10-Q 1 a2048975z10-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 March 31, 2001. |_| 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 March 31, 2001, excluding 1,083 shares held by a subsidiary: 68,945,454. 1 DANSKIN, INC. AND SUBSIDIARIES FORM 10-Q FOR THE FISCAL THREE MONTH PERIODS ENDED MARCH 31, 2001 AND APRIL 1, 2000 INDEX
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of December 30, 2000 and March 31, 2001 (Unaudited) 3 Condensed Consolidated Statements of Operations For the Fiscal Three Month Periods Ended March 31, 2001 and April 1, 2000 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows For the Fiscal Three Month Periods Ended March 31, 2001 and April 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 23
2 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands, except share and per share amounts)
ASSETS December 30, 2000 March 31, 2001 ----------------- -------------- (unaudited) Cash and cash equivalents $789 $584 Accounts receivable, less allowance for doubtful accounts of $1,039 at December 30, 2000 and $1,013 at March 31, 2001 11,598 14,394 Inventories 24,353 23,396 Prepaid expenses and other current assets 1,709 1,767 ----------------------- ---------------------- Total current assets 38,449 40,141 Property, plant and equipment - net of accumulated depreciation and amortization of $10,291 at December 30, 2000 and $10,598 at March 31, 2001 9,280 8,950 Other assets 1,123 1,147 ----------------------- ---------------------- Total assets $48,852 $50,238 ======================= ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Revolving line of credit $22,379 $27,346 Current portion of long-term debt 742 1,168 Accounts payable 6,691 6,070 Accrued expenses 8,351 7,601 ----------------------- ---------------------- Total current liabilities 38,163 42,185 ----------------------- ---------------------- Long-term debt, net of current maturities 10,558 9,982 Accrued dividends 1,434 1,776 Accrued retirement costs 1,821 1,821 ----------------------- ---------------------- Total long-term liabilities 13,813 13,579 ----------------------- ---------------------- Total liabilities 51,976 55,764 ----------------------- ---------------------- 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 30, 2000 and 68,946,537 shares issued at March 31, 2001, less 1,083 shares held by subsidiary at December 30, 2000 and March 31, 2001 689 689 Additional paid-in capital 38,542 38,562 Accumulated deficit (54,806) (57,228) Accumulated other comprehensive loss (2,759) (2,759) ----------------------- ---------------------- Total Stockholders' Deficit (3,124) (5,526) ======================= ====================== Total Liabilities and Stockholders' Equity $48,852 $50,238 ======================= ======================
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 ------------------------- April 1, 2000 March 31, 2001 (Unaudited) (Unaudited) ------------------- -------------------- Net revenues $21,204 $22,093 Cost of goods sold 15,034 15,805 ------------------- -------------------- Gross profit 6,170 6,288 Selling, general and administrative expenses 7,402 7,406 Interest expense 688 950 ------------------- -------------------- 8,090 8,356 Loss before income tax provision (1,920) (2,068) Provision for income taxes 15 12 ------------------- -------------------- Net loss (1,935) (2,080) Preferred dividends 342 342 ------------------- -------------------- Net loss applicable to Common Stock ($2,277) ($2,422) =================== ==================== Basic and diluted loss per share: Net loss per share ($0.03) ($0.04) =================== ==================== Weighted average number of common shares outstanding basic and diluted 73,986,000 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 (Dollars in thousands, except share and per share amounts)
Fiscal Three Months Ended April 1, 2000 March 31, 2001 --------------------------------------- Unaudited Unaudited Cash Flows From Operating Activities: Net loss ($1,935) ($2,080) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 522 448 Provision for doubtful accounts receivable 32 - Loss or gain on sale of on property, plant and equipment 1 44 Changes in operating assets and liabilities: Increase in accounts receivable (2,245) (2,796) Decrease in inventories 1,383 957 Increase in prepaid expenses and other assets (343) (58) Decrease in accounts payable (618) (621) Decrease in accrued expenses (1,239) (750) --------------------------------------- Net cash used in operating activities (4,442) (4,856) --------------------------------------- Cash Flows From Investing Activities: Capital expenditures (149) (134) Proceeds from sale of property, plant and equipment 77 18 --------------------------------------- Net cash used in investing activities (72) (116) --------------------------------------- Cash Flows From Financing Activities: Net borrowings under revolving line of credit 4,384 4,967 Financing costs incurred - (50) Repayments of long-term debt - (150) --------------------------------------- Net cash provided by financing activities 4,384 4,767 --------------------------------------- Net decrease in Cash and Cash Equivalents (130) (205) Cash and Cash Equivalents, Beginning of Period 663 789 --------------------------------------- Cash and Cash Equivalents, End of period $533 $584 ======================================= Supplemental Disclosure of Cash Flow Information: Interest paid $594 $902 Income taxes paid 8 10 Cash refunds received for income taxes - (5)
Non-Cash Activities: The Company issued a warrant to purchase 250,000 shares of the Company's Common Stock to CBCC at a price of $0.185 per share in March 2001. 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 Capital constraints impacted all aspects of Danskin, Inc.'s businesses during the last two fiscal years. This included in 1999, 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. Commencing in June 1999, the Company has taken a number of positive steps to address these issues. 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 ($15,210 from the sale of Series E Preferred Stock, and $4,040 in the term loan portion of the company's secured credit facility) resulting in $10,000 in undrawn availability at close. (Refer to Notes 3, 4 and 5 for a discussion of the equity private placement and the refinancing of the Company's bank debt.) In addition, during this time period, new management has undertaken a "right-sizing" reorganization of the Company's personnel and manufacturing infrastructures, eliminated substantial operating costs and changed its approach to merchandising and selling, eliminating unprofitable SKUs, emphasizing high quality businesses, adding new customers and licenses, improving factory efficiency with an effective and growing outsourcing capability as well as significant process modifications, and instituting a replenishment and forecasting capability to improve fulfillment and maximize revenue. These actions resulted in improved financial results during fiscal year 2000 as compared to fiscal year 1999. Pursuant to certain amendments to the Company's secured credit facility executed in March 2001, the Company's secured lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2001 based on the Company's forecasted monthly business plans through fiscal year 2001, plus an additional $3,000 in excess availability to a maximum overadvance of $7,631. Including the additional $3,000 in excess availability referred to above the Company had availability of $3,179 at March 31, 2001. (Refer to Note 3). 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 March 31, 2001, as well as its results of operations and its cash flows for the fiscal three month periods ended March 31, 2001 and April 1, 2000. The fiscal three months ended March 31, 2001 consisted of thirteen weeks and the fiscal three months ended April 1, 2000 consisted of fourteen 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 30, 2000. 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 30, March 31, 2000 2001 (Unaudited) ------------ ------------- Finished goods $15,090 $14,892 Raw materials 3,576 3,493 Work-in-process 4,921 4,192 Packaging materials 766 819 ------- ------- $24,353 $23,396 ======= =======
INCOME (LOSS) PER COMMON SHARE For the three months ended March 31, 2001 and April 1, 2000, basic and diluted net loss per share was computed based on weighted average common and common equivalent shares outstanding of 68,947,000 and 73,986,000, respectively. Common Stock equivalents are excluded from the basic and diluted net loss per share calculation for both periods because the effect would be antidilutive. At March 31, 2001, the Company had the following common shares and common share equivalents outstanding: Common Shares 68,946,537 Preferred Stock 49,064,418 Warrants/Options 44,549,177 ----------- Total Shares and Share Equivalents Outstanding 162,560,132 ===========
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. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority security interest in all present and future assets of the Company. Pursuant to and in accordance with its terms, the Loan and Security Agreement provides the Company with a term loan facility in the aggregate principal amount of $11,500 (the "Term Loan Facility") and a revolving credit facility, including a provision for the issuance of letters of credit (the "Revolving Credit Facility") generally in an amount not to exceed the lesser of (a) $45,000 less the aggregate outstanding principal balance under the Term Loan Facility, or (b) a formula amount based upon the Company's available inventory and accounts receivable levels, minus certain discretionary reserves. The Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of $192 commencing on the first day of December 2001. In connection with certain amendments to the Loan and Security Agreement in fiscal 2000, the Company is required to make principal payment on the Term Loan Facility in the amount of $50 per month. The Company paid $50 during each of the last four months of fiscal 2000 and each of the first three months of fiscal 2001. 7 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. BANK FINANCING (CONTINUED) 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 most recently amended in March 2001 (the "March Amendment") to stipulate that, among other things, (i) the Company must maintain a tangible net worth of not less than a net deficit of ($9,444) as of December 30, 2000 and as of the end of each month thereafter and (ii) it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement for any month of less than $0 after giving effect to the Overadvance referred to below. At March 31, 2001 the Company's tangible net worth was approximately ($5,924). Pursuant to the March Amendment, the Lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2001, plus an additional $3,000 in excess availability based on the Company's forecasted monthly business plans through fiscal year 2001, to a maximum of ($7,631) (the "Overadvance"). Including the additional $3,000 in excess availability referred to above the Company had availability of $3,179 at March 31, 2001. The maximum borrowings under the Revolving Credit Facility were $27,346 during the fiscal three months ended March 31, 2001. 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. Prior to execution of the March Amendment, the Company had the options of electing a EuroLoan, 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 further consideration to CBCC in connection with the March Amendment, 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. In connection with the March Amendment, the Company agreed: (i) to pay CBCC (a) $50 upon execution of the March Amendment, and (b) for each month thereafter that the Company does not raise $4,790 of additional capital, an additional fee equal to $25 on May 1, 2001, and an additional fee of $25 plus the amount of the previous month's fee on the first of each month thereafter until such time as the additional capital is raised, and (ii) to issue 250,000 warrants to CBCC upon execution of the March Amendment with a share price equal to the closing price of the Company's Common Stock on the date of issuance, with an additional 250,000 warrants to be issued to CBCC on the first of each month thereafter, commencing May 1, 2001, until such time as additional capital is raised. The Company has not raised the additional capital as of May 15, 2001. 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 8 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES (CONTINUED) redeemed by the Company for an amount equal to the sum of (x) $5,000 per share (as adjusted for any combinations, divisions or similar recapitalizations affecting the shares of Series E Stock), plus y) all accrued and unpaid dividends on such shares of Series E Stock to the date of redemption. Holders of the Series E Stock are entitled to vote, together with the holders of the Common Stock and any other class or series of stock then entitled to vote, as one class on all matters submitted to a vote of stockholders of the Company, in the same manner and with the same effect as the holders of the Common Stock. In any such vote, each share of issued and outstanding Series E Stock shall entitle the holder thereof to one vote per share for each share of Common Stock that would be obtained upon conversion of all of the outstanding shares of Series E Stock held by such holder, rounded up to the next one-tenth of a share. Therefore, the issuance of the Series E Stock by the Company was highly dilutive of existing holders of Common Stock. Until the fifth anniversary of the date of its issuance, the Series E Stock has a 9% annual dividend rate, provided that the Company may at its sole option pay a portion of such dividend equal to up to 2% per annum in shares of common stock of the Company; provided however, that the Company has an obligation with respect to the holders of the Series E Stock to cause the common stock of the Company to be listed on the Nasdaq Small Cap Market or the Nasdaq National Market as promptly as feasible following the issuance of the Series E Stock. If the Company does not achieve such listing, within eighteen (18) calendar months following the issuance date of the Series E Stock, dividends shall accrue prospectively at a rate of 14% per annum, payable in cash only, until such time such listing is effected. Notwithstanding the 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 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) is less than the Conversion Price ($0.31 per share), the Conversion Price shall be reset to the Market Price. If the Market Price is less than one-half of the Conversion Price, the Conversion Price shall be reset to one-half of the Conversion Price. 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 Guarantors in consideration for providing stand-by guarantees of the Company's obligations under the Loan and Security Agreement. Each warrant represents the right to purchase one share of Common Stock for $0.27 through May 2009. The 9 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. WARRANTS (CONTINUED) number of warrants issued to each Guarantor was based upon a formula which took into account the dollar amount of the Guarantee and the number of days that the Guarantee was in place. These warrants have been accounted for as an increase to additional paid in capital and were 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. In connection with the March Amendment, in March 2001 the Company issued a warrant to purchase 250,000 shares of the Company's Common Stock at a price of $0.185 per share (Refer to Note 3). This has been accounted for as additional financing fees totaling $20 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. 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), a Danskin Company" line of women's and girl's Activewear for distribution to all 991 Target Stores retail locations throughout the United States commencing June 2001. Minimum royalties due the Company for fiscal 2001 are $320. 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. 10 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED 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) and 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 three months ended March 31, 2001, Danskin Division was allocated $796 and Pennaco was allocated $396. 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 three-month periods ended April 1, 2000 and March 31, 2001 is summarized below:
DANSKIN PENNACO TOTAL April 1, 2000 Net Revenues $ 15,474 $ 5,730 $ 21,204 Operating Loss (709) (523) (1,232) March 31, 2001 Net Revenues $ 14,660 $ 7,433 $ 22,093 Operating Loss (674) (444) (1,118)
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 Capital constraints impacted all aspects of Danskin, Inc. and Subsidiaries' (the "Company") businesses during the last two fiscal periods. This included in 1999, 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. Commencing in June 1999, the Company has taken a number of positive steps to address these issues. In June 1999, Carol Hochman was brought in as the Company's President and Chief Executive Officer. During the second half of fiscal 1999, Ms. Hochman and a number of new senior executives addressed the foregoing operating issues. In this regard, in December 1999, the Company raised $19,250 of new capital (from the sale of $15,210 of an authorized $20,000 issuance of convertible preferred stock and $4,040 in the term loan portion of the Company's secured credit facility) resulting in $10,000 in undrawn availability at the close of the transaction. 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, adding new customers and licenses, improving factory efficiency with an effective and growing outsourcing capability as well as significant process modifications, and instituting a replenishment and forecasting capability to improve fulfillment and maximize revenue. These actions resulted in improved financial results during fiscal year 2000 as compared to fiscal year 1999. Pursuant to certain amendments to the Loan and Security Agreement executed in March 2001, the Company's secured lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2001, based on the Company's forecasted monthly business plans through fiscal year 2001, plus an additional $3,000 in excess availability to a maximum of $7,631 (the "Overadvance"). Including the additional $3,000 in excess availability referred to above the Company had availability of $3,179 at March 31, 2001. Based on the aforementioned Overadvance from its lender, the Company believes it will have sufficient liquidity in fiscal year 2001 to operate the business in the normal course (See Liquidity and Capital Resources.) The fiscal three months ended March 31, 2001 consisted of thirteen weeks and the fiscal three months ended April 1, 2000 consisted of fourteen weeks. 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 Condensed Consolidated 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 30, 2000. 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) RESULTS OF OPERATIONS COMPARISON OF THE FISCAL THREE MONTH PERIOD ENDED MARCH 31, 2001 WITH THE FISCAL THREE MONTH PERIOD ENDED APRIL 1, 2000 NET REVENUES: Net revenues amounted to $22,093 for the fiscal three months ended March 31, 2001, an increase of $889, or 4.2% from the prior year fiscal three months ended April 1, 2000 of $21,204. Danskin Activewear net revenues, which include the Company's retail operations, amounted to $14,660 for the fiscal three months ended March 31, 2001 a decrease of $814 or 5.3%, from $15,474 in the prior year fiscal three months ended April 1, 2000. Revenues for the fiscal three month period ended March 31, 2001 decreased primarily due to lower sales in the retail and outlet stores as a result of fewer stores, reduced traffic in the existing stores and the effect of the extra week in the fiscal three month period ended April 1, 2000. Danskin wholesale sales were $12,055 for the three months ended March 31, 2001, a slight decrease of $66 or 0.5% lower than the fiscal three months ended April 1, 2000, which included an extra week of sales. Products sold under the Danskin brand name, including international sales, were 11.8% higher for the fiscal three months ended March 31, 2001 compared to the prior year fiscal period offset by lower sales levels in private label programs, closeouts and irregulars. 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 $2,605 for the fiscal three months ended March 31, 2001, compared to $3,353 for the prior year fiscal period, a decrease of $748 or 22.3%. Comparable retail store sales decreased 8.7% for the fiscal three months ended March 31, 2001. The retail and outlet stores have been impacted by softness in the marketplace for its existing stores resulting in lower customer traffic and sales. The Company has two full price retail stores and 31 outlet stores in 19 states. There are six fewer stores in the fiscal three months ended March 31, 2001 versus the fiscal three months ended April 1, 2000 resulting in lower total retail store sales for the current quarter. In addition, the extra week of sales for the fiscal quarter 2000 contributed to the shortfall in sales for the fiscal three months ended March 31, 2001. To address these declines, and to 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. Pennaco legwear revenues amounted to $7,433 for the fiscal three months ended March 31, 2001, an increase of $1,703 or 29.7% from the prior year fiscal three months ended April 1, 2000 of $5,730. The fiscal three month revenue increase over the prior fiscal three month period is primarily attributable to the incremental sales generated from the Ellen Tracy(R) and Evan Picone(R) brands, licensed to the Company in May 2000 (discussed below). These increases were partially offset by lower sales in Round the Clock(R) and the Givenchy(R) brands due to continued weakness in the sheer hosiery market, as well as, lower levels of closeouts and irregulars compared to the three months period ended April 1, 2000. In addition, the fiscal three months ended April 1, 2000 included an extra week of sales compared to the three months ended March 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) 31, 2001. Net revenues for the Evan Picone(R) and Ellen Tracy(R) products in the fiscal three month period ended March 31, 2001 were $1,948 and $1,047, respectively. There were no revenues for Evan Picone(R) and Ellen Tracy(R) products in the fiscal three month period ended April 1, 2000 because these brands did not commence shipping until the fiscal second quarter of 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 among others. The agreement provides that Pennaco shall have the exclusive right and license to use the Ellen Tracy(R) trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of legwear in the United States and Canada. The license was previously held by Ridgeview, Inc. In a separate transaction, Pennaco obtained an exclusive license for the manufacture and sale of sheer hosiery and knee highs under the Evan-Picone(R) label. 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 and knee highs 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(R) and Ellen Tracy(R) labels will generate revenue of approximately $10,000 on an annualized basis. Sales of product under these licenses began during the second fiscal quarter 2000. Total sales for the Evan-Picone(R) and the Ellen Tracy(R) labels for the three months ended March 31, 2001 were $2,995. 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. Among new niche products being offered is Passion Privee(R), which has been well received. GROSS PROFIT: Gross profit increased by $118 or 1.9% to $6,288 for the fiscal three months ended March 31, 2001 compared to $6,170 for the fiscal three months ended April 1, 2000 due mainly to the higher net revenues for the Pennaco Division. Gross profit, as a percentage of net revenues, decreased slightly to 28.5% in the fiscal three months ended March 31, 2001 from 29.1% for the fiscal three months ended April 1, 2000. Danskin activewear gross profit, as a percentage of net revenue, increased to 32.7% for the fiscal three months ended March 31, 2001 from 31.4% for the fiscal three months ended April 1, 2000. The improvement of the Danskin activewear gross profit for the fiscal three months ended March 31, 2001 can be attributed to a higher mix percentage of Danskin brand product versus low margin private label product and 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) closeout sales. The Company's retail stores gross profit, as a percent of net revenues, for the fiscal three months ended March 31, 2001 was 54.6% compared to 52.8% for the fiscal three months ended April 1, 2000. The improvement is principally attributable to better inventory controls and an improved assortment of higher margin product and lower levels of aged inventory. Pennaco legwear gross profit, as a percentage of net revenue, decreased to 20.0% in the fiscal three months ended March 31, 2001 from 22.9% in the prior fiscal three months ended April 1, 2000 primarily due to unfavorable manufacturing variances generated integrating the Evan-Picone(R) and the Ellen Tracy(R) licenses described above, offset in part by improved margins in Round the Clock(R) and Givenchy(R) brands, and private label programs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: The Company continues to review its selling, general and administrative expenses to reduce expenses and the infrastructure to right-size the organization. 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 significant head count reductions at all divisions. As indicated previously, the Company has also streamlined retail operations to reduce operating costs. Selling, general and administrative expenses, which include retail store operating costs including rents, increased slightly by $5, or 0.01%, to $7,406 or 33.5% of net revenues, in the fiscal three months ended March 31, 2001, from $7,401,or 34.9% of net revenues for the fiscal three months ended April 1, 2000. The net increase was the result of higher selling and marketing expenses for the Company primarily attributable to hiring additional sales management and independent sales representatives to increase geographic coverage, grow the brands and increase channels of distribution. The higher selling and marketing expenses were offset by the decrease in outlet store expenses related to having six fewer stores in the fiscal three months ended March 31, 2001 compared to the fiscal three months ended April 1, 2000. Selling, general and administrative expenses, excluding retail store operations, increased $369, or 7.9%, to $5,058 or 26.0% of net revenues for the fiscal three months ended March 31, 2001, from $4,689 or 26.3% of net revenues for the fiscal three months ended April 1, 2000. INTEREST EXPENSE: Interest expense amounted to $950 for the fiscal three months ended March 31, 2001 and $688 for the prior fiscal three month period ended April 1, 2000 due primarily to an average higher level of debt. The Company's effective interest rate was 10.8% and 11.4% for the three months ended March 31, 2001 and April 1, 2000, respectively. INCOME TAX PROVISION: The Company's income tax provision 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 three months ended March 31, 2001 and April 1, 2000. The Company's net deferred tax balance was $0 at both March 31, 2001 and December 30, 2000. 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) NET LOSS: As a result of the foregoing, the net loss was $2,056 for the fiscal three months ended March 31, 2001 compared to the net loss of $1,935 for the fiscal three months ended April 1, 2000. 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. 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 $414 to $4,856 for the fiscal three months ended March 31, 2001, from a use of cash in operations of $4,442 for the fiscal three months ended April 1, 2000, principally attributable to the operating loss for the three months ended March 31, 2001, decreases in accrued expenses and accounts payable and increases in accounts receivable offset by a decrease in the Company's inventories. The maximum borrowing balance under the revolving line of credit was $27,346 during the fiscal three months ended March 31, 2001. Including the additional $3,000 in excess availability previously discussed the Company had availability of $3,179 at March 31, 2001. Working capital was ($2,044) at March 31, 2001 compared to $286 at December 30, 2000. The change in working capital is primarily attributable to an increase of $4,967 in the revolving line of credit to fund the net loss, decreases in accrued expenses and accounts payable, term loan payments 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) completed in December 1999 an equity private placement offering of $15,210 of an authorized $20,000 issuance of convertible preferred stock, and refinancing of the term loan portion of its secured credit facility which resulted in approximately $10,000 of undrawn availability under such facility at the closing of the transaction, (ii) implemented a cost savings strategy Company-wide which has resulted in, and the Company believes will continue to produce, significant reductions in the Company's infrastructure expenses, (iii) has taken actions to increase the revenue of each of its operating segments, including selling to new customers and entering into new licensing arrangements, and (iv) amended its secured credit facility 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) in March 2001, which provides the Company with additional borrowing capacity of varying amounts through December 31, 2001, based on the Company's forecasted business plans plus an additional $3,000 in excess availability through fiscal year 2001 to a maximum of $7,631 (the "Overadvance"). In addition, the Company is currently seeking to raise additional capital, either by placing the remaining $4,790 of the convertible preferred stock referred to above or by raising additional capital through the sale of other 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. 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. 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) is less than the Conversion Price ($0.31 per share), the Conversion Price shall be reset to the Market Price. If the Market Price is less than one-half of the Conversion Price, the Conversion Price shall be reset to one-half of the Conversion Price. 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 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) certain discretionary reserves. The Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of $192 commencing on the first day of December 2001. In connection with certain amendments to the Loan and Security Agreement in fiscal 2000, the Company is required to make a principal payment on the Term Loan Facility in the amount of $50 per month. The Company paid $50 during each of the last four months of fiscal 2000 and each of the three months in fiscal 2001. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority security interest in all present and future assets of the Company. The Loan and Security Agreement contains certain affirmative and negative covenants including, maintenance of tangible net worth and a limitation on capital expenditures, respectively. The tangible net worth covenant is calculated by subtracting from total assets all intangible assets and total liabilities. The Loan and Security Agreement was amended in March 2001 ("March Amendment") to stipulate that, among other things, (i) the Company must maintain a tangible net worth of not less than a net deficit of ($9,444) as of December 30, 2000 and as of the end of each month thereafter, and (ii) that it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement any month of less than $0 after taking into account the Overadvance discussed below. At March 31, 2001, the Company's tangible net worth was approximately ($5,924). Pursuant to the March Amendment, the Lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2001, based on the Company's forecasted business plans plus an additional $3,000 in excess availability through fiscal year 2001 to a maximum $7,631 (the "Overadvance"). Including the additional $3,000 in excess availability referred to above the Company had availability of $3,179 at March 31, 2001. The maximum borrowings under the Revolving Credit Facility was $27,346 during the fiscal three months ended March 31, 2001. In connection with the March Amendment, the Company agreed: (i) to pay CBCC (a) $50 upon execution of the March Amendment, and (b) for each month thereafter that the Company does not raise $4,790 of additional capital, an additional fee equal to $25 on May 1, 2001, and an additional fee of $25 plus the amount of the previous month's fee on the first of each month thereafter until such time as the additional capital is raised, and (ii) to issue 250,000 warrants to CBCC upon execution of the March Amendment with a share price equal to the closing price of the Company's Common Stock on the date of issuance, with an additional 250,000 warrants to be issued to CBCC on the first of each month thereafter commencing May 1, 2001, until such time as the additional capital is raised. 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. Prior to execution of the March Amendment, the Company had the option of electing a EuroLoan 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 further consideration to CBCC in connection with the March Amendment, 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. 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% 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) 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, 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, vendor arrangements and by raising additional capital as previously discussed. 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 internet strategy. STRATEGIC OUTLOOK Over the last twenty-one months that the current management team has been in place, significant progress has been made in all aspects of the operation of the business. Fiscal 2000 was a "transition" year for the Company and its businesses. 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 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 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) label. In a separate transaction, Pennaco also recently obtained an 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) exclusive license for the manufacture and sale of sheer hosiery and knee highs under the Evan-Picone(R) label. 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 2001 and beyond. 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 presents 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 will dramatically expand the consumer's ability to connect with the Company, finding retail locations to purchase Danskin products, directly purchasing plus-sized apparel which is particularly hard to find, and accessing information on the Danskin Women's Triathlon Series, the most popular multi-sport series in the world exclusively for women, beginning its 12th year in 2001. The Triathlon Series is a tremendous content opportunity in it's own right with 190 million reach through 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 will enable participants to register on-line 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, Timex and Dupont, to link our active women to their websites. Phase II will include the development of a business-to-business site for dance and specialty stores seeking Danskin products. 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 (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 opportunity by providing a strong support to the independent representative sales force serving this channel of distribution. 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. 20 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) 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 HEREIN, INCLUDING, WITHOUT LIMITATION, STATEMENTS WITH RESPECT TO THE COMPANY'S ANTICIPATED RESULTS OF OPERATIONS OR LEVEL OF BUSINESS FOR FISCAL YEAR 2001 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. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 7 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 None. (b) REPORTS ON FORM 8-K None. 22 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. May 15, 2001 By: /s/ CAROL J. HOCHMAN ------------------------------------- Carol J. Hochman Chief Executive Officer May 15, 2001 By: /s/ JOHN A. SARTO ------------------------------------- John A. Sarto EVP, Chief Financial Officer 23