-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RDP3Qir8XpzvAGBksl7neIdXVK1Szrh1dJXonHSGm+sbMVB6uANTaO8zmldD5SSM yPgIVwPpBFKLQhKF5jEnZA== /in/edgar/work/20000815/0000912057-00-037805/0000912057-00-037805.txt : 20000922 0000912057-00-037805.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-037805 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000701 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DANSKIN INC CENTRAL INDEX KEY: 0000889299 STANDARD INDUSTRIAL CLASSIFICATION: [2330 ] IRS NUMBER: 621284179 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20382 FILM NUMBER: 703246 BUSINESS ADDRESS: STREET 1: 530 SEVENTH AVE, M1 CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2127644630 MAIL ADDRESS: STREET 1: 111 W 40TH ST CITY: NEW YORK STATE: NY ZIP: 10018 10-Q 1 a10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 2000. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 0-20382 DANSKIN, INC. ------------- Exact name of registrant as specified in its charter) DELAWARE 62-1284179 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Incorporation Or organization Identification No.) 530 SEVENTH AVENUE, NEW YORK, NY 10018 -------------------------------------- (Address of principal executive offices) (212) 764-4630 -------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares outstanding of the issuer's Common Stock, $0.01 par value, as of June 30, 2000, excluding 1,083 shares held by a subsidiary: 73,985,454 DANSKIN, INC. AND SUBSIDIARIES FORM 10-Q FOR THE FISCAL THREE AND SIX MONTH PERIODS ENDED June 26, 1999 and July 1, 2000 INDEX
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of December 25, 1999 and July 1, 2000 (Unaudited) 3 Condensed Consolidated Statements of Operations For the Fiscal Three and Six Month Periods Ended June 26, 1999 and July 1, 2000 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows For the Fiscal Six Month Periods Ended June 26, 1999 and July 1, 2000 (Unaudited) 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 22
2 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 25, 1999 JULY 1, 2000 ----------------- ------------ (unaudited) Current assets: Cash and cash equivalents $ 663 $ 777 Accounts receivable, less allowance for doubtful accounts of $1,087 at December 25, 1999 and $1,095 at July 1, 2000 9,448 12,982 Inventories 24,159 25,165 Prepaid expenses and other current assets 1,756 1,647 -------- -------- Total current assets 36,026 40,571 Property, plant and equipment - net of accumulated depreciation and amortization of $9,366 at December 25, 1999 and $10,251 at July 1, 2000 10,747 10,110 Other assets 1,115 1,007 -------- -------- ======== ======== Total assets $ 47,888 $ 51,688 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving line of credit $ 10,041 $ 19,078 Accounts payable 7,316 6,731 Accrued expenses 10,434 8,986 -------- -------- -------- -------- Total current liabilities 27,791 34,795 -------- -------- Long-term debt, net of current maturities 11,500 11,500 Accrued dividends 65 749 Accrued retirement costs 2,658 2,658 -------- -------- -------- -------- Total long-term liabilities 14,223 14,907 -------- -------- Total liabilities 42,014 49,702 -------- -------- Commitments and contingencies Stockholders' Equity Series E Cumulative Convertible Preferred Stock, 3,042 shares Liquidation Value of $15,210 15,210 15,210 Common Stock, $.01 par value, 100,000,000 shares authorized, 73,985,878 shares issued at December 25, 1999 and 73,986,537 shares issued at July 1, 2000, less 1,083 shares held by subsidiary at December 25, 1999 and July 1, 2000 739 739 Additional paid-in capital 39,853 39,852 Notes receivable from stock sale (1,361) (1,361) Accumulated deficit (45,532) (49,419) Accumulated other comprehensive loss (3,035) (3,035) -------- -------- Total Stockholders' Equity 5,874 1,986 ======== ======== Total Liabilities and Stockholders' Equity $ 47,888 $ 51,688 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 3 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL THREE MONTHS ENDED FISCAL SIX MONTHS ENDED ---------------------------- ---------------------------- JUNE 26, 1999 JULY 1, 2000 JUNE 26, 1999 JULY 1, 2000 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ------------ ------------ ------------ ------------ Net revenues $ 23,526 $ 20,471 $ 47,667 $ 41,502 Cost of goods sold 17,009 14,419 33,030 29,281 ------------ ------------ ------------ ------------ Gross profit 6,517 6,052 14,637 12,221 Selling, general and administrative expenses 8,402 7,230 18,703 14,631 Non-recurring income (665) (665) Interest expense 745 750 1,389 1,438 ------------ ------------ ------------ ------------ 9,147 7,315 20,092 15,404 Loss before income tax provision (2,630) (1,263) (5,455) (3,183) Provision for income taxes 45 5 90 20 ------------ ------------ ------------ ------------ Net loss (2,675) (1,268) (5,545) (3,203) Preferred dividends 271 342 541 684 ------------ ------------ ------------ ------------ Net loss applicable to Common Stock ($ 2,946) ($ 1,610) ($ 6,086) ($ 3,887) ============ ============ ============ ============ Basic and diluted loss per share: Net loss per share ($ 0.14) ($ 0.02) ($ 0.29) ($ 0.05) ============ ============ ============ ============ Weighted average number of common shares outstanding basic and diluted 21,022,000 73,987,000 21,017,000 73,986,000 ============ ============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 4 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL SIX MONTHS ENDED JUNE 26, 1999 JULY 1, 2000 ------------- ------------ UNAUDITED UNAUDITED --------- --------- Cash Flows From Operating Activities: Net loss ($5,545) ($3,203) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 830 1,035 Stock grants issued 94 -- Provision for doubtful accounts receivable 110 30 Net loss on sale of property, plant and equipment 13 1 Net gain on sale of trademark -- (365) Changes in operating assets and liabilities: Increase in accounts receivable (1,497) (3,564) Decrease (increase) in inventories 1,613 (1,006) Decrease in prepaid expenses and other assets 179 62 Decrease in accounts payable (524) (585) Decrease in accrued expenses (2,636) (1,636) ------- ------- Net cash used in operating activities (7,363) (9,231) ------- ------- Cash Flows From Investing Activites: Capital expenditures (1,966) (368) Proceeds from sale of trademark -- 600 Proceeds from sale of property, plant and equipment -- 77 ------- ------- Net cash used in investing activities (1,966) 309 ------- ------- Cash Flows From Financing Activities: Net borrowings under revolving line of credit 9,751 9,037 Repayments of long-term debt (1,063) -- Proceeds from term loans 943 -- Expenses related to recapitalization -- (1) Financing costs incurred (59) -- ------- ------- Net cash provided by financing activities 9,572 9,036 ------- ------- Net increase in Cash and Cash Equivalents 243 114 Cash and Cash Equivalents, Beginning of Period 546 663 ------- ------- Cash and Cash Equivalents, End of period $ 789 $ 777 ======= ======= Supplemental Disclosure of Cash Flow Information: Interest paid $ 1,331 $ 1,307 Income taxes paid 85 17 Non-Cash Activities The Company issued a stock grant of 100,000 shares valued at $.9375 per share to the CFO in January 1999.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 5 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ITEM 1. FINANCIAL STATEMENTS (CONTINUED) 1. LIQUIDITY During fiscal 1999, capital constraints impacted all aspects of Danskin, Inc.'s and Subsidiaries' (the "Company") businesses. This included, among other aspects: the Company's ability to purchase piece goods; its ability to fulfill customers' orders resulting in both a decline in potential revenues, as a substantial percentage of orders were either shipped late and/or only partially fulfilled, and declines in orders as a result of inadequate and/or mismatched inventory, poor reporting systems and the absence of an integrated and focused retail strategy. The Company has taken a number of positive steps. In June 1999, the then Chief Executive Officer was terminated and was replaced by Carol Hochman. During the second half of fiscal 1999, Carol Hochman and a number of new senior executives addressed the foregoing operating issues. In this regard, in December 1999, the Company raised $19,250 of new capital (from the sale of $15,210 of an authorized $20,000 issuance of convertible preferred stock, and $4,040 in the term loan portion of the Company's secured credit facility) resulting in $10,000 in undrawn availability at close. (Refer to Notes 3, 4 and 5 for a discussion of the equity private placement completed to-date and the refinancing of the Company's bank debt.) In addition, beginning in the second half of fiscal 1999, new management undertook a "right-sizing" reorganization of the Company's personnel and manufacturing infrastructures, eliminated substantial operating costs and changed its approach to merchandising and selling, eliminating unprofitable SKUs, emphasizing high quality businesses, and instituting a replenishment and forecasting capability to improve fulfillment and maximize revenue. These actions resulted in improved financial results during the first fiscal six months ended July 1, 2000 as compared to the prior year fiscal six months ended June 26, 1999. At July 1, 2000 availability under the Company's Revolving Credit Facility was approximately $4,500. The Company is currently seeking to place the remaining $4,790 of such convertible preferred stock on the same terms and conditions as the December offering and has engaged an investment banker to promote the placement. The Company presently anticipates that the proceeds from such sale, if successful, will be used to finance the Company's Internet efforts and for general working capital purposes. (Refer to "Item 2. Management Discussion and Analysis, Strategic Outlook"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION In the opinion of the management of the Company, the accompanying Condensed Consolidated Financial Statements have been presented on a basis consistent with the Company's fiscal year end financial statements and contain all adjustments (all of which were of a normal and recurring nature) necessary to present fairly the financial position of the Company as of July 1, 2000, as well as its results of operations and its cash flows for the fiscal six month periods ended June 26, 1999 and July 1, 2000. The fiscal six months ended July 1, 2000 consisted of twenty-seven weeks and the fiscal six months ended June 26, 1999 consisted of twenty-six weeks. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. See the Annual Report of the Company on Form 10-K for the Fiscal Year Ended December 25, 1999. Operating results for interim periods may not be indicative of results for the full fiscal year. 6 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower cost or market on a first-in, first-out basis. Inventories consisted of the following:
December 25, July 1, 1999 2000 (Unaudited) -------------- ------------ Finished goods $ 13,978 $ 14,621 Raw materials 4,365 4,500 Work-in-process 5,339 5,265 Packaging materials 477 779 -------------- ------------ $ 24,159 $ 25,165 ============== ============
INCOME (LOSS) PER COMMON SHARE For the six months ended June 26, 1999 and July 1, 2000, basic and diluted net loss per share was computed based on weighted average common and common equivalent shares outstanding of 21,017 and 73,986, respectively. Common Stock equivalents are excluded from the basic and diluted net loss per share calculation for both periods because the effect would be antidilutive. At July 1, 2000, the Company had the following common shares and common share equivalents outstanding: Common Shares 73,986,537 Preferred Stock 49,064,516 Warrants/Options 38,196,609 ----------- Total Shares and Share Equivalents Outstanding 161,247,662 ===========
3. BANK FINANCING Effective October 8, 1997, the Company entered into a loan and security agreement (the "Loan and Security Agreement") with Century Business Credit Corporation ("CBCC" or the "Lender") which matures on December 8, 2004. Proceeds of the Loan and Security Agreement were used to pay all of the Company's indebtedness to its former lender, and to establish working capital lines of credit. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority security interest in all present and future assets of the Company. Pursuant to and in accordance with its terms, the Loan and Security Agreement initially provided the Company with a term loan facility in the aggregate principal amount of $10,000 (the "Term Loan Facility") and a revolving credit facility, including a provision for the issuance of letters of credit (the "Revolving Credit Facility") generally in an amount not to exceed the lesser of (a) $45,000 less the aggregate outstanding principal balance under the Term Loan Facility, or (b) a formula amount based upon the Company's available inventory and accounts receivable levels, minus certain discretionary reserves. 7 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. BANK FINANCING (CONTINUED) In December 1999, the Loan and Security Agreement was amended to, among other things, (i) extend the maturity date of the facility from October 8, 2002 to December 8, 2004, and (ii) increase the amount available under the Term Loan Facility to $11,500. The Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of $192 commencing on the first day of December 2001. The Loan and Security Agreement contains certain affirmative and negative covenants including, maintenance of tangible net worth and a limitation on capital expenditures, respectively. The tangible net worth covenant is calculated by subtracting from total assets all intangible assets and total liabilities. The Loan and Security Agreement was re-finalized to stipulate that (i) the Company must maintain a tangible net worth of not less than $0 as of the end of May 2000 and as of the end of each month thereafter, and (ii) it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement for the month of August, and for any month thereafter, of less than $1,000. At July 1, 2000, the Company's tangible net worth was approximately $1,700. Availability at July 1, 2000 was approximately $4,500. The maximum borrowings under the Revolving Credit Facility was $19,078 during the fiscal six months ended July 1, 2000. Interest on the Company's obligations and under the Loan and Security Agreement generally accrues at a rate per annum equal to the sum of the Prime Rate plus one half of one (1/2%) percent and is payable monthly. Interest may also accrue at a rate per annum equal to the sum of the Eurodollar Rate, as defined in the Loan and Security Agreement, plus two and three quarters percent (2 3/4%). 4. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES In December 1999, the Company issued $15,210 stated value of 9% Series E Senior Step-Up Convertible Preferred Stock (the "Series E Stock"). The 3,042 shares of Series E Stock are convertible into Common Stock, at the option of the holder, at an initial conversion rate of 16,129 shares of Common Stock for each share of Series E Stock so converted, subject to adjustment in certain circumstances. The terms of the Series E Stock also provide that, at any time after the fifth anniversary of the date of its issuance, the Series E Stock may, at the election of the Company, be redeemed by the Company for an amount equal to the sum of (x) $5,000 per share (as adjusted for any combinations, divisions or similar recapitalizations affecting the shares of Series E Stock), plus (y) all accrued and unpaid dividends on such shares of Series E Stock to the date of redemption. Holders of the Series E Stock are entitled to vote, together with the holders of the Common Stock and any other class or series of stock then entitled to vote, as one class on all matters submitted to a vote of stockholders of the Company, in the same manner and with the same effect as the holders of the Common Stock. In any such vote, each share of issued and outstanding Series E Stock shall entitle the holder thereof to one vote per share for each share of Common Stock that would be obtained upon conversion of all of the outstanding shares of Series E Stock held by such holder, rounded up to the next one-tenth of a share. Therefore, the issuance of the Series E Stock by the Company was highly dilutive of existing holders of Common Stock. Until the fifth anniversary of the date of its issuance, the Series E Stock has a 9% annual dividend rate, provided that the Company may at its sole option pay a portion of such dividend equal to up to 2% per annum in shares of common stock of the Company; provided however, that the Company has an obligation with respect to the holders of the Series E Stock to cause the common stock of the Company to be listed on the Nasdaq Small Cap Market or the Nasdaq National Market as promptly as feasible following the issuance of the Series E Stock. If the Company does not achieve such listing, within eighteen (18) calendar months following the issuance date of the Series E Stock, dividends 8 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) shall accrue prospectively at a rate of 14% per annum, payable in cash only, until such time such listing is effected. Notwithstanding the forgoing, from and after the fifth anniversary of the date of issuance, dividends accrue on the Series E Stock at a rate of 14% per annum, payable only in cash. Simultaneously with the Company's issuance of the Series E Stock, the holders of the Company's Series D Redeemable Cumulative Convertible Preferred Stock (the "Series D Stock"), agreed to convert such Series D Stock into Common Stock of the Company in accordance with the terms and conditions of the Series D Stock. The holders of the 2,400 shares of Series D Stock issued by the Company converted such preferred stock into Common Stock at the stated conversion rate of 16,666.66 shares of Common Stock for each share of the Series D Stock so converted. In addition, the Series D Stock had an 8% annual dividend rate, payment of which was deferred through December 31, 1999. Danskin Investors agreed that, for the period beginning on the date of issuance of the Series D Stock and ending on December 31, 1999, all dividends accrued on the Series D Stock could be paid, at the option of the Company, in cash or in additional Common Stock of the Company. Therefore, as a result of the conversion of the Series D Stock, the Company issued 46,924,000 shares of Common Stock in respect of the Series D Stock and all accrued but unpaid dividends through the effective date of the conversion. 5. WARRANTS In November 1999, the Company issued 12,103,200 warrants to certain shareholders, affiliates of the Company, and various third parties in consideration for providing stand-by guarantees of the Company's obligations under the Loan and Security Agreement. Each warrant represents the right to purchase one share of Common Stock for $0.27 through May 2009. The number of warrants issued to each guarantor was based upon a formula that took into account the dollar amount of the limited guarantee and the number of days that such guarantee was in place. These warrants have been accounted for as an increase to additional paid in capital and was amortized as interest expense over the life of the guarantee. In December 1999, in connection with an amendment to the Loan and Security Agreement, the Company issued to CBCC, its secured lender, a warrant to purchase 550,000 shares of the Company's Common Stock at a price of $0.27 per share. This has been accounted for as additional financing fees totaling $110 and additional paid-in-capital. The unamortized portion of such fees will be amortized over the remaining life of the loan. In connection with the placement of the Series E Preferred Stock, the Company issued to Utendahl Capital Partners for its services as placement agent in connection with the sale of certain of the Series E Preferred Stock, a warrant to purchase 119,987 shares of the Company's Common Stock at a price of $0.31 per share. Such warrants were recorded as additions to paid-in capital. 6. NON-RECURRING INCOME Non-recurring income for the three and six months ended July 1, 2000 was $665 primarily as a result of a net recovery of $365 for an outstanding amount owed the Company for the sale of a trademark, and $300 resulting from securing a subtenant for the Company's former corporate offices in New York City, in respect of which the Company previously recognized a loss in 1999. 7. NEW LICENSES Effective May 5, 2000, the Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen Tracy(R) name. The agreement provides that Pennaco shall have the exclusive right and license to use the Ellen Tracy(R) trademark in connection with the 9 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) manufacture, assemblage, sale, marketing and distribution, advertising and promotion of legwear in the United States and Canada. Ridgeview, Inc. previously held the license. In a separate transaction, Pennaco obtained an exclusive license for the manufacture and sale of sheer hosiery and knee-highs under the Evan-Picone(R) name. The agreement provides that Pennaco shall have the exclusive right and license to use the Evan-Picone(R) trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of sheer hosiery in the United States and Canada. Ridgeview, Inc previously held this license as well. In connection with obtaining the Ellen Tracy(R) and Evan-Piccone(R) licenses, Danskin has hired Barry Tartarkin, former President of Ridgeview, Ladies Hosiery Group, as the Vice President, General Manager of its Pennaco Hosiery division, along with certain other members of Mr. Tartarkin's management team. Mr. Tartarkin is entitled to, among other things, a percentage of sales of product under the aforementioned license agreements. Mr. Tartarkin replaces Joyce Darkey who has been appointed Vice President, Strategic Planning & Development for Danskin, Inc., spearheading Danskin's Internet efforts. 8. LEGAL PROCEEDINGS The Company severed its relationship with Cathy Volker, the Company's former Chief Executive Officer, in June 1999. The Company's and Ms. Volker's respective rights and obligations under Ms. Volker's Employment Agreement, dated as of February 2, 1998, if any, are the subject of a pending arbitration. On November 25, 1996, the Company commenced suit against Herman Gruenwald, former President, Director and Principal shareholder of Siebruck Hosiery, Ltd. ("Siebruck") for damages in the amount of $1,450 in the Superior Court, Montreal. The claim relates to unreported sales in excess of $1,500 arising under a license agreement entered into by and between the Company and Siebruck, which expired on December 31, 1995. Siebruck was placed under the provision of the Canadian Bankruptcy and Insolvency Act. Mr. Gruenwald's statement of defense included a cross-demand against the Company wherein he is claiming damages to his reputation in the amount of Cdn. $3,000. A reasonable evaluation of the claim against the Company cannot be made at this time. However, the Company does not presently anticipate that the ultimate resolution of such claim will be material to its financial condition, results of operations, liquidity, or business of the Company. The Company is a party to a number of other legal proceedings arising in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, taken together, have a material adverse impact on the financial condition, results of operations, liquidity or business of the Company. 9. SEGMENT DISCLOSURE The Company is organized based on the products its offers. The Company presently operates under two operating segments: Danskin, which designs, manufactures, markets, and sells activewear, dancewear, bodywear, tights and exercise apparel through wholesale channels to retailers and through the Company's outlet and retail stores; and Pennaco, which currently designs, manufactures, and markets hosiery under the brand names Round-the-Clock(R), Givenchy(R), Evan-Picone(R) and Ellen Tracy(R). (Refer to Note 7 for a discussion of Evan Picone(R) and Ellen Tracy (R) licenses). Pennaco also manufactures under private labels for select retailers. The Company evaluates performance based on profit or loss from operations before extraordinary items, interest expense and income taxes. The Company allocates corporate administrative expenses to each 10 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) segment. For the fiscal six months ended July 1, 2000, Danskin was allocated $1,581 and Pennaco was allocated $799. For the fiscal six months ended June 26, 1999, Danskin was allocated $1,949 and Pennaco was allocated $993. The Company does not allocate interest expense to the divisions. Financial information by segment for the fiscal six-month periods ended July 1, 2000 and June 26, 1999 is summarized below:
DANSKIN PENNACO TOTAL June 26, 1999 Net Revenues $ 32,472 $ 15,195 $ 47,667 Operating Loss (3,007) (1,059) (4,066) July 1, 2000 Net Revenues $ 29,799 $ 11,703 $ 41,502 Operating Loss (1,480) (930) (2,410)
10. COMMON STOCK Bid quotations for the Company's Common Stock may be obtained from the "pink sheets" published by the National Quotation Bureau and the Common Stock is traded in the over-the-counter market. 11 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTRODUCTION During fiscal year 1999, capital constraints impacted all aspects of Danskin, Inc.'s businesses. This included, among others: the Company's ability to purchase piece goods; its ability to fulfill customers' orders resulting in both a decline in potential revenues, as a substantial percentage of orders were either shipped late and/or only partially fulfilled, and declines in orders as a result of inadequate and/or mismatched inventory; poor reporting systems and the absence of an integrated and focused retail strategy. The Company has taken a number of positive steps. In June 1999, the then Chief Executive Officer was terminated and was replaced by Carol Hochman. During the second half of fiscal 1999, Carol Hochman, and a number of new senior executives, addressed the aforementioned operational issues. In this regard, in December 1999, the Company raised $19,250 of new capital ($15,210 from the sale of Series E Preferred Stock, and $4,040 in the term loan portion of the Company's secured credit facility). In addition, during this time period, new management has undertaken a "right-sizing" reorganization of the Company's personnel and manufacturing infrastructures, eliminated substantial operating costs and changed its approach to merchandising and selling, eliminating unprofitable SKUs, emphasizing high quality businesses, and instituting a replenishment and forecasting capability to improve fulfillment and maximize revenue. Based on the aforementioned infusion of new capital, which resulted in $10,000 in undrawn availability at close, and new management's "right-sizing" actions, the Company believes it will have sufficient liquidity in year 2000 to operate the business in the normal course. (See Liquidity and Capital Resources.) As described above, new management has taken positive steps in improving business processes, which it believes will improve ongoing profitability for the Company. As described below, these actions resulted in improved operating results during the fiscal six month period ended July 1, 2000. The fiscal six months ended July 1, 2000 consisted of twenty-seven weeks and the fiscal six months ended June 26, 1999 consisted of twenty-six weeks. The fiscal three months ended July 1, 2000 and June 26, 1999 consisted of thirteen weeks each. The following discussion provides an assessment of the Company's results of operations, capital resources and liquidity which should be read in conjunction with the Consolidated Condensed Financial Statements, related notes and other information included in this quarterly report on Form 10-Q (operating data includes operating data for the Company's retail activities) and with the Annual Report on Form 10-K for the fiscal year ended December 25, 1999. RESULTS OF OPERATIONS COMPARISON OF THE FISCAL THREE AND SIX MONTH PERIODS ENDED JULY 1, 2000 WITH THE FISCAL THREE AND SIX MONTH PERIODS ENDED JUNE 26, 1999. NET REVENUES: In the operating plan for fiscal year 2000, which management views as a transition year, the Company has undertaken steps to eliminate unprofitable business and products and cut infrastructure to maximize financial results and minimize risk. In addition, the Company has taken steps to increase volume in the specialty store class of trade, increase retail store profitability and is positioned to take advantage of consolidation opportunities in the hosiery industry. Net revenues amounted to $20,471 for the fiscal three months ended July 1, 2000, a decrease of $3,055, or 13.0% from the prior year fiscal three months ended June 26, 1999. Net revenues for the six months ended July 1, 2000 amounted to $41,502, a decrease of $6,165 or 12.9% from the prior year six 12 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) months ended June 26, 1999. Danskin Activewear net revenues, which include the Company's retail operations, amounted to $14,487 for the fiscal three months ended July 1, 2000, a decrease of $1,378 or 8.7%, from $15,865 in the prior year fiscal three months ended June 26, 1999. Activewear revenues amounted to $29,799 for the six months ended July 1, 2000, a decrease of $2,673 or 8.2%, from $32,472 in the prior year six month period. Revenues for the fiscal three and six month period ended July 1, 2000 decreased primarily due to lower volumes in Danskin basic replenishment business, the packables line and private label programs, as well as, fewer retail and outlet stores, offset in part by the extra week in the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999. The Company's marketing of activewear wholesale products continues to address the trend toward casual wear and emphasizes fashion and dancewear product offerings complementing the Company's basic replenishment products. In addition, the Company continues to work with its major retail partners to increase the percentage of orders of basic product placed via electronic re-order/fulfillment programs (Electronic Data Interchange "EDI") in an effort to drive its replenishment business, to increase open-to-buy-levels and to seek out new customers and new channels of distribution. Sales in the Company's retail stores were $3,160 for the fiscal three-month period ended July 1, 2000, compared to $3,668 for the prior year fiscal period, and were $6,513 for the six month period ended July 1, 2000 compared to $7,563 for the same prior year period. Comparable retail store sales increased 2.0% for the three months ended July 1, 2000 and declined 1.9% for the six months ended July 1, 2000. The decline in retail store sales is largely attributable to the impact of the aforementioned capital constraints encountered during the fiscal year 1999, resulting in inventory imbalances and promotional requirements, all of which have been addressed by management, offset by the extra week in the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999. To address these declines, and to enhance the performance of its retail stores, the Company continues to improve store product offerings, as it now has the capital resources to do so, to renegotiate existing leases to achieve optimum store size, to streamline store operations to reduce operating costs and to set up an automatic stock replenishment system. In addition, the Company is continuing to take steps necessary to evaluate certain unprofitable or under-performing locations. In this regard, in the fiscal period ended July 1, 2000, the Company has eleven fewer stores than the fiscal period ended June 26, 1999. In addition, the Company has closed 14 stores and opened 3 new stores over the past year. Pennaco legwear revenues amounted to $5,984 for the fiscal three months ended July 1, 2000, a decline of $1,677, or 21.9% from the prior year fiscal three month period. Revenues amounted to $11,703 for the six months ended July 1, 2000, a decline of $3,492, or 23.0%, from the six month period ended June 26, 1999. The decline in legwear revenues versus the prior fiscal year period reflects weakness in the sheer hosiery market, and in particular, on sales of basic "everyday" sheer hosiery, decreased sales in Round the Clock(R) Take 2 Value Pack Program, decreased continuity programs with chain stores, reduced sales of the Danskin sock program and lower sales levels of closeouts and irregulars. This was offset by the extra week in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999. The Round the Clock(R) Take 2 Value Pack Program was launched in the fiscal six month period ended June 26, 1999 and generated pipeline orders of $1,600, which were not duplicated in the fiscal six month period ended July 1, 2000. These sales decreases were partially offset by the initial shipments of $1,106 of Evan Picone and of Ellen Tracy products in the fiscal three month period ended July 1, 2000. Management believes that the Company is positioned to take advantage of consolidation opportunities in the hosiery industry. In this regard, effective May 5, 2000, the Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen Tracy(R) name. The agreement provides that Pennaco shall have the exclusive right and license to use the 13 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Ellen Tracy(R)trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of legwear in the United States and Canada. The license was previously held by Ridgeview, Inc. In a separate transaction, Pennaco has obtained an exclusive license for the manufacture and sale of sheer hosiery and knee highs under the Evan-Picone(R) name. The agreement provides that Pennaco shall have the exclusive right and license to use the Evan-Picone(R) trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of sheer hosiery in the United States and Canada. The license was previously held by Ridgeview, Inc. The Company presently anticipates that together, the sales of product under the Evan-Picone and Ellen Tracy labels will generate revenue of approximately $20,000 on an annualized basis. Sales of product under these licenses began during the second fiscal quarter 2000. Total sales for Evan-Picone and the Ellen Tracy label for the second fiscal quarter 2000 were $1,106. Management believes that opportunities exist for margin and revenue improvement for market right products and programs in niche and occasion-oriented sheer hosiery and through expanded distribution. Accordingly, the Company has initiated a program of product development focused on these product segments and is focusing on expanding distribution into new wholesale accounts. In addition, opportunities exist for niche products and in the growing specialty, and dot.com channel segments, as well as in a more focused strategy by new management since the Ralph Lauren Hosiery license was abandoned. Substantial product development and research resources were committed to this license in 1999 that will be more effectively deployed on the opportunities outlined above. Among new niche products being offered is Passion Privee(R), which has been well received. GROSS PROFIT: Gross profit decreased by $465 to $6,052 for the fiscal three months ended July 1, 2000 compared to $6,517 for the fiscal second quarter ended June 26, 1999. Gross profit decreased by $2,416, or 16.5%, to $12,221 for the six months ended July 1, 2000 from $14,637 for the six months ended June 26, 1999. Gross profit, as a percentage of net revenues, increased to 29.6% in the fiscal three month period ended July 1, 2000 from 27.7% for the fiscal three months ended June 26, 1999. For the fiscal six month period ending July 1, 2000, gross profit decreased to 29.4% compared to 30.7% for the six month period ended June 26, 1999. Margins for the fiscal three and six month period ended July 1, 2000 were adversely affected as a result of the capital constraints experienced during fiscal 1999, which resulted in an increased cost of inventory and an aggressive program to dispose of excess and aging inventory. Danskin activewear gross profit, as a percentage of net revenue, increased to 31.6% for the fiscal three months ended July 1, 2000 from 30.0% for the fiscal three months ended June 26, 1999, and decreased to 31.6% for the six months ended June 2000 from 33.8% for the six months ended June 1999. The fiscal three month improvement in margin is mainly due to higher mix of high margin Danskin brand sales, improved margins in closeout sales and higher margins in the Company's retail stores. The fiscal six month period decreases were primarily a result of the impact of the aforementioned capital constraints experienced during fiscal 1999, a greater mix of closeout sales and a lower mix of high margin Danskin brand basic products. As previously discussed margins for fiscal 2000 were adversely affected as a result of the capital constraints experienced during fiscal 1999, which resulted in an increased cost of inventory. The closeout sales are the result of an aggressive inventory reduction program instituted to improve the quality of inventory and reduce carry costs. The Company's retail stores gross profit, as a percent of net revenues, for the fiscal three month period ended July 1, 2000 was 55.4% compared to 53.1% for the fiscal 14 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) three month period ended June 26, 1999 and 54.1% for the six months ended July 1, 2000 from 53.0% for the six months ended June 1999. Pennaco legwear gross profit, as a percentage of net revenue, increased to 24.6% in the fiscal three months ended July 1, 2000 from 23.0% in the prior fiscal three month period ended June 26, 1999 due primarily to realization of higher margins in the Evan Picone(R) and Ellen Tracy labels, partially offset by lower margins for Givenchy and private label customers. Higher manufacturing cost per unit attributable to lower production levels and increased promotional allowances to meet competitive pressure have generated lower margins for Givenchy and private label programs. For the fiscal six month period ended July 1, 2000 gross profits were 24.0% compared to 24.2% in the prior fiscal six month period. The slightly lower gross profit level is driven principally by increased manufacturing unit cost due to reduced production volume levels projected for Year 2000 offset by favorable margin impact from the Evan Picone and Ellen Tracy labels. As previously discussed, the Company is positioned to take advantage of consolidation in the hosiery industry and has obtained licenses for the sale of product under the Evan-Picone and Ellen Tracy Labels. In addition to the aforementioned product development programs, the Company has also initiated a program to phase out unprofitable styles within its existing lines at Pennaco, implemented cost improvement programs, and price increases on Round-the-Clock(R), which, to date, have not been negatively received by customers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Under new management, the Company has undergone a thorough review of its selling, general and administrative expenses and has reduced expenses and the infrastructure to right-size the organization. This encompassed implementation of a cost-savings strategy to control all expenses and streamline processes to increase efficiencies. The result is accountability and improved business processes as well as significant head count reductions at all divisions. As indicated previously, the Company is also streamlining retail operations to reduce operating costs. Selling, general and administrative expenses, which include retail store operating costs including rents, decreased $1,172, or 13.9%, to $7,230 or 35.3% of net revenues, in the fiscal three months ended July 1, 2000, from $8,402, or 35.7% of net revenues for the fiscal three months ended June 26, 1999. For the fiscal six month period ended July 1, 2000, selling, general and administrative expenses were $14,631 a decrease of $4,072 or 21.8% compared to $18,703 for the six months ended June 26, 1999. Selling, general and administrative expenses, as a percent of net revenues, was 35.3% for the fiscal six month period ended July 1, 2000 versus 39.2% for the fiscal six month period ended June 26, 1999. The significant decreases were realized in sales promotion and advertising, selling expenses and administrative expenses. Selling, general and administrative expenses, excluding retail store operations, decreased $2,844, or 23.3%, to $9,346, or 26.7% of net revenues for the fiscal six months ended July 1, 2000, from $12,190, or 30.4% of net revenues for the fiscal six months ended June 26, 1999. INTEREST EXPENSE: Interest expense amounted to $750 for the fiscal three months ended July 1, 2000 and $745 for the prior fiscal three month period ended June 26, 1999. Interest expense for the fiscal six month period ended July 1, 2000 was $1,438 compared to $1,389 for the six month period ended June 26, 1999. The Company's effective interest rate was 11.0% and 9.2% for the three months ended July 1, 2000 and June 26, 1999, respectively, and 11.2% and 9.2% for the six months ended July 1, 2000 and June 26, 1999, respectively. 15 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME TAX PROVISION (BENEFIT): The Company's income tax provision (benefit) rates differed from the Federal statutory rates due to the utilization of net operating losses, the effect of the Alternative Minimum Tax and the effect of state taxes for the fiscal six months ended July 1, 2000 and June 26, 1999. The Company's net deferred tax balance was $0 at both July 1, 2000 and December 25, 1999. NET LOSS: As a result of the foregoing, the net loss was $1,610 for the fiscal three months ended July 1, 2000, an improvement of $1,336 compared to the net loss of $2,946 for the fiscal three months ended June 26, 1999. For the six months ended July 1, 2000, the net loss was $3,887, and improvement of $2,199 compared to a net loss of $6,086 for the prior year fiscal period. YEAR 2000 READINESS DISCLOSURE Prior to the end of fiscal 1999, the Company engaged an outside consultant to test and verify that the Company's information systems were year 2000 compliant. In addition, the Company assessed and remediated its non-information systems. The Company's information systems and non-information systems tested and verified as year 2000 compliant. Moreover, the Company has not experienced any significant operational problems posed by year 2000 issues. The Company has a high degree of confidence that its systems will continue to be reliable from a year 2000 perspective. However, there can be no guarantees that year 2000 issues, whether at the Company, its suppliers or its customers, will not have an adverse impact on the Company's operations in the future. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity and capital requirements relate to the funding of working capital needs, primarily inventory, accounts receivable, capital investments in operating facilities, machinery and equipment, and principal and interest payments on indebtedness. The Company's primary sources of liquidity have been from bank financing, issuance of convertible securities, vendor credit terms and internally generated funds. Net cash flow used in operations increased by $1,868 to $9,231 for fiscal six months ended July 1, 2000, from a use of cash in operations of $7,363 for the fiscal six months ended June 26, 1999, principally attributable to decreases in accounts payable and accrued expenses, and increases in accounts receivable and inventories (which included the purchase of Ellen Tracy-Registered Trademark- and Evan Picone-Registered Trademark- inventory from Ridgeview, Inc.) The maximum borrowings under the revolving line of credit was $19,078 during the fiscal six months ended July 1, 2000. Availability was $4,500 as of July 1, 2000. Working capital was $5,776 at July 1, 2000 compared to $8,235 at December 25, 1999. The change in working capital is primarily attributable to an increase of $9,037 in the revolving line of credit to fund the net loss and capital expenditures. As reflected in the Consolidated Condensed Financial Statements, the Company (i) completed in December 1999 an equity private placement offering of $15,210 of an authorized $20,000 issuance of convertible preferred stock, and a refinancing of the term loan portion of its secured credit facility which resulted in approximately $10,000 of undrawn availability under such facility at the closing of the transaction, (ii) implemented a cost savings strategy Company-wide which has resulted in, and the 16 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Company believes will continue to produce, significant reductions in the Company's infrastructure expenses, and (iii) taken actions to increase the revenue of each of its operating segments. The Company is currently seeking to place the remaining $4,790 of such convertible preferred stock on the same terms and conditions as the December offering and has engaged an investment banker to promote the placement. The Company presently anticipates that the proceeds from such sale, if successful, will be used to finance the Company's Internet efforts and for general working capital purposes. (Refer to "Item 2. Management Discussion and Analysis, Strategic Outlook"). Specifically, in December 1999, the Company issued $15,210 stated value of 9% Series E Senior Step-Up Convertible Preferred Stock (the "Series E Stock"). The 3,042 shares of Series E Stock are convertible into Common Stock, at the option of the holder, at an initial conversion rate of 16,129 shares of Common Stock for each share of Series E Stock so converted, subject to adjustment in certain circumstances. The terms of the Series E Stock also provide that, at any time after the fifth anniversary of the date of its issuance, the Series E Stock may, at the election of the Company, be redeemed by the Company for an amount equal to the sum of (x) $5,000 per share (as adjusted for any combinations, divisions or similar recapitalizations affecting the shares of Series E Stock), plus (y) all accrued and unpaid dividends on such shares of Series E Stock to the date of redemption. Until the fifth anniversary of the date of its issuance, the Series E Stock has a 9% annual dividend rate, provided that the Company may at its sole option pay a portion of such dividend equal to up to 2% per annum in shares of common stock of the Company; provided however, that the Company has an obligation with respect to the holders of the Series E Stock to cause the common stock of the Company to be listed on the Nasdaq Small Cap Market or the Nasdaq National Market as promptly as feasible following the issuance of the Series E Stock. If the Company does not achieve such listing, within eighteen (18) calendar months following the issuance date of the Series E Stock, dividends shall accrue prospectively at a rate of 14% per annum, payable in cash only, until such time such listing is effected. Notwithstanding the above, from and after the fifth anniversary of the date of issuance, dividends accrue on the Series E Stock at a rate of 14% per annum, payable only in cash. In addition, in connection with the Company's issuance of the Series E Stock, the Company's loan and security agreement (the "Loan and Security Agreement") with Century Business Credit Corporation ("CBCC or the "Lender") was amended to, among other things, (i) increase the amount available under the term loan portion of the facility to $11,500, providing the Company with $4,040 in additional capital, (ii) provide for interest only payments being required through December 2001, providing the Company with $4,600 of additional liquidity, and (iii) extend the maturity date of the entire facility from October 8, 2002 to December 8, 2004. Pursuant to and in accordance with its terms, the Loan and Security Agreement provides the Company with a term loan facility in the aggregate principal amount of $11,500 (the "Term Loan Facility") and a revolving credit facility, including a provision for the issuance of letters of credit (the "Revolving Credit Facility") generally in an amount not to exceed the lesser of (a) $45,000 less the aggregate outstanding principal balance under the Term Loan Facility, or (b) a formula amount based upon the Company's available inventory and accounts receivable levels, minus certain discretionary reserves. The Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of $192 commencing on the first day of December 2001. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority security interest in all present and future assets of the Company. The Loan and Security Agreement contains certain affirmative and negative covenants including, maintenance of tangible net worth and a limitation on capital expenditures, respectively. The tangible net 17 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) worth covenant is calculated by subtracting from total assets all intangible assets and total liabilities. The Loan and Security Agreement was re-finalized in August 2000 to stipulate that (i) the Company must maintain a tangible net worth of not less than $0 as of the end of May 2000, and as of the end of each month thereafter, and (ii) that it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement for the month of August 2000, and for any month thereafter, of less than $1,000. At July 1, 2000, the Company's tangible net worth was approximately $1,700. Availability at July 1, 2000 was approximately $4,500. The maximum borrowings under the Revolving Credit Facility was $19,078 during the fiscal six months ended July 1, 2000. Interest on the Company's obligations and under the Loan and Security Agreement generally accrues at a rate per annum equal to the sum of the Prime Rate plus one half of one (1/2%) percent and is payable monthly. Interest may also accrue at a rate per annum equal to the sum of the Eurodollar Rate, as defined in the Loan and Security Agreement, plus two and three quarters percent (2 3/4%). Simultaneously with the Company's issuance of the Series E Stock, the holders of the Company's Series D Redeemable Cumulative Convertible Preferred Stock (the "Series D Stock") agreed to convert such Series D Stock into Common Stock of the Company in accordance with the terms and conditions of the Series D Stock. The holders of the 2,400 shares of Series D Stock issued by the Company converted such preferred stock into Common Stock at the stated conversion rate of 16,666.66 shares of Common Stock for each share of the Series D Stock so converted. In addition, the Series D Stock had an 8% annual dividend rate, payment of which was deferred through December 31, 1999. Danskin Investors agreed that, for the period beginning on the date of issuance of the Series D Stock and ending on December 31, 1999, all dividends accrued on the Series D Stock could be paid, at the option of the Company, in cash or in additional Common Stock of the Company. The Company elected to pay such accrued but unpaid dividends in Common Stock. Therefore, as a result of the conversion of the Series D Stock, the Company issued 46,924,000 shares of Common Stock in respect of the Series D Stock and all accrued but unpaid dividends through the effective date of the conversion. The Company expects to finance its short term growth, working capital requirements, capital expenditures, management information systems upgrades and debt service requirements principally from the additional capital and liquidity provided by the sale of Series E Stock and the refinancing of its secured term debt, as discussed above, along with vendor arrangements. The Company expects to finance its long-term growth, working capital requirements, capital expenditures, management information systems upgrades, and debt service requirements through a combination of cash provided from operations and bank credit lines. The Company may need additional financing, however, for the acquisition or development of any new business or programs, including the development of its strategy to develop Danskin.com as a content and commerce site for active women. STRATEGIC OUTLOOK As previously discussed, in the operating plan for fiscal year 2000, which management views as a transition year, the Company has undertaken steps to eliminate unprofitable business and products and cut infrastructure to maximize financial results and minimize risk. In addition, the Company has taken steps to increase volume in the specialty store class of trade, increase retail store profitability and is positioned to take advantage of consolidation opportunities in the hosiery industry. 18 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The Company's business strategy is to capitalize on and enhance the consumer recognition of Brand Danskin(R) by continuing to develop new and innovative activewear and legwear products that reflect a woman's active lifestyle, and to offer those products to the consumer in traditional and non-traditional channels of distribution. The Company continues to pursue a "Primary Resource Strategy," moving Brand Danskin(R) beyond its traditional stretch bodywear platform. The Company intends to continue to offer new and innovative products that blend technical innovation with comfort and style, broadening the position of Brand Danskin(R) to the consumer beyond "activewear" to one of "active lifestyle." The Company continues to expand the visibility of Brand Danskin(R) beyond its traditional channels of distribution to alternative channels such as the internet (select retailer sites), direct mail, and home shopping television channels. The Company's Pennaco hosiery division has developed a diversified portfolio of products under proprietary, licensed and private label brands. These products include sheer and super sheer products, value oriented multipacks, plus size offerings, trouser socks and tights. Most recently, the Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen Tracy(R) name. In a separate transaction, Pennaco also recently obtained an exclusive license for the manufacture and sale of sheer hosiery and knee highs under the Evan-Picone(R) name. (Refer to Note 7). The Company's business strategy with respect to the Pennaco division is to continue to develop market right products and programs, exploiting its significant manufacturing expertise, and the diversity of its product offerings, to achieve strategic alliances with its key retail partners to enable it to maintain its industry position in a contracting sheer hosiery market. The Company has developed, and intends to implement, a robust Internet strategy in the near future. The strategy is predicated upon the strong recognition of Brand Danskin(R) among women, and its lifestyle credibility among women in the dance and physical activity arenas. According to research we have obtained, this segment of the female population has the potential to capture the focused attention of substantially more that half of all U.S. women. The Company believes that Brand Danskin's(R) high recognition and credibility presents a unique opportunity to create and implement a lifestyle Internet site focused on content and contextual commerce relevant to dance and physical activity. Phase I of Danskin.com would be the development of a content-rich community site focused on dance, women's lifestyles, athletics and other activities, offering subject specific information and support, chat rooms, e-mail, and a full line of Danskin(R) products. The site will enable women to access news and information on a variety of participatory activities - running, walking, dance, yoga, hiking, spinning and all types of fitness - plus a national calendar of events, the opportunity to register for events online and may offer hotlinks to related sites. The Company will also use the Danskin.com portal to expand the internet presence of and access to the Danskin Women's Triathalon Series, the most popular multi-sport series in the world exclusively for women. The six-city series reaches over 140 million through media exposure, community involvement and participant's inspiration stories. Danskin sponsors "grass roots' programs in each market to enhance the experience for participants. The `Mentor Mentee' program allows first-time entrants to receive support and advice from past participants and through `Team Survivor,' Danskin provides free specialized coaching and training for breast cancer survivors. Danskin.com will allow the Company to expand the reach and marketing impact of the Triathlon. 19 DANSKIN, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) In addition to its own events, the Company would offer approved sponsors, who share the Company's credibility in the women's active lifestyle arena, the ability to post news of their events for women to participate in or attend, providing schedules and on-line registration. Phase I will also include the development of a business-to-business site for dance and specialty stores seeking Danskin(R) product. The Company recently introduced a new In-Stock program to address the needs of its retail partners and the dance community. With this new program, Danskin guarantees availability of key products on a yearly basis, with two-week turnaround for shipment. The In-Stock program will enable Danskin to increase its offerings to retailers and consumers who require products that can be re-ordered for theatrical productions and team uniforms. The combination of the In-Stock program and a business-to-business Internet site, Danskin anticipates significantly increased business opportunity with its retail partners that specialize in outfitting schools and dance troupes that rely on Danskin's quality, fit and style. Phase II of the Danskin.com strategy contemplates the creation of a majority owned subsidiary to be called Danskin.com, Inc., which would host vendor commerce offerings from a variety of branded vendors each selling its product line on Danskin.com. Under this model Danskin.com would realize revenue in a similar fashion as traditional franchisors, being paid "rent" for the location, royalties for sales made under the Danskin.com mark, and a contribution toward content production and marketing measured by a percent of sales revenue generated at the Danskin.com site. It is the Company's intention to finance Phase I of Danskin.com with the proceeds of a second closing on the sale of the Series E Stock (Refer to Note 4 of the Notes to Consolidated Condensed Financial Statements), following `proof of concept' resulting from successful implementation of Phase I, to seek strategic and/or venture capital partners/investors for Phase II of Danskin.com and to finance the growth and marketing of Danskin.com beyond Phase I with the proceeds of such investment. If successful through the first two phases of its strategy, it is the Company's intention to undertake a public offering of Danskin.com. Although the Company's Internet strategy has been received with interest by several investment bankers and potential investors, there can be no assurance that the Company or Danskin.com will successfully raise sufficient funds to implement its strategy, or that if implemented, that its strategy will be successful. In addition to the foregoing, the Company is seeking to increase its presence at retail by exploring various licensing opportunities for Brand Danskin(R)as well as seeking to increase its presence in international markets. Based on the foregoing and the previously discussed infusion of new capital and new management's "right-sizing" actions, the Company believes it will be able to implement its strategy. There can be no assurances that the Company will be able to implement these strategies, or that if implemented, that such strategies will be successful. In addition, there can be no assurance that the Company would not be adversely affected by adverse changes in general economic conditions, the financial condition of the apparel industry or retail industry, or adverse changes in retailer or consumer acceptance of the Company's products as a result of fashion trends or otherwise. Moreover, the retail environment remains intensely competitive and highly promotional and there can be no assurance that the Company would not be adversely affected by pricing changes of the Company's competitors. CERTAIN STATEMENTS CONTAINED IN THE DISCUSSION BELOW, INCLUDING, WITHOUT LIMITATION, STATEMENTS WITH RESPECT TO THE COMPANY'S ANTICIPATED RESULTS OF OPERATIONS OR LEVEL OF BUSINESS FOR FISCAL YEAR 2000 OR ANY OTHER FUTURE PERIOD, SHALL BE DEEMED FORWARD-LOOKING STATEMENTS WITHIN THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS A NUMBER OF FACTORS AFFECTING THE COMPANY'S BUSINESS AND OPERATIONS COULD CAUSE ACTUAL RESULTS TO DIFFER 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND CERTAIN ASSUMPTIONS, REFERRED TO BELOW, ARE INDICATED BY WORDS OR PHRASES SUCH AS "ANTICIPATES," "ESTIMATES," "PROJECTS," "MANAGEMENT EXPECTS," "THE COMPANY BELIEVES," "IS OR REMAINS OPTIMISTIC," OR "CURRENTLY ENVISIONS" AND SIMILAR WORDS OR PHRASES. THESE FACTORS INCLUDE, AMONG OTHERS, CHANGES IN THE REGIONAL AND GLOBAL ECONOMIC CONDITIONS; RISKS ASSOCIATED WITH CHANGES IN THE COMPETITIVE MARKETPLACE, INCLUDING THE LEVEL OF CONSUMER CONFIDENCE AND SPENDING, AND THE FINANCIAL CONDITION OF THE APPAREL INDUSTRY AND THE RETAIL INDUSTRY, AS WELL AS ADVERSE CHANGES IN RETAILER OR CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS AS A RESULT OF FASHION TRENDS OR OTHERWISE AND THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE COMPANY'S COMPETITORS; RISKS ASSOCIATED WITH THE COMPANY'S DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE DEPARTMENT STORE AND SPORTING GOODS STORE CUSTOMERS, INCLUDING RISKS RELATED TO CUSTOMER REQUIREMENTS FOR VENDOR MARGIN SUPPORT, AND THOSE RELATED TO EXTENDING CREDIT TO CUSTOMERS; RISKS ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS AND OTHER OWNERSHIP CHANGES IN THE RETAIL INDUSTRY; UNCERTAINTIES RELATING TO THE COMPANY'S ABILITY TO IMPLEMENT ITS GROWTH STRATEGIES; AND RISKS ASSOCIATED WITH CHANGES IN SOCIAL, POLITICAL, ECONOMIC AND OTHER CONDITIONS AFFECTING FOREIGN SOURCING. 21 DANSKIN, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not trade in derivative financial instruments. The Company's revolving line of credit bears interest at a variable rate (prime plus1/2%) and, therefore, the Company is subject to market-risk in the form of interest rate fluctuations. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 8 in the Notes to Consolidated Condensed Financial Statements in Part I - Financial Information of this Quarterly Report on Form 10-Q. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Financial Data Schedule. (b) REPORTS ON FORM 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DANSKIN, INC. August 15, 2000 By: /s/ CAROL J. HOCHMAN ----------------------------- Carol J. Hochman Chief Executive Officer August 15, 2000 By: /s/ JOHN A. SARTO ----------------------------- John A. Sarto EVP, Chief Financial Officer 22 EX-27 2 ex-27.txt EXHIBIT 27
5 0000889299 DANSKIN, INC. US $ 6-MOS DEC-30-2000 DEC-26-1999 JUL-01-2000 1.0 777,000 0 12,982,000 1,095,000 25,165,000 40,571,000 10,110,000 10,251,000 51,688,000 34,795,000 0 0 15,210,000 739,000 (13,963,000) 51,688,000 41,502,000 41,502,000 29,281,000 29,281,000 13,966,000 0 1,438,000 (3,183,000) 20,000 (3,203,000) 0 0 0 (3,203,000) (0.05) (0.05)
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