-----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, SuKaTsqv08e/77EFrzoqvpF7SxScEVeccr55q2SHP6AzjsiIDpxrEl3Nz4H/0BLP J99ndcF+erzUUoPVnwEtPg== 0000912057-02-042023.txt : 20021112 0000912057-02-042023.hdr.sgml : 20021111 20021112160625 ACCESSION NUMBER: 0000912057-02-042023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020928 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DANSKIN INC CENTRAL INDEX KEY: 0000889299 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 621284179 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20382 FILM NUMBER: 02817318 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 a2093396z10-q.txt FORM 10Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2002. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 020382 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 / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes / / No /X/ The number of shares outstanding of the issuer's Common Stock, $0.01 par value, as of September 28, 2002, excluding 1,083 shares held by a subsidiary: 68,945,454. ================================================================================ DANSKIN, INC. AND SUBSIDIARIES FORM 10Q FOR THE FISCAL THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 INDEX
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 29, 2001 AND SEPTEMBER 28, 2002 (UNAUDITED) 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 28, 2002 (UNAUDITED) 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL NINE MONTH PERIODS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 28, 2002 (UNAUDITED) 5 NOTES TO UNAUDITED 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 ITEM 4. CONTROLS AND PROCEDURES 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 22 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8K 22 SIGNATURES 23 CERTIFICATIONS
2 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 29, 2001 SEPTEMBER 28, 2002 ------------------ ------------------ (UNAUDITED) Cash and cash equivalents $ 642 $ 337 Accounts receivable, less allowance for doubtful accounts of $1,005 at December 29, 2001 and $956 at September 28, 2002 11,050 15,514 Inventories 20,307 21,357 Prepaid expenses and other current assets 1,711 1,841 ------------------ ------------------ Total current assets 33,710 39,049 Property, plant and equipment - net of accumulated depreciation and amortization of $10,583 at December 29, 2001 and $11,440 at September 28, 2002 6,179 5,311 Other assets 1,111 1,031 ------------------ ------------------ Total assets $ 41,000 $ 45,391 ================== ================== LIABILITIES AND STOCKHOLDERS' DEFICIT Revolving line of credit $ 26,447 $ 31,329 Current portion of long-term debt 800 800 Accounts payable 6,385 7,465 Accrued expenses 7,018 6,928 ------------------ ------------------ Total current liabilities 40,650 46,522 ------------------ ------------------ Long-term debt, net of current maturities 11,000 11,225 Accrued dividends 3,229 4,826 Accrued retirement costs 2,860 2,840 ------------------ ------------------ Total long-term liabilities 17,089 18,891 ------------------ ------------------ Total liabilities 57,739 65,413 ------------------ ------------------ Commitments and contingencies Stockholders' Deficit Series E Cumulative Convertible Preferred Stock, 3,042 shares Liquidation Value of $15,210 15,210 15,210 Common Stock, $.01 par value, 250,000,000 shares authorized, 68,946,537 shares issued at December 29, 2001 and 68,946,537 shares issued at September 28, 2002, less 1,083 shares held by a subsidiary at December 29, 2001 and September 28, 2002 689 689 Additional paid-in capital 38,702 38,844 Accumulated deficit (66,619) (70,044) Accumulated other comprehensive loss (4,721) (4,721) ------------------ ------------------ Total Stockholders' Deficit (16,739) (20,022) ================== ================== Total Liabilities and Stockholders' Deficit $ 41,000 $ 45,391 ================== ==================
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 NINE MONTHS ENDED ------------------------------ ------------------------------ SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, 2001 2002 2001 2002 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ------------- ------------- ------------- ------------- Net revenues $ 21,718 $ 23,209 $ 63,529 $ 63,522 Cost of goods sold 14,264 14,982 43,911 41,376 ------------- ------------- ------------- ------------- Gross profit 7,454 8,227 19,618 22,146 Selling, general and administrative expenses 7,389 7,010 21,945 21,165 Interest expense 1,194 961 3,084 2,776 ------------- ------------- ------------- ------------- 8,583 7,971 25,029 23,941 (Loss) income before income tax provision (1,129) 256 (5,411) (1,795) Provision for income taxes 9 9 33 33 ------------- ------------- ------------- ------------- Net (loss) income (1,138) 247 (5,444) (1,828) Preferred dividends 532 532 1,263 1,597 ------------- ------------- ------------- ------------- Net loss applicable to Common Stockholders $ (1,670) $ (285) $ (6,707) $ (3,425) ============= ============= ============= ============= Basic and diluted loss per share: Net loss per share $ (0.02) $ (0.00) $ (0.10) $ (0.05) ============= ============= ============= ============= Weighted average number of common shares outstanding basic and diluted 68,947,000 68,947,000 68,947,000 68,947,000 ============= ============= ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL NINE MONTHS ENDED SEPTEMBER 29, 2001 SEPTEMBER 28, 2002 ------------------ ------------------ UNAUDITED UNAUDITED ------------------ ------------------ Cash Flows From Operating Activities: Net loss $ (5,444) $ (1,828) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,346 1,218 Net loss on sale of property, plant and equipment 44 72 Accrued financing fees converted to term loan - 675 Warrants issued 100 142 Changes in operating assets and liabilities: Increase in accounts receivable (1,972) (4,464) Decrease (increase) in inventories 2,130 (1,050) Increase in prepaid expenses and other assets (824) (130) (Decrease) increase in accounts payable (19) 1,080 Decrease in accrued expenses (1,214) (110) ------------------ ------------------ Net cash used in operating activities (5,853) (4,395) ------------------ ------------------ Cash Flows From Investing Activities: Capital expenditures (230) (277) Proceeds from sale of property, plant and equipment 22 - ------------------ ------------------ Net cash used in investing activities (208) (277) ------------------ ------------------ Cash Flows From Financing Activities: Net borrowings under revolving line of credit 5,372 4,882 Repayments of long-term debt (400) (450) Proceeds from term loans 825 Financing costs incurred (54) (65) ------------------ ------------------ Net cash provided by financing activities 5,743 4,367 ------------------ ------------------ Net decrease in Cash and Cash Equivalents (318) (305) Cash and Cash Equivalents, Beginning of Period 789 642 ------------------ ------------------ Cash and Cash Equivalents, End of period $ 471 $ 337 ================== ================== Supplemental Disclosure of Cash Flow Information: Interest paid $ 2,550 $ 1,804 Income taxes paid 29 72 Cash refunds received for income taxes (6) (3)
Non-Cash Activities: The Company issued warrants to purchase 1,500,000 shares of the Company's Common Stock to CBCC at prices ranging from $0.10 to $0.185 per share during the nine months ended September 29, 2001. The Company issued warrants to purchase 2,250,000 shares of the Company's Common Stock to CBCC at prices ranging from $0.05 to $0.10 per share during the nine months ended September 28, 2002. During fiscal 2002, CBCC converted $675 of financing fees to a term loan in connection with an amendment to the Company's debt agreement. During fiscal 2001 and 2002, the Company recorded preferred dividends of $1,263 and $1,597, respectively. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ITEM 1. FINANCIAL STATEMENTS (CONTINUED) 1. LIQUIDITY Danskin, Inc. has made significant progress under the current management in its "right sizing" reorganization plan implemented over the last three fiscal years. Despite continuing to be negatively impacted by capital constraints and the effects of a significantly contracting sheer hosiery market, the Company experienced improved financial results during the fiscal quarter and nine months ended September 28, 2002 as compared to the fiscal quarter and nine months ended September 29, 2001. The Company's improved financial results reflect the benefits achieved from substantial operational improvements in each of its divisions and successes in reaching new customers and channels of distribution as well as expansion of its licensing efforts in the Danskin division. Pursuant to certain amendments to the Company's secured credit facility executed in November 2002, the Company's secured lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2003 to meet borrowing levels required by the Company's forecasted monthly business plans through fiscal year 2003, to a maximum overadvance of $10,979. The Company had availability of $124 under the existing agreement at September 28 2002. (Refer to Note 3). Based on the aforementioned overadvance the Company believes it will have sufficient liquidity for the balance of fiscal year 2002 and fiscal year 2003 to operate the business in the normal course, contingent upon achievement of its forecasted monthly business plans. The Company's monthly business plans for the balance of 2002 and 2003 anticipate net revenue increases and margin improvements. No assurances can be given, however, regarding the Company's ability to meet its forecasted monthly business plans for the balance of 2002 and 2003. If such monthly plans are not achieved, and if not achieved, additional capital not raised, it would be necessary for the Company to seek to further amend the Loan and Security Agreement. DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION In the opinion of the management of the Company, the accompanying Consolidated Financial Statements have been presented on a basis consistent with the Company's fiscal year end financial statements and contain all adjustments (all of which were of a normal and recurring nature) necessary to present fairly the financial position of the Company as of September 28, 2002, as well as its results of operations and its cash flows for the fiscal three and nine month periods ended September 28, 2002 and September 29, 2001. The fiscal three months ended September 28, 2002 and September 29, 2001 each consisted of thirteen weeks. The fiscal nine months ended September 28, 2002 and September 29, 2001 each consisted of thirty-nine weeks. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. See the Annual Report of the Company on Form 10K for the Fiscal Year Ended December 29, 2001. Operating results for interim periods may not be indicative of results for the full fiscal year. INVENTORIES 6 Inventories are stated at the lower of cost or market on a first-in, first-out basis. Inventories consisted of the following:
DECEMBER 29, SEPTEMBER 28, 2001 2002 ------------- ------------- (UNAUDITED) Finished goods $ 14,344 $ 14,943 Work-in-process 2,729 2,968 Raw Materials 2,568 2,828 Packaging materials 666 618 ------------- ------------- $ 20,307 $ 21,357 ============= =============
LOSS PER COMMON SHARE For both the nine months ended September 28, 2002 and September 29, 2001, basic and diluted net loss per share was computed based on weighted average common and common equivalent shares outstanding of 68,947,000. Common Stock equivalents are excluded from the basic and diluted net loss per share calculation for both periods because the effect would be antidilutive. At September 28, 2002, the Company had the following common shares and common share equivalents outstanding:
Common Shares 68,946,537 Preferred Stock-if converted 84,500,676 Warrants/Options 48,697,331 ----------- Total Shares and Share Equivalents Outstanding 202,144,544 ===========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. At this time, we do not expect the adoption of this pronouncement to have a material effect on the consolidated results of operations or financial position. 7 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 31, 2005. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority security interest in all present and future assets of the Company. Pursuant to and in accordance with its terms, the Loan and Security Agreement provides the Company with a term loan facility in the aggregate principal amount of $11,500 (the "Term Loan Facility") and a revolving credit facility, including a provision for the issuance of letters of credit (the "Revolving Credit Facility") generally in an amount not to exceed the lesser of (a) $45,000 less the aggregate outstanding principal balance under the Term Loan Facility, or (b) a formula amount based upon the Company's available inventory and accounts receivable levels, minus certain discretionary reserves. The Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of (i) $50 on the first day of September 2001 and on the first day of each month thereafter through December 2003, and (ii) $192 commencing on the first day of January 2004 and on the first day of each month thereafter. The Loan and Security Agreement has been amended from time to time since inception, each time providing the Company with the additional liquidity necessary to meet its business plans. Pursuant to an amendment executed in November 2002 (the "November Amendment"), the Company's secured lender has agreed to provide the Company with additional borrowing capacity of varying amounts through December 31, 2003, to meet borrowing levels required by the Company's forecasted monthly business plans through fiscal year 2003, to a maximum overadvance of $10,979. At September 28, 2002 under the Company's Revolving Credit Facility, the Company had borrowing capacity equal to an overadvance of $6,842. The Company had availability of $124 at September 28, 2002. The maximum borrowings under the Revolving Credit Facility were $32,348 during the fiscal nine months ended September 28, 2002. In connection with an Amendment executed in March 2002, the Company agreed (i) to pay CBCC 5% of net royalties earned by the Company on licensing agreements entered into after February 28, 2002, with payments not to exceed $500 in any fiscal year. Payments will continue until the earlier of (i) December 31, 2005, and (ii) such time as the Company has $3,000 in undrawn availability. Through September 28, 2002, CBCC has not earned any royalties. In connection with certain amendments, most recently the November Amendment, the Company agreed: (i) to pay CBCC a fee, currently equal to $85, on the first day of each month, and (ii) to issue 300,000 warrants to CBCC with a share price equal to the closing price of the Company's Common Stock on the date of issuance, on DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) the first of each month. Under the terms of the current agreement with CBCC, the accrual of said additional payment will terminate at such time as the Company's overadvance is equal to or less than $2,500. Therefore in accordance with this understanding, cumulatively through September 28, 2002, the Company has incurred $1,200 in additional fees to CBCC and has issued 4,500,000 warrants to CBCC with share prices ranging from $0.05 to $0.185. $142 and $100 has been recognized relative to warrants issued as a component of interest expense during the nine months ended September 28, 2002 and September 29, 2001, respectively. These fees are evidenced by a promissory note payable January 1, 2004, thereby relieving the Company of the requirement of cash payments to CBCC in respect of this obligation through December 2003. 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. In accordance with the November Amendment, the Company must maintain a tangible 8 net worth of not less than a net deficit of ($27,574) as of December 28, 2002 and as of the end of each month thereafter. Also, it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement for any month of less than $0 after giving effect to the Overadvance. At September 28, 2002 the Company's tangible net worth was a deficit of ($20,514). 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. The Company previously had the option of electing a Euro Loan, pursuant to which interest on the Company's obligations would 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%). However, as consideration to CBCC in connection with certain previous amendments, the Company has agreed to waive its right to elect a Eurodollar Loan until such time as the Company maintains average undrawn availability of at least $1,000 for three consecutive months. 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, as adjusted for the reset provision discussed below, subject to adjustment in certain circumstances. The Series E Stock also contains a "reset" provision, which provides that if, at the eighteen (18) month anniversary of the date of issuance (June 8, 2001), the Market Price (generally defined to mean the average closing price of the Common Stock for the twenty day period prior to such date (the "Reset Period")) is less than the Conversion Price ($0.31 per share), the Conversion Price shall be reset to the Market Price. At the Reset Period, the Market Price of the Common Stock was $0.18 Per Share. Therefore, as a result of the reset provision, the conversion rate for the Series E Stock was adjusted from 16,129 shares of Common Stock to 27,778 shares of Common Stock, for each share of Series E Stock so converted. 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 to 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 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 foregoing, 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. The Common Stock is not presently listed as required by the terms of the Series E Stock. Therefore effective June 8, 2001, dividends on the Series E Stock are accruing at a rate of 14% per annum. If the Series E Stock is converted, accumulated but unpaid dividends are payable in cash upon conversion. As such, the accumulated dividends have been recognized as a liability on the accompanying consolidated balance sheets. 5. WARRANTS 9 In March 2001, in connection with an amendment to the Loan and Security Agreement, the Company issued a warrant to purchase 250,000 shares of the Company's Common Stock at a price of $0.185 per share. This warrant has been accounted for as additional financing fees and additional paid in capital. The unamortized portion of such fees are being amortized over the remaining life of loan. The Company issued warrants to purchase 250,000 shares of the Company's Common Stock each month beginning May 1, 2001 through September 1, 2002 (cumulatively 4,250,000 shares) at prices ranging from $0.05 per share to $0.18 per share. These warrants have been accounted for as additional interest expense and as additional paid in capital. 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. NEW LICENSES During the first quarter of fiscal year 2001, the Company signed a multi-year license agreement with Jacques Moret, Inc., for the manufacture of the Freestyle(R) line of women's and girl's activewear for distribution to all 991 Target Stores retail locations throughout the United States commencing June 2001. The Company followed with licenses for women's socks under the Freestyle(R) Brand with Renfro Corporation for distribution to Target Stores that began in the third quarter of 2001 and a license for girls' intimate apparel under the Freestyle(R) Brand at Target, signed with Delta Galil, which put product in store in the third quarter of 2002. The Company continues to explore additional licensing opportunities. 7. LEGAL PROCEEDINGS 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. The matter is presently pending before the Superior Court and a reasonable evaluation of the claim against the Company or the timing of its resolution 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. DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. 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), Givenchy(R), Evan Picone(R), Ellen Tracy(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. For the fiscal nine months ended September 10 28, 2002 and September 29, 2001, Danskin Division was allocated $2,260 and $2,289 respectively and Pennaco was allocated $1,120 and $1,135. Capital expenditures for corporate administration are included with the Danskin Division. In addition, the Company does not allocate interest expense to the divisions. Financial information by segment for the fiscal nine month ended September 29, 2001 and September 28, 2002 is summarized below:
DANSKIN PENNACO TOTAL --------- --------- --------- September 29, 2001 Net Revenues $ 43,227 $ 20,302 $ 63,529 Operating (Loss) (897) (1,430) (2,327) September 28, 2002 Net Revenues $ 46,335 $ 17,187 $ 63,522 Operating Income (Loss) 2,788 (1,807) 981
9. 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 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 The Company has made significant progress under current management in its "right-sizing" reorganization plan implemented over the last three fiscal years. Despite continuing to be negatively impacted by capital constraints and the effects of a significantly contracting sheer hosiery market, the Company experienced improved financial results during the fiscal quarter and nine months ended September 28, 2002 as compared to the fiscal quarter and nine months ended September 29, 2001. The Company's improved financial results reflect the benefits achieved from substantial operational improvements in each of its divisions and successes in reaching new customers and channels of distribution as well as expansion of its licensing efforts in the Danskin division. 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) Pursuant to certain amendments to the Company's secured credit facility executed in November 2002, the Company's secured lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2003 to meet borrowing levels required by the Company's forecasted monthly business plans through fiscal year 2003, to a maximum overadvance of $10,979. At September 28, 2002 under the Company's Revolving Credit Facility, the Company had borrowing capacity equal to an overadvance of $6,842. The Company had availability of $124 at September 28, 2002. (Refer to Note 3). Based on the aforementioned overadvance the Company believes it will have sufficient liquidity for the balance of fiscal year 2002 and fiscal year 2003 to operate the business in the normal course, contingent upon achievement of its forecasted monthly business plans. The Company's monthly business plans for the balance of 2002 and 2003 anticipate net revenue increases and margin improvements. No assurances can be given, however, regarding the Company's ability to meet its forecasted monthly business plans for the balance of 2002 and 2003. If such monthly plans are not achieved, and if not achieved, additional capital not raised, it would be necessary for the Company to seek to further amend the Loan and Security Agreement. (See Liquidity and Capital Resources) The fiscal three months ended September 28, 2002 and September 29, 2001 each consisted of thirteen weeks. The fiscal nine months ended September 28, 2002 and September 29, 2001 each consisted of thirty-nine weeks. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, 12 the Company evaluates its estimates, including those related to accounts and notes receivable, inventories, intangible assets, investments, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. SALES RETURNS AND OTHER CUSTOMER RELATED ALLOWANCES Sales are recorded net of expected future returns and other customer related allowances. The Company is not contractually obligated to accept returns; however, based on facts and circumstances at the time a customer may request approval for a return, the Company may permit the exchange of products sold to certain customers. In addition, the Company may provide co-operative advertising and other allowances to certain customers in accordance with industry practice. These reserves are determined based on historical experience, budgeted customer allowances and existing commitments to customers. Although management believes it provides adequate reserves with respect to these items, actual activity could vary from management's estimates and such variances could have a material impact on reported results. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make payments when due or within a reasonable period of time thereafter. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make required payments, additional allowances may be required. 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) INVENTORIES The Company writes down its inventories for estimated obsolete or slow-moving inventories equal to the difference between the cost of inventories and estimated market value based upon assumed market conditions. If actual market conditions are less favorable than those assumed by management, additional inventory write-downs may be required. 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 Financial Statements, related notes and other information included in this quarterly report on Form 10Q (operating data includes operating data for the Company's retail activities) and with the Annual Report on Form 10K for the fiscal year ended December 29, 2001. RESULTS OF OPERATIONS COMPARISON OF THE FISCAL THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 28, 2002 WITH THE FISCAL THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 29, 2001 NET REVENUES: 13 Net revenues amounted to $23,209 for the fiscal three months ended September 28, 2002, an increase of $1,491, or 6.9% from the prior year fiscal three months ended September 29, 2001 of $21,718. Net revenues for the nine months ended September 28, 2002 amounted to $63,522, a decrease of $7 from the prior year nine months ended September 29, 2001. Danskin Activewear net revenues, which include the Company's retail operations, amounted to $16,839 for the fiscal three months ended September 28, 2002 an increase of $1,672 or 11.0%, from $15,167 in the prior year fiscal three months ended September 29, 2001. Activewear net revenues amounted to $46,335 for the fiscal nine months ended September 28, 2002, an increase of $3,108 or 7.2%, from $43,227 in the prior year fiscal nine months ended September 29, 2001. Revenues for the fiscal three and nine months ended September 28, 2002 increased primarily due to higher royalty income generated from the Jacque Moret, Inc. license agreement, higher brand Danskin sales, higher internet sales, an increase in continuity programs and the successful launch of the New York City Ballet program. 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 reorder/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. The Company has historically used its retail stores as a means to dispose of excess product as well as to increase brand awareness. The Company continually evaluates store-by-store performance in order to determine the most beneficial way to sell such product. Sales in the Company's retail stores were $3,667 for the fiscal three months ended September 28, 2002, compared to $4,062 for the prior year fiscal period, and were $8,821 for the nine month period ended September 28, 2002 compared to $9,352 for the nine months ended September 29, 2001. The decrease in sales for the three and nine month period is primarily a result of four fewer stores opened during the period versus the same prior period. Comparable retail store sales increased 0.3% for the fiscal three months ended September 28, 2002 and increased 2.8% for the nine months ended September 28, 2002 due to improved traffic generated in the stores through sales promotions, better inventory mix and improved customer service. As of September 28, 2002, the Company has three full price retail stores and 29 permanent outlet stores in 19 states. There are four fewer stores in the fiscal nine months ended September 28, 2002 versus the fiscal nine months ended September 29, 2001 resulting in lower total retail store sales for the current year. In order to capitalize on the recent momentum in the retail and outlet stores and enhance the performance of its retail stores, the Company continues to improve store product offerings, 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 to maximize inventory turns. In addition, the Company is continuing to take steps necessary to evaluate certain unprofitable or under-performing locations. During the past nine months, the Company has closed seven stores and opened five new stores in prime locations including a full price retail store in Westport, CT. 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) Pennaco legwear revenues amounted to $6,370 for the fiscal three months ended September 28, 2002, a decrease of $181 or 2.8% from the prior year fiscal three months ended September 29, 2001 of $6,551. Revenues amounted to $17,187 for the nine months ended September 28, 2002, a decrease of $3,115 or 15.3% from the prior year fiscal nine months ended September 29, 2001 revenues of $20,302. The decrease in revenues for the fiscal three and nine month periods ended September 28, 2002 is primarily attributable to the continued weakness in the sheer hosiery market, reduced "open to buys" for department store buyers of branded in store inventory, Givenchy returns related to a repackaging program and an unseasonably warm winter in the Northeast. Net revenues for Round the Clock(R), Evan Picone(R) and the Givenchy(R) brands, as well as the Custom Collection and private label customers experienced significant shortfalls compared to the revenues for the nine months ended September 29, 2001. Such shortfalls were partially offset by an increase in revenue for Ellen Tracy(R). Management believes that the Company is positioned to take advantage of consolidation opportunities in the hosiery industry. The Company has initiated a program of product development focused on market right product and programs in niche and occasion oriented sheer hosiery 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. GROSS PROFIT: 14 Gross profit increased by $773 or 10.4% to $8,227 for the fiscal three months ended September 28, 2002 compared to $7,454 for the fiscal three months ended September 29, 2001. Gross profit increased $2,528 or 12.9% to $22,146 for the fiscal nine months ended September 28, 2002 from $19,618 for the fiscal nine months ended September 29, 2001. Gross profit, as a percentage of net revenues, increased to 35.4% in the fiscal three months ended September 28, 2002 from 34.3% for the fiscal three months ended September 29, 2001. For the fiscal nine months ended September 28, 2002, gross profit increased to 34.9% of net revenues compared to 30.9% for the fiscal nine months ended September 29, 2001. Danskin activewear gross profit, as a percentage of net revenue, increased to 43.2% for the fiscal three months ended September 28, 2002 from 39.2% for the fiscal three months ended September 29, 2001, and increased to 41.3% for the fiscal nine months ended September 28, 2002 from 35.8% for the fiscal nine months ended September 29, 2001. The improvement of the Danskin activewear gross profit for the fiscal three and nine months ended September 28, 2002 can be attributed to a higher mix of royalty income generated from the Jacques Moret, Inc. license agreement, cost reductions implemented in the manufacturing facility in York, PA including lower pricing for raw materials, lower product cost realized from a successful offshore sourcing program, increased sales volumes and reduced levels of closeout and irregular sales due to improved management of excess and discontinued inventory. The Company's retail stores gross profit, as a percent of net revenues, for the fiscal three months ended September 28, 2002 was 56.3% compared to 56.6% for the fiscal three months ended September 29, 2001, and 55.7% for the nine months ended September 28, 2002 versus 56.6% for the nine months ended September 29, 2001. The decrease in the margin percentage of net revenues is principally attributable to additional promotions and discounts used to drive increased traffic in the stores and generate positive comparable sales to last year in a very difficult retail environment. The comparable store sales increase for the nine months ended September 28, 2002 was 2.8% versus the nine months ended September 29, 2001. 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) Pennaco legwear gross profit, as a percentage of net revenue, decreased to 14.9% in the fiscal three months ended September 28, 2002 from 23.0% in the prior fiscal three months ended September 29, 2001 and decreased to 17.6% for the nine months ended September 28, 2002 from 20.4% for the nine months ended September 29, 2001. The decrease in margins for the three and nine months ended September 28, 2002 is primarily due to the unfavorable volume effect on manufacturing costs in the Grenada, MS plant associated with the significant lower volume in sales in Round the Clock(R), Givenchy(R) and Custom Collections. The Company has initiated a program to source product in Italy along with continued sourcing in Mexico to improve margins and offset the effect of the volume loss in the plant. In addition, the Company continues to address cost reductions and process efficiencies at the manufacturing plant to offset the volume loss. Total gross profit dollars for the three and nine months ended September 28, 2002 were $559 and $1,112, respectively lower than the three and nine months ended September 29, 2001, primarily related to the lower sales volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: The Company continues to review its selling, general and administrative expenses to reduce expenses and the infrastructure. This encompasses 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 head count reductions at all divisions. As indicated previously, the Company continues to streamline retail operations to reduce operating costs. Selling, general and administrative expenses, which include retail store operating costs including rents, decreased by $379, or 5.1%, to $7,010 or 30.2% of net revenues, in the fiscal three months ended September 28, 2002, from $7,389,or 34.0% of net revenues for the fiscal three months ended September 29, 2001. For the fiscal nine months ended September 28, 2002, selling, general and administration expenses were $21,165 a decrease of $780 or 3.6% compared to $21,945 for the nine months ended September 29, 2001. Selling, general and administration expenses, as a percent of net revenues, was 33.3% for the nine months ended September 28, 2002 versus 34.5% for the nine months ended September 29, 2001. The net decrease for the three and nine month periods was the result of lower retail/outlet store expenses related to having four fewer stores compared to the same prior year period, reduced sales promo and advertising for Pennaco, lower Pennaco sales commissions and retail merchandising expense or area representatives, lower distribution expenses and reduced administrative expenses. Selling, general and administrative expenses, excluding retail store operations, 15 decreased $596, or 4.0%, to $14,222 or 26.0% of net revenues for the fiscal nine months ended September 28, 2002 from $14,818 or 27.4% of net revenues for the fiscal nine months ended September 29, 2001. INTEREST EXPENSE: Interest expense amounted to $961 for the fiscal three months ended September 28, 2002 and $1,194 for the prior year fiscal three months ended September 29, 2001. Interest expense amounted to $2,776 for the fiscal nine months ended September 28, 2002 and $3,084 for the prior year fiscal nine months ended September 29, 2001. The lower interest expenses for the three and nine month periods are due primarily to lower interest rates partially offset by higher average levels of debt and higher financing fees related to the Overadvance. $142 and $100 has been recognized relative to warrants issued as a component of interest expense during the nine months ended September 28, 2002 and September 29, 2001, respectively. The Company's effective interest rate was 8.9% and 12.0% for the three months ended September 28, 2002 and September 29, 2001, respectively, and 9.1% and 10.8% for the nine months ended September 28, 2002 and September 29, 2001, respectively. INCOME TAX PROVISION: The Company's income tax provision rates differed from the Federal statutory rates as the Company has not provided a tax benefit against the net loss for the periods presented due to the uncertainty of their ability to utilize currently generated net operating loss carryforwards against future earnings, and the effect of state taxes for the fiscal three and nine months ended September 28, 2002 and September 29, 2001. The Company's net deferred tax balance was $0 at both September 28, 2002 and December 29, 2001. 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) The Company has undergone 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) carryforward will be limited. Under these rules, the amount of the Company's NOL carryforward 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%. NET INCOME (LOSS): As a result of the foregoing, the net income was $247 for the fiscal three months ended September 28, 2002 compared to the net loss of $1,138 for the fiscal three months ended September 29, 2001. For the nine months ended September 28, 2002, the net loss was $1,828 compared to a net loss of $5,444 for the nine months ended September 29, 2001. 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 decreased by $1,458 to $4,395 for the fiscal nine months ended September 28, 2002, from a use of cash in operations of $5,853 for the fiscal nine months ended September 29, 2001. The improvement in net cash used in the nine months ended September 28, 2002 versus the nine months ended September 29, 2001 is primarily a result of improved operating results and better utilization of working capital. The net cash used in operating activities of $4,395 is principally attributable to the net 16 operating loss for the nine months ended September 28, 2002, decreases in accrued expenses and increases in accounts receivable and inventory partially offset by an increase in accounts payable. The maximum borrowing balance under the Company's revolving line of credit was $32,348 during the fiscal nine months ended September 28, 2002. The Company had availability of $124 at September 28, 2002. Working capital was a deficit of ($7,473) at September 28, 2002 compared to a deficit of ($6,940) at December 29, 2001. The change in working capital is primarily attributable to an increase of $4,882 in the revolving line of credit to fund the net loss, decreases in accrued expenses, increases in inventories and accounts receivable, term loan payments, financing costs and capital expenditures. As reflected in the Consolidated Financial Statements, the Company has incurred losses for each of the periods presented. However, the Company (i) has implemented a cost savings strategy Company-wide which has resulted in, and the Company believes will continue to produce, reductions in the Company's infrastructure expenses, (ii) has taken actions to increase the revenue of its operating segments, including selling to new customers and entering into new licensing arrangements, and (iii) has amended its secured credit facility from time to time, to provide the Company with the liquidity it needs to meet its business plans. In addition, the Company is currently seeking to raise additional capital through the sale of debt or equity securities. The Company presently anticipates that the proceeds from any such sale, if successful, will be used for general working capital purposes. 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 31, 2005. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority interest in all present and future assets of the Company. 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) 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 (i) $50 on the first day of September 2001 and on the first day of each month thereafter through December 2003, and (ii) $192 commencing on the first day of January 2004 and on the first day of each month thereafter. The Loan and Security Agreement has been amended from time to time since inception, each time providing the Company with the additional liquidity necessary to meet its business plans. Pursuant to an amendment executed in November 2002 (the "November Amendment"), the Company's secured lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2003 to meet borrowing levels required by the Company's forecasted monthly business plans through fiscal year 2003, to a maximum overadvance of $10,979. At September 28, 2002 under the Company's Revolving Credit Facility, the Company had borrowing capacity equal to an overadvance of $6,842. The Company had availability of $124 at September 28, 2002. The maximum borrowings under the Revolving Credit Facility were $32,348 during the fiscal nine months ended September 28, 2002. In connection with an amendment executed in March 2002, the Company agreed (i) to pay CBCC 5% of net royalties earned by the Company on licensing agreements entered into after February 28, 2002, with payments not to exceed $500 in any fiscal year. Payments will continue until the earlier of (i) December 31, 2005, and (ii) such time as the Company has $3,000 in undrawn availability. Through September 28, 2002, CBCC has not earned any royalties. In connection with certain amendments, most recently the November Amendment, the Company agreed: (i) to pay CBCC a fee, currently equal to $85, on the first day of each month, and (ii) to issue 300,000 warrants to CBCC with a share price equal to the closing price of the Company's Common Stock on the date of issuance, on the first of each month. Under the terms of the agreement with CBCC, the accrual of said additional payment will terminate at such time as the Company's overadvance is equal to or less than $2,500. 17 Therefore, in accordance with this understanding, through September 28, 2002, the Company has incurred $1,200 in additional fees to CBCC and has issued 4,500,000 warrants to CBCC with share prices ranging from $0.05 to $0.185 per share. These fees are evidenced by a promissory note payable January 1, 2004, thereby relieving the Company of the requirement of cash payments to CBCC in respect of this obligation through December 2003. 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. In accordance with the November Amendment, the Company must maintain a tangible net worth of not less than a net deficit of ($27,574) as of December 28, 2002 and as of the end of each month thereafter. Also, it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement for any month of less than $0 after giving 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) effect to the Overadvance. At September 28, 2002 the Company's tangible net worth was a deficit of ($20,514). The maximum borrowings under the Revolving Credit Facility were $32,348 during the fiscal nine months ended September 28, 2002. 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. The Company previously had the option of electing a Euro Loan, pursuant to which interest on the Company's obligations would 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%). However, as consideration to CBCC in connection with certain previous amendments, the Company agreed to waive its right to elect a Eurodollar Loan until such time as the Company maintains average undrawn availability of at least $1,000 for three consecutive months. 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 Series E Stock also contains a "reset" provision which provides that if, at the eighteen (18) month anniversary of the date of issuance (June 8, 2001), the Market Price (generally defined to mean the average closing price of the Common Stock for the twenty day period prior to such date (the "Reset Period")) is less than the Conversion Price ($0.31 per share), the Conversion Price shall be reset to the Market Price. At the Reset Period, the Market Price of the Common Stock was $0.18 per share. Therefore, as a result of the reset provision, the conversion rate for the Series E Stock was adjusted from 16,129 shares of Common Stock to 27,778 shares of Common Stock, for each share of Series E Stock so converted. 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. The Common Stock is not presently listed as required by the terms of the Series E Stock. Therefore, effective June 8, 2001, dividends on the Series E Stock are accruing at a rate of 14% per annum. 18 The Company expects to finance its short term growth, working capital requirements, capital expenditures, and debt service requirements principally from the additional capital and liquidity provided by the cash generated from operations, existing credit lines, including the Overadvance as discussed previously and vendor arrangements. The Company's monthly business plans for the balance of 2002 and 2003 anticipate net revenue increases and margin improvements. No assurances can be given, however, regarding the Company's ability to meet its forecasted monthly business plans for the balance of 2002 and 2003. If such monthly plans are not achieved, and if not achieved, additional capital not raised, it would be necessary for the Company to seek to further amend the Loan and Security Agreement. 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) 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 will require additional capital and/or financing, however, for the development of any new business or programs. STRATEGIC OUTLOOK Over the period that the current management team has been in place, significant progress has been made in all aspects of the operation of the business. The Company has undertaken steps to eliminate unprofitable businesses and products and cut infrastructure to maximize financial results and minimize risk. In addition, the Company has taken steps to expand distribution with the addition of new customers and licenses, and 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. 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, dancewear, legwear and lifestyle products that reflect a woman's active lifestyle, and to offer those products to the consumer in traditional and nontraditional 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." New innovation initiatives launched in 2001 for selling during the Spring and Fall 2002 seasons included O2 Performance(R), Danskin Yoga and Denise Austin(R) by Danskin(R). Additionally, the Company launched a new license with New York City Ballet(R) to develop innovative contemporary dance apparel. The Company continues to expand the visibility of Brand Danskin(R) beyond its traditional channels of distribution to alternative channels such as the internet (both direct to consumer selling and select retailer sites), direct mail, and home shopping television channels. The Company has also successfully capitalized on the strength of the Danskin(R) brand by offering a new consumer a derivative line of Danskin(R) product - Freestyle(R), a Danskin Company. This aspirational line allows the Company to offer not only activewear for women and girls in a new channel to a new customer, but has also expanded the Danskin brand's acceptance to intimate apparel, footwear and active lifestyle products. The Company continues to explore other avenues of expansion for the Freestyle(R) brand and for other associations with Brand Danskin. 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 ultra sheer products, value oriented multipacks, plus size offerings, trouser socks and tights, in each instance, seeking to exploit any positive market positions of its proprietary and licensed brands. 19 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 sheer hosiery market that continues to contract. The Company developed, and is implementing, an integrated Internet strategy. The strategy is predicated upon the strong recognition of Brand Danskin(R) and its lifestyle credibility among women in the dance and physical activity arenas. The Company believes that Brand Danskin(R)'s high recognition and credibility present a unique opportunity to create and implement an Internet site focused on both content and contextual commerce relevant to dance and physical activity. Phase I of Danskin.com was completed during the second quarter of fiscal year 2001, dramatically expanding the consumer's ability to connect with the Company, finding retail locations to purchase Danskin products, directly purchasing Danskin apparel, and Danskin plus-sized apparel which is particularly hard to find, and accessing information on the Danskin Women's Triathlon Series, the most popular and largest multisport series in the world exclusively for women, which recently concluded its 13th year in 2002. 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) The Triathlon Series is a tremendous content opportunity in its own right with extensive media exposure, community involvement and participant's inspirational stories. Danskin sponsors "grass roots" programs in each of seven race cities (Seattle, Sacramento, Denver, Austin, Boston, Chicago, Orlando) that will be improved through interactive activities on Danskin.com. The "Mentor Mentee" program allows first time entrants to receive support and advice from past participants and is only possible in a meaningful way through internet communication. Team Survivor is Danskin's program to support breast cancer survivors with free specialized coaching and training to prepare for the race. For the first time in 2001, Danskin.com enabled participants to register online for a Danskin race. Danskin.com also enhances the sponsorship opportunities available to partners of the Danskin Women's Triathlon Series, including Dove, Ryka, Shape, and Dupont, linking our active women to their websites. Phase II of Danskin.com, launched during March 2002, initiated a unique business-to-business site for dance and specialty stores seeking Danskin products putting Danskin in direct contact with a significant number of its specialty retail accounts. 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 reordered for theatrical productions and team uniforms (a quick-growing market for young women). The combination of the In-Stock program and a business-to-business Internet site should significantly increase the Company's business opportunities by providing strong support to the independent representative sales force serving this channel of distribution. In addition to the foregoing, with the addition of licenses for fitness equipment and socks under the Danskin(R) Brand, the Company is aggressively seeking to increase its presence at retail by continuing to explore various licensing opportunities for Brand Danskin(R) ,including footwear, bags, headwear and sport watches. The Company also continues to pursue a strategy to increase its presence in international markets. There can be no assurances that the Company will be able to implement these strategies, or that if implemented, that such strategies will be successful. In addition, there can be no assurance that the Company would not be adversely affected by adverse changes in general economic conditions, the financial condition of the apparel industry or retail industry, or adverse changes in retailer or consumer acceptance of the Company's products as a result of fashion trends or otherwise. Moreover, the retail environment remains intensely competitive and highly promotional and there can be no assurance that the Company would not be adversely affected by pricing changes of the Company's competitors. 20 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) CERTAIN STATEMENTS CONTAINED IN THE DISCUSSION HEREIN, INCLUDING, WITHOUT LIMITATION, STATEMENTS WITH RESPECT TO THE COMPANY'S ANTICIPATED RESULTS OF OPERATIONS OR LEVEL OF BUSINESS FOR FISCAL YEAR 2002 OR ANY OTHER FUTURE PERIOD, SHALL BE DEEMED FORWARD-LOOKING STATEMENTS WITHIN THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS A NUMBER OF FACTORS AFFECTING THE COMPANY'S BUSINESS AND OPERATIONS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND CERTAIN ASSUMPTIONS, REFERRED TO HEREIN, ARE INDICATED BY WORDS OR PHRASES SUCH AS "ANTICIPATES," "ESTIMATES," "PROJECTS," "MANAGEMENT EXPECTS," "THE COMPANY BELIEVES," "IS OR REMAINS OPTIMISTIC," OR "CURRENTLY ENVISIONS" AND SIMILAR WORDS OR PHRASES. THESE FACTORS INCLUDE, AMONG OTHERS, CHANGES IN THE REGIONAL AND GLOBAL ECONOMIC CONDITIONS; RISKS ASSOCIATED WITH CHANGES IN THE COMPETITIVE MARKETPLACE, INCLUDING THE LEVEL OF CONSUMER CONFIDENCE AND SPENDING, AND THE FINANCIAL CONDITION OF THE APPAREL INDUSTRY AND THE RETAIL INDUSTRY, AS WELL AS ADVERSE CHANGES IN RETAILER OR CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS AS A RESULT OF FASHION TRENDS OR OTHERWISE AND THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE COMPANY'S COMPETITORS; RISKS ASSOCIATED WITH THE COMPANY'S DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE DEPARTMENT STORE AND SPORTING GOODS STORE CUSTOMERS, INCLUDING RISKS RELATED TO CUSTOMER REQUIREMENTS FOR VENDOR MARGIN SUPPORT, AND THOSE RELATED TO EXTENDING CREDIT TO CUSTOMERS; RISKS ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS AND OTHER OWNERSHIP CHANGES IN THE RETAIL INDUSTRY; UNCERTAINTIES RELATING TO THE COMPANY'S ABILITY TO IMPLEMENT ITS GROWTH STRATEGIES; AND RISKS ASSOCIATED WITH CHANGES IN SOCIAL, POLITICAL, ECONOMIC AND OTHER CONDITIONS AFFECTING FOREIGN SOURCING. 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 plus 1/2%) and, therefore, the Company is subject to market-risk in the form of interest rate fluctuations. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 7 in the Notes to Consolidated Financial Statements in Part I- Financial Information of this Quarterly Report on Form 10Q. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In March 2001, in connection with an amendment to the Loan and Security Agreement, the Company issued a warrant to purchase 250,000 shares of the Company's Common Stock at a price of $0.185 per share. This warrant has been accounted for as additional financing fees and additional paid in capital. The unamortized portion of such fees are being amortized over the remaining life of loan. The Company issued warrants to purchase 250,000 shares of the Company's Common Stock each month beginning May 1, 2001 through September 1, 2002 (cumulatively 4,250,000 shares) at prices ranging from $0.05 per share to $0.18 per share. These warrants have been accounted for as additional interest expense and as additional paid in capital. The Company relied upon Section 4(2) of the Securities Act in issuing these securities. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) EXHIBITS Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8K On July 24, 2002, the Company filed a Current Report on Form 8-K reporting, under Item 4 -- Changes in Registrant's Certifying Accountant, that the Board of Directors, upon recommendation of its Audit Committee, dismissed Arthur Andersen LLP as the Company's independent public accountants and engaged Deloitte & Touche LLP to serve as the Company's independent public accountants. 22 DANSKIN, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DANSKIN, INC. November 12, 2002 By: /s/ CAROL J. HOCHMAN --------------------------------------- Carol J. Hochman Chief Executive Officer November 12, 2002 By: /s/ JOHN A. SARTO --------------------------------------- John A. Sarto EVP, Chief Financial Officer 23 CERTIFICATIONS I, Carol J. Hochman, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Danskin, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 By: /s/ CAROL J. HOCHMAN - --------------------------------- Carol J. Hochman Chief Executive Officer I, John A. Sarto, EVP, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Danskin, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 By: /s/ JOHN A. SARTO - ------------------------------------ John A. Sarto EVP, Chief Financial Officer EX-99.1 3 a2093396zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I. In connection with the Quarterly Report on Form 10-Q of Danskin, Inc. (the "Company") for the quarterly period ended September 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1.) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2.) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 12, 2002 By: /s/ CAROL J. HOCHMAN --------------------------------------- Carol J. Hochman Chief Executive Officer By: /s/ JOHN A. SARTO --------------------------------------- John A. Sarto EVP, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----