Stock option exercises 4
Employee Stock Grant 324
Warrants Issued 2,165
Stock sale (1,361) --
---------- ------- ------------- -----
Balance, December 25, 1999 ($1,361) ($45,532) ($3,035) $5,874
========== ======= ============= =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
F-5
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 27, 1997 DECEMBER 26, 1998 DECEMBER 25, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 412 ($ 6,921) ($19,908)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 2,476 1,727 2,002
Write off of certain trademarks -- 184 --
Extraordinary gain from early retirement of debt (5,245) -- --
Stock grants issued -- 446 324
Provision for doubtful accounts receivable 49 327 250
Warrants Issued 2,165
Loss on sale of on property, plant and equipment 68 954 58
Deferred income taxes -- -- --
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,109 1,090 3,820
Decrease (increase) in inventories 5,361 (1,672) 6,227
(Increase) decrease in prepaid expenses and other assets (1,553) (698) 898
(Decrease) increase in accounts payable (1,639) 397 (1,124)
(Decrease) increase in accrued expenses (2,184) 2,693 (3,026)
-------- -------- --------
Net cash used in operating activities (1,146) (1,473) (8,314)
-------- -------- --------
Cash Flows From Investing Activites:
Capital expenditures (241) (4,673) (2,836)
-------- -------- --------
Net cash used in investing activities (241) (4,673) (2,836)
-------- -------- --------
Cash Flows From Financing Activities:
Net (repayments) borrowings under revolving line of credit (1,430) 7,490 (5,988)
Repayments of long-term debt (333) (1,326) (2,157)
Proceeds from term loans -- -- 4,983
Sale of Common Stock -- 3,000 --
Expenses associated with issuance of rights to purchase
Common Stock -- (299) --
Payment of subordinated debt -- (3,000) --
Purchase and retirement of Common Stock (20) -- --
Sale of Common Stock to Savings Plan 60 -- --
Common Stock option exercises -- 49 4
Issuance of Series E Preferred Stock -- -- 15,210
Expenses associated with the issuance of Series E
Preferred Stock -- -- (437)
Proceeds from recapitalization (Note16) 4,000 -- --
Proceeds from warrant notes -- 15 --
Financing costs incurred (1,259) (45) (348)
-------- -------- --------
Net cash provided by financing activities 1,018 5,884 11,267
-------- -------- --------
Net (decrease) increase in Cash and Cash Equivalents (369) (262) 117
Cash and Cash Equivalents, Beginning of Period 1,177 808 546
-------- -------- --------
Cash and Cash Equivalents, End of Period $ 808 $ 546 $ 663
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 3,767 $ 2,282 $ 3,350
Income taxes paid 345 60 118
Cash refunds received for income taxes (121) (26) (63)
</TABLE>
Non-Cash Activities
The Company declared a stock dividend of one share for every 11.99 shares of
common stock on September 29, 1997.
Early extinguishment of long term debt resulted in an extraordinary gain of
$5,245 (Note 18)
The Company issued 159,570 shares to the Bond Fund for Growth as a dividend in
lieu of cash.
The Company issued a stock grant of 750,000 shares valued at $.594 per share to
the CEO in February 1998.
The Company issued a stock grant of 100,000 shares valued at $.9375 per share to
the CFO in January 1999.
The Company issued a stock grant of 1,000,000 shares valued at $0.23 per share
to the CEO in December 1999.
The Company issued 12,103,200 warrants in connection with the bridge financing
in November 1999. (Note 17)
The Company issued 550,000 warrants to CBCC in connection with the refinancing
of the Company's secured bank debt (Note 17).
In December 1999, Carol Hochman issued a promissory note in the principal amount
of $1,361 in connection with her purchase of Common Stock of the Company.
In December 1999, the Company issued a warrant to Utendahl Capital Partners in
respect of their participation in the placement of the Company's Series E
Stock (Note 17).
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
F-6
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. LIQUIDITY
During fiscal 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.
A number of positive steps have been taken by the Company. 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
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) resulting in $10,000 in undrawn availability at close. (Refer
to Notes 12 and 13 for a discussion of the equity private placement and the
refinancing of the Company's bank debt.) 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.
The Company incurred a net loss of $20,986 for the fiscal year ended December
25, 1999. Fiscal 1999 results were adversely impacted by non-cash charges
pertaining to the amortization of warrants issued and employee stock grants
amounting to $2,489.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Danskin, Inc. (the "Company") was incorporated on February 21, 1986 to own and
operate the business and assets of two divisions of a corporation acquired on
July 22, 1986.
The Company currently operates under two divisions: Danskin, which designs,
manufactures and markets dance wear, bodywear, tights and exercise apparel, and
also operates 34 retail stores and one full price store; and Pennaco, which
designs, manufactures and markets hosiery under the brand names
Round-the-Clock(R), and Givenchy(R), and under private labels for major
retailers.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of the
Company, including all of its operating divisions, and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain reclassifications were made to prior year information to conform to the
current year presentation.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday in December. Fiscal 1997
ended on December 27, 1997, fiscal 1998 ended on December 26, 1998 and fiscal
1999 ended on December 25, 1999. In addition, all fiscal years presented contain
52 weeks.
F-7
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 25,
1998 1999
------------ ------------
<S> <C> <C>
Finished goods $18,735 $13,978
Work-in-process 6,271 5,339
Raw materials 4,725 4,365
Packaging materials 655 477
------- -------
$30,386 $24,159
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Furniture and fixtures, machinery and equipment and buildings
are depreciated by the straight-line method over the estimated useful lives of
the assets, ranging from 5 to 20 years. Leasehold improvements are amortized by
the straight-line method over the related lease terms or the estimated useful
life of the asset, whichever is less.
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED
The excess of purchase price over fair value of net tangible assets acquired is
amortized on a straight-line basis over 20 years.
DEFERRED FINANCING CHARGES
Deferred financing charges are amortized over the respective terms of debt
obtained under financing agreements.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with an
original maturity of three months or less to be cash equivalents.
TRADEMARKS
The Company amortizes capitalized costs to acquire trademarks over the estimated
useful life of the trademark, generally 15 years.
INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per share is calculated by dividing net income (loss)
applicable to Common Stock by the weighted average Common Stock outstanding
during the period. Diluted net income (loss) per share is calculated by dividing
net income (loss) applicable to Common Stock by the weighted average Common
Stock and Common Stock equivalents outstanding. Common Stock equivalents,
including Convertible Series D Preferred Stock, Convertible Series E Preferred
Stock, management options and warrants, are reflected in diluted net income
(loss) per share except to the
F-8
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
extent they are antidilutive.
At December 25, 1999 the Company had the following common shares and common
shares equivalents outstanding:
<TABLE>
<S> <C>
Common Shares 73,985,878
Preferred Stock 49,064,516
Warrants 30,533,199
Options 7,592,683
-----------
Total Shares and Share Equivalents Outstanding: 161,176,276
</TABLE>
Due to the net loss before extraordinary items for all periods presented, the
assumed exercise of common stock equivalents would be antidilutive and thus have
not been included as common stock equivalents for purposes of the calculation of
diluted earnings per share.
REVENUE RECOGNITION
Revenue within the wholesale operations is recognized at the time merchandise is
shipped from the Company's distribution centers. Retail store revenues are
recognized at the time of sale. All revenue is net of returns.
ADVERTISING AND PROMOTION
All costs associated with advertising and promoting products are expensed when
the advertising or event takes place. Costs associated with the Company's
catalogs are expensed when the catalogs are distributed. Advertising and
promotion expenses were $5,982 in fiscal 1997, $7,431 in fiscal 1998 and $4,575
in fiscal 1999.
INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes,"
which requires the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
LONG-LIVED ASSETS
The Company continually evaluates the carrying value and the economic useful
life of its long-lived assets based upon the Company's operating performance and
its expected future net cash flows and will adjust the carrying amount of assets
which may not be recoverable. The Company does not believe that any impairment
exists in the recoverability of its long-lived assets as of the fiscal year end.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
method of accounting for stock options and other equity instruments used for
compensation purposes, and requires companies electing to report in accordance
with the standard to recognize or disclose such compensation in its financial
statements. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company, as permitted,
continues to account for such transactions under Accounting Principles Board
Opinion No. 25 ("APB No.25"), "Accounting for Stock Issued to Employees," but
discloses in a note to the consolidated financial statements pro forma net
income and earnings per share as if the Company had adopted the fair value
method of accounting. (See Note XX)
FINANCIAL INSTRUMENTS
In assessing the fair value of financial instruments at December 26, 1998 and
December 25, 1999, the Company has used a variety of methods and assumptions,
which were based on estimates of market conditions and risks existing at that
time. For certain instruments, including cash and cash equivalents; it was
assumed that the carrying amount approximated fair value for the majority of
these instruments because of their short maturity. Bank debt obligations are
valued at carrying amount due to floating interest rates on such debt. These
values merely represent a general approximation of possible value and may never
actually be realized.
The estimated fair values of the Company's financial instruments are summarized
as follows:
<TABLE>
<CAPTION>
December 26, 1998 December 25, 1999
----------------------------- -----------------------------
Carrying Estimated Carrying Estimate
Amount Fair Value Amount Fair Value
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 546 $ 546 $ 663 $ 663
Revolving line of credit (16,029) (16,029) (10,041) (10,041)
Long-term debt (8,674) (8,674) (11,500) (11,500)
</TABLE>
Recently Issued Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at fair value. The
Statement also requires that changes in derivative fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 will be effective for the Company's financial statements in the year
2001. The Company is currently analyzing the impact of this new pronouncement on
its financial position and results of operations.
3. STOCK OPTION PLAN
On July 1, 1992, the Company's Board of Directors adopted the 1992 Stock Option
Plan (the "Plan"), pursuant to which 339,474 shares of common stock were
reserved for issuance. The Plan provides for the granting of options to
directors, officers and certain key employees of the Company. The option price
shall not be less than 100% of the fair market value on the date of grant. No
options may be granted after 10 years from the date of adoption but all options
then outstanding will remain outstanding in accordance with the exercise terms
as determined at each grant date.
F-10
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. STOCK OPTION PLAN (CONTINUED)
On July 29, 1993, the stockholders of Danskin authorized an increase to the
number of options available for distribution to 600,000. Options become
exercisable at the discretion of the Compensation Committee of the Board of
Directors and the plan provides for discretion on vesting requirements.
Effective October 19, 1994, the Board of Directors of the Company amended the
Plan to increase the number of options available for grant from 600,000 to
660,000. On October 27, 1994, the Board of Directors of the Company increased
the number of options available for grant from 660,000 to 900,000, which
received the approval of stockholders as voted upon at the 1995 annual meeting.
Effective September 18, 1997, the Executive Committee of the Board of Directors
of the Company amended the Company's Stock Option Plan to clarify that the Board
of Directors retains the discretion to determine the fair market value of the
Common Stock with respect to periods when the Common Stock is not actively
traded on NASDAQ or any other national exchange or under circumstances where
significant transactions in the Common Stock have occurred outside traditional
trading venues.
Effective May 18, 1998, the Executive Committee of the Board of Directors of the
Company amended the Stock Option Plan to increase the number of options
available for grant thereunder by 2.5 million shares. On August 5, 1999, the
Board of Directors amended the Stock Option Plan to increase the number of
options available for grant thereunder by 2.5 million shares.
In October 1997, a total of 239,943 options were repriced with an exercise price
of $.625. All participants granted options prior to repricing, with the
exception of certain executives and outside directors, were given the
opportunity to exchange previous grants, which were all originally granted at
higher exercise prices (ranging from $1.875 to $4.875).
Under provisions of the Plan, as a result of deemed changes in control, prior
vesting and fully vested grants, 628,978 options outstanding under the Plan as
of December 27, 1997 were fully exercisable.
The following table summarizes the activity relating to the Plan as of and for
the fiscal year ended December 27, 1997, the fiscal year ended December 26, 1998
and for the fiscal year ended December 25, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 27, 1997 DECEMBER 26, 1998 DECEMBER 25, 1999
--------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
EXERCISE AVERAGE AVERAGE AVERAGE
PRICE EXERCISE EXERCISE EXERCISE
RANGE # OF SHARES PRICE # OF SHARES PRICE # OF SHARES PRICE
------------- -------------- ---------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, $ 0.625- 701,918 $3.5940 759,034 $2.2750 2,462,776 $1.4140
beginning of year $ 13.00
Granted $ 0.270- 369,999 $0.7628 2,370,000 $1.5140 4,665,000 $0.3020
$ 4.875
Canceled $ 0.625- (312,883) $3.4440 (573,376) $2.4140 (1,352,308) $1.5610
$ 13.00
Exercised $ 0.625- -- -- (92,882) $0.6250 (5,185) $0.6250
$ 0.625
Outstanding, end of year $ 0.270- 759,034 $2.2750 2,462,776 $1.4140 5,770,283 $0.4550
$ 13.00
</TABLE>
F-11
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. STOCK OPTION PLAN (CONTINUED)
Options exercisable and shares available for future grant amounted to:
<TABLE>
<CAPTION>
DECEMBER 26, December 25,
1998 1999
------------ -----------
<S> <C> <C>
Options exercisable 271,105 267,916
Shares available for grant* 844,342 1,650
</TABLE>
The weighted average fair value of total stock options granted during 1999 was
$0.15 per share. The fair value of each stock option grant is estimated on the
date of grant using a pricing model, which approximates the Black-Scholes
pricing model, with the following weighted average assumptions used for grants
in 1999: risk-free interest rate of 6.42%; no expected dividend yield; expected
life of 9.54 years; and expected volatility of 38.73%, and for grants in 1998:
risk-free interest rate of 5.53%; no expected dividend yield; expected life of
9.8 years; and expected volatility of 29.43%. Stock options generally expire 10
years from the grant date or at termination, if earlier. The stock options
exercisable at December 25, 1999 have a weighted average exercise price of $0.30
per share.
- -----------------------------------
* "Shares available for grant" under the Plan is equal to (a) the total number
of options available for grant under the Plan, less (b) the sum of (x) options
presently exercisable, (y) non-exercisable options, and (z) previously exercised
options.
The Company accounts for stock options in accordance with APB No. 25, under
which no compensation cost has been recognized for stock option awards. Had
compensation cost for the Plan been determined consistent with SFAS No.123, the
Company's pro forma net loss would have been $20,150 and net loss applicable to
Common Stock and net loss per share (basic and diluted) for the fiscal year
ended December 25, 1999 would have been $21,228 and $0.90 per share,
respectively; for the fiscal year ended December 26, 1998, the Company's pro
forma net income would have been $8.0 million and net loss applicable to Common
Stock and net loss per share (basic and diluted) would have been $9,100 and
$0.56 per share, respectively; and for the fiscal year ended December 27, 1997,
the Company's pro forma net income would have been $237 and net loss applicable
to Common Stock and net loss per share (basic and diluted) would have been $188
and $0.02 per share, respectively.
In accordance with the terms of his employment agreement, John A. Sarto,
Executive Vice President and Chief Financial Officer received options to
purchase 1,582,400 shares of Common Stock of the Company for $0.27. Two
hundred and twenty five thousand of such options vested on the date of grant.
Of the balance of the options, 50% vest 25% a year, and 50% vest in
accordance with a performance based vesting schedule.
4. STOCKHOLDER RIGHTS PLAN
The Company adopted a stockholder rights plan on June 5, 1996, for stockholders
of record on June 17, 1996, which would become effective in the event of an
accumulation of more than 35% of its common stock by an acquirer. A rights
agreement was executed on June 5, 1996 between the Company and its Rights Agent,
a copy of which was filed as an exhibit to the Company's Report on Form 8-K
filed on June 6, 1996. In September 1997, the Board of Directors of the Company,
redeemed the Right issued pursuant to the Rights Agreement for $.01 per right in
cash to holders of Common Stock held of record as of the close of business on
September 22, 1997.
5. STOCK MARKET LISTING
The Company's Common Stock was traded over-the-counter on the Nasdaq National
Market under the symbol "DANS" until August 8, 1996, at which time it was moved
to The Nasdaq SmallCap(TM) Market under the same symbol. Effective June 27,
1997, the Company's Common Stock was delisted due to the Company's
non-compliance with NASDAQ's
F-12
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. STOCK MARKET LISTING (CONTINUED)
minimum capital and surplus requirement. Bid quotations for the Company's Common
Stock may be obtained from the "pink sheets" published by the National Quotation
Bureau, and the Common Stock is traded in the over-the-counter market.
6. SAVINGS AND PROFIT SHARING PLAN
The Company maintains a savings and profit sharing plan (the "Savings Plan") for
the benefit of employees meeting certain eligibility requirements. Company
profit sharing contributions are made at the discretion of the Board of
Directors. Effective April 1, 1987, under a 401(k) vehicle, eligible employees
may elect to defer a portion of their base salary, up to the maximum allowed, as
a deduction for Federal income tax purposes. The Company will match 25% of each
participant's investment, up to 6% of the participant's base salary. Total
expense for this plan, for the fiscal years ended December 27, 1997, December
26, 1998 and December 25, 1999, was approximately $150, $152 and $147,
respectively. The Company also maintains an hourly savings and profit sharing
plan (the "Hourly Savings Plan"), for which the Company will match 10% of each
participant's investment up to 6% of base salary, with nominal plan expense.
On October 28, 1992, the Company registered a total of 200,000 shares of the
Company's common stock and participating interests in the Salaried Savings Plan
in conjunction with an amendment to the Salaried Savings Plan to add shares of
the Company's common stock as an investment option under such plan. All shares
issued to or purchased from the Salaried Savings Plan are issued or sold at the
then current market price.
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 25,
1998 1999
---------------- ----------------
<S> <C> <C>
Land $ 45 $ 45
Buildings and improvements 1,777 1,777
Machinery and equipment 6,658 8,818
Furniture and fixtures 4,345 4,364
Leasehold improvements 2,680 3,311
Construction in progress 3,075 1,798
-------- --------
18,580 20,113
-------- --------
Accumulated depreciation
and amortization (8,807) (9,366)
-------- --------
$ 9,773 $ 10,747
======== ========
</TABLE>
F-13
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 25,
1998 1999
------------ -------------
<S> <C> <C>
Deferred financing charges (net of accumulated
amortization of $152 at December 1998
and $315 at December 1999) $ 20 $ 704
Unrecognized net pension obligation 139 277
Notes receivable 488 89
Trademarks (net of accummulated amortization of
$447 at December 1998 and $482
December 1999) 80 45
------ ------
$1,227 $1,115
====== ======
</TABLE>
F-14
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
December 26, December 25,
1998 1999
------------ ------------
<S> <C> <C>
Salaries, wages and other compensation $ 695 $ 501
Employee benefits 2,829 1,844
Accrued cooperative advertising and
promotion costs 4,821 3,572
Accrued rent 2,051 1,688
Other accrued expenses 3,296 2,829
------------ ------------
$13,692 $10,434
============ ============
</TABLE>
10. NET REVENUES
Net revenues consist of:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 27, DECEMBER 26, DECEMBER 25,
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Net Sales $120,965 $108,024 $ 87,408
Royalties and licensing fees 1,021 717 562
-------- -------- --------
======== ======== ========
$121,986 $108,741 $ 87,970
======== ======== ========
</TABLE>
11. NON-RECURRING CHARGES
Non-recurring charges of $300 for the fiscal year ended December 27, 1997
consisted of certain executive employee severance costs.
Non-recurring charges were $2,419 for the fiscal year ended December 26, 1998.
These charges consisted of severance costs related to the resignation and
termination of former executives of the Company, a provision established for the
remaining net lease obligation for the former corporate office at 111 West 40th
Street in New York City and write-offs of non-operating assets, offset by a
reversal of a reserve against an outstanding amount owed by the Company for the
sale of a trademark and the gain on the sale of the Reading, PA outlet store.
Non-recurring charges for the fiscal 1999 were $795. These charges consisted of
an additional provision for remaining lease obligations for the former corporate
office at 111 West 40th Street in New York City due to the loss of a subtenant,
and establishment of a reserve against an outstanding amount owed the Company
for the sale of a trademark.
F-15
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. BANK FINANCING
<TABLE>
<CAPTION>
December 26, December 25,
1998 1999
------------ ------------
<S> <C> <C>
Revolving line of credit $16,029 $10,041
======= =======
Long-term debt:
Term notes $ 8,674 $11,500
====== =======
Less current maturities of long-term debt 2,000 --
======= =======
$ 6,674 $11,500
======= =======
</TABLE>
Maturities of term notes are as follows for the year ended:
<TABLE>
<S> <C>
December 2001 $ 192
December 2002 2,299
December 2003 2,299
December 2004 6,710
------------
$11,500
============
</TABLE>
Effective October 8, 1997 (the "Refinancing Closing Date"), the Company replaced
its former financing arrangements with First Union National Bank of North
Carolina ("First Union") with a new loan and security agreement (the "Loan and
Security Agreement") with Century Business Credit Corporation ("CBCC" or the
"Lender") which matures on December 8, 2004. Proceeds of the Loan and Security
Agreement were used to pay all of the Company's indebtedness to First Union, and
to establish working capital lines of credit. 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. In connection
with the closing on the Loan and Security Agreement, the Company paid CBCC a
facility fee equal to $300.
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.
Pursuant to certain amendments to the Loan and Security Agreement executed in
1999, CBCC increased the Company's availability under the Revolving Credit
Facility by an amount not to exceed $6,210 (the "Additional Collateral Amount"),
in support of which certain shareholders and affiliates of the Company and
various third parties, provided stand-by guarantees, as set forth below, and
provided the Company with $2,150 (the "Overadvance Amount") of additional
borrowing capacity through November 30, 1999 and $1,250 through December 31,
1999.
In connection with the availability of the Additional Collateral Amount, certain
shareholders and affiliates of the Company, and various third parties, issued
limited guarantees in favor of the Lender in an aggregate principal amount not
to exceed $6,210 (each, a "Guarantee," together, the "Guarantees"). Pursuant to
the terms of the Guarantees, each guarantor guaranteed the performance of the
Company's obligations under the Loan and Security Agreement, and the payment of
any and all sums due and owing by the Company to the Lenders under such
Agreement, in all cases, limited
F-16
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. BANK FINANCING (CONTINUED)
to the dollar amount of the Guarantee. In accordance with their terms, the
Guarantees were withdrawn when the Company had availability under the Loan and
Security Agreement in excess of $6,000, without giving effect to the Additional
Collateral Amount. In consideration for the issuance of the Guarantees, the
Company (i) issued warrants to each guarantor, and (ii) paid to each guarantor
interest on the amount of each Guarantee at a rate equal to the difference
between (a) the Prime Rate minus 3% and (b) 10% per annum. (Refer to Note 13 for
a discussion of the Company's issuance of $15,210 of Series E Stock and Note 17
for a discussion of the Guarantor Warrants).
In December 1999, in connection with the Company's issuance of Series E Stock,
and the elimination of the Additional Collateral Amount and the Overadvance
Amount, the Loan and Security Agreement was amended (the "December Amendment")
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 tangible net worth covenant stipulates that the Company must
maintain a tangible net worth of not less than $2,000 as of the end of December
1999, and as of the end of each month thereafter. At December 25, 1999, the
Company's tangible net worth was approximately $5,600.
The December Amendment also imposed an additional Event of Default which
stipulates that, 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 (i) less than $3,000 and shall not have increased the undrawn
availability above $3,000 within thirty (30) days of such occurrence, or (ii)
less than $2,000. The maximum outstanding borrowings under the Revolving Credit
Facility for fiscal 1999 amounted to $29,852. Availability at December 25, 1999
was approximately $9,200.
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%).
In connection with the execution of the December Amendment, the Company paid
CBCC a $75 amendment fee and issued 550,000 warrants to CBCC to purchase an
aggregate of 550,000 shares of Common Stock of the Company at $.27 per share.
(Refer to Note 17 for a discussion of the warrants issued to CBCC).
13. 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
F-17
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES (CONTINUED)
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.
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"), issued by the Company pursuant to the terms of a certain
Securities Purchase Agreement, dated September 22, 1997 (the "1997 Securities
Purchase Agreement"), entered into by the Company and Danskin Investors, LLC
("Danskin Investors"), and in connection with the refinancing of the Company's
obligations to First Union National Bank, (See Note 12), 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.
In furtherance of the terms of the 1997 Securities Purchase Agreement, on April
28, 1998, the Company filed a Registration Statement on Form S-1 in connection
with the registration under the Securities Act of 1933, as amended, of (i) an
aggregate of 10,838,124 rights to purchase shares of Common Stock, and (ii)
2,131,889 shares of Common Stock issuable upon exercise of such rights. The
Board of Directors established May 8, 1998 as the date of record for holders of
Common Stock to participate in such offering. Holders of Common Stock held of
record as of the close of business on the record date had the right to purchase,
pro rata, 2,131,889 shares of Common Stock at a per share price of $0.30 (the
"Rights Offering"). The Rights Offering commenced on July 6, 1998 and expired on
August 6, 1998. Approximately 8.4 million rights were subscribed for and
approximately 1.6 million shares were issued in respect of such rights. In
accordance with the terms of the Securities Purchase Agreement, the Danskin
Investors purchased the rights not subscribed for on primary subscription,
totaling 488,289 shares of Common Stock, at $0.30 per share. The Company
realized aggregate gross proceeds of approximately $640.
On August 6, 1996, the Company issued to a bond fund, certain 10% Cumulative
Preferred Stock, having a liquidation preference of $5,000, in exchange for an
8% subordinated convertible debenture, which had an aggregate face value of
$5,000. The Preferred Stock was entitled to vote on an as converted basis and
was convertible into 4,403,339 shares of Common Stock at a conversion price of
$1.14 per share following the "reset" of such conversion price that took place
F-18
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES (CONTINUED)
on August 6, 1997. The Company had the right to make quarterly dividend payments
by issuing additional shares of common stock in lieu of cash, and did so in
March 1997 by issuing 56,689 shares of Common Stock at $2.205 per share and in
June 1997 by issuing 102,881 shares of Common Stock at $1.21 per share. By
agreement of the Company and the holder of the 10% Cumulative Preferred Stock,
the issuance in June 1997 of Common Stock in lieu of cash was rescinded. The
Company did not take action with respect to the dividend payment, which was due
on September 1, 1997. In September 1997, the holder of the 10% Cumulative
Preferred Stock exchanged such preferred stock, and any accrued but unpaid
dividends, for 3,436,214 shares of Common Stock and certain other rights,
including the right to participate in the purchase of the securities issued
pursuant to the 1997 Securities Purchase Agreement. Thereupon, the 10%
Cumulative Preferred Stock was canceled and retired.
14. RELATED PARTY ACTIVITIES
In connection with the Company's issuance to the Chairman of the Corporation of
a warrant to purchase 5,372,315 shares of Common Stock of the Company, in
September 1997, the Chairman executed a seven-year promissory note in favor of
the Company in the original principal amount of $80. The promissory note bears
interest at 6.55% per annum, payable annually.
15. PENSION PLAN
The Company sponsors and administers two defined benefit pension plans, the
Danskin Division Hourly Employees' Pension Plan and the Pennaco Hosiery Division
Hourly Employees' Pension Plan. Substantially all of the hourly employees of the
Danskin division and the Pennaco Hosiery division participate in these plans.
Benefits under the plans are based on years of service. The Company's funding
policy is to contribute the minimum required contribution for each plan year.
Effective April 15, 1997, the Pennaco Hosiery Division Hourly Employees' Pension
Plan was frozen. No person who is not already a participant can now become a
participant and no additional credited service shall be granted to any
participant. The resulting loss from curtailment of this Plan, amounting to
$178, has been reflected as a component of net pension cost in 1997.
In addition, as of December 26, 1998 and December 25, 1999, the Company recorded
a minimum pension liability adjustment to equity of $3,046 and $3,035,
respectively.
In each of October 1998 and 1999, the Company amended the Danskin Division
Hourly Employees' Pension Plan to increase the monthly benefit level for 1997
and 1998, respectively, credited service from $7.00 to $8.00 and amended the
Pennaco Hosiery Division Hourly Employees' Pension Plan to increase the monthly
benefit level for 1997 and 1998 from $0.00 to $8.00.
The following table sets forth the plans' funded status at December 26, 1998 and
December 25, 1999:
F-19
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PENSION PLAN DECEMBER 26, 1998 DECEMBER 25, 1999
----------------- -----------------
DANSKIN PENNACO DANSKIN PENNACO
--------------- ---------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of Year $5,805 $7,787 $6,597 $8,320
Service Cost 103 0 122 0
Interest Cost 407 511 443 564
Amendments 15 126 15 136
Actuarial Loss/(Gain) 804 464 (364) (604)
Benefits Paid (537) (568) (531) (582)
--------------- ---------------- -------------------- ---------------
$6,597 $8,320 $6,282 $7,834
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year $5,573 $6,055 $5,931 $6,539
Actual Return on Plan Assets 726 708 (24) (22)
Employer Contribution 169 344 0 358
Benefits Paid (537) (568) (531) (582)
--------------- ---------------- -------------------- ---------------
Fair Value of Plan assets at End of Year $5,931 $6,539 $5,376 $6,293
Funded Status ($666) ($1,781) ($906) ($1,541)
Unrecognized Net Transition Asset (173) 0 (120) 0
Unrecognized Prior Service Cost 15 124 29 250
Unrecognized Net Actuarial (Gain)/Loss 1,727 1,492 1,765 1,389
--------------- ---------------- -------------------- ---------------
Net amount recognized $903 ($165) $768 $98
=============== ================ ==================== ===============
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $903 $0 $768 $98
Accrued benefit liability (1,569) (1,781) (1,674) (1,639)
Intangible Asset 15 124 29 249
Accumulated other comprehensive income 1,554 1,492 1,645 1,390
--------------- ---------------- -------------------- ---------------
$903 ($165) $768 $98
=============== ================ ==================== ===============
Assumptions as of December 31
Discount rate 6.75% 6.75% 7.75% 7.75%
Expected long-term rate of return on assets 8.50% 8.50% 8.50% 8.50%
Components of Net Periodic Pension Cost
Service Cost $103 $0 $122 $0
Interest Cost 407 511 443 563
Expected Return on Plan Assets (460) (509) (478) (548)
Amortization of Net Transition (Asset) Obligation (53) 0 (53) 0
Amortization of Prior service Cost 1 2 2 11
Recognized Actuarial (Gain)/Loss 68 17 100 69
--------------- ---------------- -------------------- ---------------
Net Periodic Pension Cost $66 $21 $136 $95
</TABLE>
F-20
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
16. RECAPITALIZATION
In anticipation of the refinancing of the Company's obligations under its former
financing arrangement with First Union, Danskin Investors contributed $21,256 of
the Company's then outstanding term loan, and $4,000 in cash in exchange for
Series C Preferred Stock of the Company and $15,000 in Subordinated Debt.
Shortly thereafter, upon the refinancing, the $15,000 in Subordinated Debt and
the Series C Preferred Stock was exchanged for $3,000 in Subordinated Debt,
$12,000 (liquidation value) of Series D Stock and warrants to purchase
10,000,000 shares of Common Stock at $0.30 per share. This effectively created a
non-cash reduction in the Company's debt of $10,256. (Refer to Note 13 for a
discussion of the Subordinated Debt, the Series D Preferred Stock and Note 17
for a discussion of the Warrants.)
17. WARRANTS
In October 1997, the Company granted warrants to Danskin Investors to purchase
10,000,000 shares of the Company's common stock at a price of $0.30 per share.
This has been accounted for as an addition to paid-in capital at their fair
value of $244, as determined by an independent valuation firm, and a reduction
of the extraordinary gain described in Note 18. In addition, the Company sold
warrants to purchase 5,372,315, 795,900 and 1,591,797 of the Company's common
shares at $0.30 per share to three members of the Company's Board of Directors
for their fair values aggregating to $144.6. These have been accounted for as
additions to paid in capital.
In November 1999, the Company issued 12,103,200 warrants to Guarantors 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 which took into
account the dollar amount of the Guarantee and the number of days that the
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. (Refer to Note 12 for a discussion of the Guarantees.)
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.
18. EXTRAORDINARY GAIN
The Company restructured its debt during 1997. This has been accounted for as a
troubled debt restructuring. The write-off of old deferred financing costs and
legal and other costs that the Company incurred to effect this debt
restructuring have been offset against the extraordinary gain.
F-21
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
18. EXTRAORDINARY GAIN (CONTINUED)
The extraordinary gain is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Gain for the forgiveness of debt $ 10,256
Valuation of warrants given to Investor Group (244)
Write-off of deferred financing to Investor Group (2,603)
Fees incurred in effecting the debt restructuring (2,164)
--------
Total $ 5,245
========
</TABLE>
19. INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 27, 1997 DECEMBER 26, 1998 DECEMBER 25, 1999
<S> <C> <C> <C>
Federal:
Current Provision $ 50 $-- $--
---- ---- ----
50 -- --
State:
Current Provision 195 190 20
---- ---- ----
$245 $190 $ 20
==== ==== ====
</TABLE>
The following represented the significant items comprising net deferred taxes as
of December 26, 1998 and as of December 25, 1999:
F-22
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
19. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 26, 1998 DECEMBER 25, 1999
------------------------ ------------------------
<S> <C> <C>
Future Deductible Items:
Accounts Receivable Allowance $ 408 $ 434
Inventory Allowance 1,215 597
Non-Deductible Accruals 2,946 1,658
Pension and Retirement Accruals 243 446
Net Operating Loss Carry Forward 7,144 10,688
Other 2,906 3,412
--------------- ----------------
14,862 17,235
Future Taxable Items
Prepaid Expenses (301) (301)
Property, Plant, & Equipment 240 393
--------------- ----------------
(61) 92
Valuation Allowance (14,801) (17,327)
--------------- ----------------
$ -- $ --
--------------- ----------------
</TABLE>
The difference between income tax expense and the tax computed by applying the
statutory income tax rate to income before taxes was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 27, 1997 DECEMBER 26, 1998 DECEMBER 25, 1999
------------------------ ----------------------- -----------------------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate 34% (34)% (34)%
State Income Taxes, net of Federal Benefit 30 3 --
Change in Valuation Allowance 47 (34) --
Losses Not Utilized -- 34 34
Losses Utilized (81) -- --
Alternative Minimum Tax 7 -- --
------------------------ ----------------------- -----------------------
Effective Income Tax Rate 37% 3% 0%
======================== ======================= =======================
</TABLE>
The valuation allowance for the period ended December 1997 increased $309 to
$10,934. The valuation allowance for the period ended December 1998 increased
$3,867 to $14,801. The valuation allowance for the period ended December 1999
increased $2,526 to $17,327. Valuation allowances have been established since
management deems it is more likely than not that certain tax benefits will not
be realized.
Deferred income taxes result primarily from net operating losses, certain
inventory adjustments not currently deductible for income tax purposes, the use
of accelerated depreciation methods for income tax purposes, accruals and
reserves not currently deductible, and differences in reporting pension expense
for financial statement and income tax purposes.
F-23
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
19. INCOME TAXES (CONTINUED)
Net operating losses amounting to approximately $19,000 at December 26, 1998
expire during the years 2010 to 2016; annual usage is subject to the
limitations discussed below. An additional net operating loss (NOL) of
approximately $9,000 was generated for the fiscal year ended December 25,
1999. This NOL generated from 1999 losses, is not subject to any limitation
and will expire in the year 2019.
During 1997, the Company underwent a change of ownership within the meaning of
Internal Revenue Code Section 382. As a result of this change in ownership, the
future utilization of the Company's net operating loss (NOL) carry forward will
be limited. Under these rules, the amount of the Company's NOL carry forward
that can be used in each subsequent year is limited to an annual amount. This
annual limitation is determined by multiplying the value of the Company on the
date of the ownership change by the Federal long-term interest rate of
approximately 5.5%.
20. COMMITMENTS AND CONTINGENCIES
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, in the aggregate, have a material
adverse impact on the financial condition, results of operations, liquidity or
business of the Company.
TAX AUDITS
The Company is not presently the subject of any pending state or federal audits.
OPERATING LEASES
The minimum annual rental commitments under non-cancelable operating leases at
December 25, 1999 for office space, manufacturing space, equipment and retail
stores were approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING: AMOUNT
--------------------- ---------
<S> <C>
December 2000 $ 4,445
December 2001 3,538
December 2002 2,412
December 2003 1,882
December 2004 1,382
Thereafter 3,882
---------
Total minimum rental payments $17,541
=========
</TABLE>
The majority of operating leases are for three-year to five-year terms,
generally with options to renew for similar terms, except for the corporate
office, one full price retail store, and the Pennaco mill and warehouse space
which are for terms of 9 to 15 years. Certain leases require the payment of
contingent rent based upon sales and other factors.
F-24
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
20. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense was approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 27, 1997 DECEMBER 26, 1998 DECEMBER 25, 1999
---------------------------- ----------------------------- ---------------------------
<S> <C> <C> <C>
Minimum rent $ 6,150 $ 5,802 $ 5,207
Contingent rent 892 1,054 580
---------------------------- ----------------------------- ---------------------------
Rent expense $ 7,042 $ 6,856 $ 5,787
============================ ============================= ===========================
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements that provide for base and
incentive compensation, and that are terminable for "cause", as defined, or
resignation following a "change of control", as defined. The Company's total
minimum commitment pursuant to the term of these agreements for fiscal 2000 and
future years totals approximately $2,000 per year, unless employment is
terminated in which case total pay will generally continue for 12 to 24 months
following such termination.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of accounts receivable from department stores,
sporting goods stores and other specialty retailers as well as commercial
letters of credit. Although the concentration of risk is limited due to the
large number of customers included within the Company's customer base, several
of the Company's retail customers have experienced financial difficulties in
recent years. These financial difficulties have increased the risk of extending
credit to such customers. The Company subjects all customers to credit
evaluation prior to acceptance and maintains ongoing reviews based on
established policies.
MINIMUM ROYALTY COMMITMENTS
The Company generally enters into licensing arrangements, as a licensee, that
provide for minimum annual royalty payments and additional royalty payments
based on a percentage of net revenues. The Company also licenses its Danskin(TM)
and Round-the-Clock(TM) names to selected companies. As of December 25, 1999,
the Company was committed to certain licensing arrangements as follows:
<TABLE>
<CAPTION>
Royalty Expense Royalty Income
-------------- -----------------
<S> <C> <C>
Fiscal Years Ending:
December 2000 $ 525 $ 193
December 2001 550 218
December 2002 575 120
December 2003 600 120
-------------- -----------------
$ 2,250 $ 651
=============== =================
</TABLE>
F-25
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
21. STOCK ISSUANCES
In furtherance of the terms of the Securities Purchase Agreement, on April 28,
1998, the Company filed a Registration Statement on Form S-1 in connection with
the registration under the Securities Act of 1933, as amended, of (i) an
aggregate of 10,838,124 rights to purchase shares of Common Stock, and (ii)
2,131,889 shares of Common Stock issuable upon exercise of such rights. The
Board of Directors established May 8, 1998 as the date of record for holders of
Common Stock to participate in such offering. Holders of Common Stock held of
record as of the close of business on the record date had the right to purchase,
pro rata, 2,131,889 shares of Common Stock at a per share price of $0.30 (the
"Rights Offering"). Approximately 8.4 million rights were subscribed for and
approximately 1.6 million shares were issued in respect of such rights. In
accordance with the terms of the Securities Purchase Agreement executed in 1997,
Danskin Investors purchased the rights not subscribed for on primary
subscription, totaling 488,289 shares of Common Stock, at $0.30 per share. The
Company realized gross proceeds of approximately $640.
In addition, on May 27, 1998, the Company, Danskin Investors, and a bond fund
purchased 7,864,336 shares of Common Stock, in exchange for approximately $2,400
aggregate principal amount of Remaining Subordinated Notes (the "Stock Sale").
As a result of the Rights Offering and the Stock Sale, the Company issued
10,000,000 shares of Common Stock at $0.30 per share, as contemplated by the
Securities Purchase Agreement. In addition, the outstanding principal amount of
Remaining Subordinated Notes was satisfied in full.
On December 8, 1999, Carol Hochman, the Chief Executive Officer, purchased
5,040,000 shares of Common Stock of the Company for $0.27 per share. Ms.
Hochman issued a promissory note, in favor of the Company, in the original
principal amount of $1,361 as payment for the shares. Such note receivable
has been classified as stockholders' equity.
On December 8, 1999, and in accordance with the terms of her employment
agreement, Ms. Hochman received a grant of 1,000,000 shares.
22. SEGMENT INFORMATION
The Company is organized based on the products that it offers. The Company
currently operates under two operating segments: Danskin, which designs,
manufactures, markets and sells activewear, dance wear, bodywear, tights and
exercise apparel through wholesale channels to retailers and through the
Company's outlet and retail stores; and Pennaco, which designs, manufactures and
markets hosiery under the brand names Round-The-Clock(R) and Givenchy(R), and
under private labels for major 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. The Danskin Division was
allocated $4,287 in fiscal 1999, $3,964 in fiscal 1998 and $2,359 in fiscal
1997. Pennaco was allocated $2,201 in fiscal 1999, $3,293 in fiscal 1998 and
$2,038 in fiscal 1997. Capital expenditures for corporate administration are
included with the Danskin Division. In addition, the Company does not allocate
interest expense to the divisions.
F-26
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Financial information by segment for the fiscal years ended December 25, 1999,
December 26, 1998 and December 26, 1997 is summarized below:
<TABLE>
<CAPTION>
DANSKIN PENNACO TOTAL
---------- --------- ----------
<S> <C> <C> <C>
1999
Net Revenues ...................... $ 60,643 $ 27,327 $ 87,970
Operating Loss .................... (10,887) (3,539) (14,426)
Identifiable assets at year-end ... 35,151 12,737 47,888
Depreciation and amortization ..... 1,320 484 1,804
Capital expenditures .............. 1,779 1,057 2,836
1998
Net Revenues ...................... $ 73,468 $ 35,273 $ 108,741
Operating Loss .................... (2,671) (1,547) (4,218)
Identifiable assets at year-end ... 41,549 16,157 57,706
Depreciation and amortization ..... 1,108 485 1,593
Capital expenditures .............. 3,450 1,223 4,673
1997
Net Revenues ...................... $ 81,158 $ 40,828 $ 121,986
Operating Loss .................... (13) (297) (310)
Identifiable assets at year-end ... 38,509 16,493 55,002
Depreciation and amortization ..... 1,345 751 2,096
Capital expenditures .............. 236 5 241
</TABLE>
Reconciliation of depreciation and amortization to consolidated totals is as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Total segment depreciation and amortization ... $2,096 $1,593 $1,804
Amortization of deferred financing costs ...... 380 134 198
------ ------ ------
Consolidated depreciation and amortization .... $2,476 $1,727 $2,002
====== ====== ======
</TABLE>
F-27
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL INFORMATION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED
---------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
---------- ---------- ---------- ------------
Fiscal year ended December 25,1999: (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues ........................... $ 24,141 $ 23,526 $ 21,173 $ 19,130
========== ========== ========== ============
Gross profit ........................... $ 8,120 $ 6,517 $ 6,226 $ 1,818
========== ========== ========== ============
Net loss ............................... ($ 2,870) ($ 2,675) ($ 3,348) ($ 11,015)
========== ========== ========== ============
Net loss applicable to Common Stock .... ($ 3,140) ($ 2,946) ($ 3,619) ($ 11,281)
========== ========== ========== ============
Basic and diluted net loss per share ... ($ 0.15) ($ 0.14) ($ 0.17) ($ 0.36)
========== ========== ========== ============
Weighted average common shares and share
equivalents outstanding .............. 21,012,000 21,022,000 21,022,000 30,916,000
========== ========== ========== ============
Fiscal year ended December 26, 1998
Net revenues ........................... $ 28,251 $ 26,444 $ 27,959 $ 26,087
========== ========== ========== ============
Gross profit ........................... $ 10,473 $ 10,275 $ 10,813 $ 8,752
========== ========== ========== ============
Net loss ............................... ($ 1,757) ($ 319) ($ 1,862) ($ 2,983)
========== ========== ========== ============
Net loss applicable to Common Stock .... ($ 2,062) ($ 586) ($ 2,133) ($ 3,254)
========== ========== ========== ============
Basic and diluted net loss per share ... ($ 0.20) ($ 0.04) ($ 0.11) ($ 0.16)
========== ========== ========== ============
Weighted average common shares and share
equivalents outstanding .............. 10,529,000 13,538,000 19,689,000 20,917,000
========== ========== ========== ============
</TABLE>
S-1
<PAGE>
DANSKIN, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SCHEDULE II
------------------
COLUMN A COLUMN B COLUMN C-ADDITIONS COLUMN D COLUMN E
-------- -------- ------------------ -------- --------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS (A) PERIOD
- ----------- ------------ ---------- ----------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal year Ended December 25,
1999
Allowance for doubtful
accounts receivable.............. $1,021 $250 $ -- $184 $1,087
===============================================================================================
Fiscal year Ended Deceber 26,
1998
Allowance for doubtful
accounts receivable.............. $ 848 $327 $ -- $154 $1,021
===============================================================================================
Fiscal year Ended December 27,
1997
Allowance for doubtful
accounts receivable.............. $ 938 $49 $ -- $139 $ 848
===============================================================================================
</TABLE>
(a) Uncollectible accounts receivable written off, net of recoveries.
S-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000889299
<NAME> DAN SKIN, INC.
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> DEC-25-1999
<EXCHANGE-RATE> 1
<CASH> 663,000
<SECURITIES> 0
<RECEIVABLES> 9,448,000
<ALLOWANCES> 1,087,000
<INVENTORY> 24,159,000
<CURRENT-ASSETS> 36,026,000
<PP&E> 10,747,000
<DEPRECIATION> 9,366,000
<TOTAL-ASSETS> 47,888,000
<CURRENT-LIABILITIES> 27,791,000
<BONDS> 0
0
15,210,000
<COMMON> 739,000
<OTHER-SE> (10,075,000)
<TOTAL-LIABILITY-AND-EQUITY> 47,888,000
<SALES> 87,970,000
<TOTAL-REVENUES> 87,970,000
<CGS> 65,289,000
<TOTAL-COSTS> 65,289,000
<OTHER-EXPENSES> 37,107,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,462,000
<INCOME-PRETAX> (19,888,000)
<INCOME-TAX> 20,000
<INCOME-CONTINUING> (19,908,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,908,000)
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
