-----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, RaVubtTLtVrucOiHqQrjzknvmok14L3q2Iv2j5j5p/uc1FNKlVGW1kW8je2Bbidf /KOD6PYALcbzzm4Vq9jdZg== 0001005477-99-005353.txt : 19991117 0001005477-99-005353.hdr.sgml : 19991117 ACCESSION NUMBER: 0001005477-99-005353 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 000-20382 FILM NUMBER: 99756608 BUSINESS ADDRESS: STREET 1: 111 W 40TH ST 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 FORM 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 September 25, 1999. |_| 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 September 30, 1999, excluding 1,083 shares held by a subsidiary: 21,020,795 DANSKIN, INC. AND SUBSIDIARIES FORM 10-Q FOR THE FISCAL THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 and SEPTEMBER 25, 1999 INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Condensed Balance Sheets As of December 26, 1998 and September 25, 1999 (Unaudited)................................ 3 Consolidated Condensed Statements of Operations For the Fiscal Three and Nine Month Periods Ended September 26, 1998 and September 25, 1999 (Unaudited).................................... 4 Consolidated Condensed Statements of Cash Flows For the Fiscal Nine Month Periods Ended September 26, 1998 and September 25, 1999 (Unaudited).................................................. 5 Notes to Unaudited Consolidated Condensed Financial Statements.... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings ............................................. 17 Item 6. Exhibits and Reports on Form 8-K .............................. 17 SIGNATURES................................................................... 17 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollar amounts in thousands, except per share amounts)
December 26,1998 September 25, 1999 ---------------- ------------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 546 $ 709 Accounts receivable, less allowance for doubtful accounts of $1,021 at December 26, 1998 and $1,057 at September 25, 1999 13,518 12,992 Inventories (Note 1) 30,386 28,781 Prepaid expenses and other current assets 2,256 1,867 -------- -------- Total current assets 46,706 44,349 Property, plant and equipment - net of accumulated depreciation and amortization of $8,807 at December 26, 1998 and $9,943 at September 25, 1999 9,773 11,012 Other assets 1,227 1,192 -------- -------- Total Assets $ 57,706 $ 56,553 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Revolving line of credit (Note 3) $ 16,029 $ 28,139 Current portion of long-term debt (Note 3) 2,000 2,189 Accounts payable 8,440 7,238 Accrued expenses 13,692 11,093 -------- -------- Total current liabilities 40,161 48,659 -------- -------- Long-term debt, net of current maturities (Note 3) 6,674 5,817 Accrued dividends 1,176 1,896 Accrued retirement costs 2,301 2,301 -------- -------- Total long-term liabilities 10,151 10,014 -------- -------- Total Liabilities 50,312 58,673 -------- -------- Commitments and contingencies Series D Cumulative Convertible Preferred Stock, 2,400 shares Liquidation Value $12,000,000 (Note 5) 11,294 11,386 Stockholders' Deficit Common Stock, $.01 par value, 100,000,000 shares authorized, 20,916,693 shares issued at December 26, 1998 and 21,021,878 shares issued at September 25, 1999, less 1,083 shares held by subsidiary at December 26, 1998 and September 25, 1999 209 210 Additional paid-in capital 23,483 23,579 Accumulated deficit (24,546) (34,249) Accumulated other comprehensive loss (3,046) (3,046) -------- -------- Total Stockholders' Deficit (3,900) (13,506) ======== ======== Total Liabilities and Stockholders' Deficit $ 57,706 $ 56,553 ======== ========
These Statements should be read in conjunction with the accompanying Notes to Consolidated Condensed Financial Statements. 3 Item 1. Financial Statements (continued) DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Dollar amounts in thousands, except per share amounts)
Fiscal Three Months Ended Fiscal Nine Months Ended ------------------------- ------------------------ September 26, 1998 September 25, 1999 September 26, 1998 September 25, 1999 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------------ ------------------ ------------------ ------------------ Net revenues $ 27,959 $ 21,173 $ 82,654 $ 68,840 Cost of goods sold 17,146 14,947 51,093 47,977 -------- -------- -------- -------- Gross profit 10,813 6,226 31,561 20,863 Selling, general and administrative expenses 11,487 8,544 32,075 27,245 Non-recurring charges (Note 7) 475 -- 1,439 -- Interest expense 669 985 1,850 2,374 -------- -------- -------- -------- Total Expenses 12,631 9,529 35,364 29,619 Loss before income tax provision (1,818) (3,303) (3,803) (8,756) Provision for income taxes 44 45 135 135 -------- -------- -------- -------- Net loss (1,862) (3,348) (3,938) (8,891) Preferred dividends 271 271 843 812 -------- -------- -------- -------- Net loss applicable to Common Stock ($ 2,133) ($ 3,619) ($ 4,781) ($ 9,703) ======== ======== ======== ======== Basic/Diluted net loss per share: (Note 1) Net loss per share ($ 0.11) ($ 0.17) ($ 0.33) ($ 0.46) ======== ======== ======== ======== Weighted average number of common shares 19,689 21,022 14,585 20,966 ======== ======== ======== ========
These statements should be read in conjunction with the accompanying Notes to Consolidated Condensed Financial Statements. 4 Item 1. Financial Statements (continued) DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands, except per share amounts)
FISCAL NINE MONTHS ENDED ------------------------ September 26, 1998 September 25, 1999 (unaudited) (unaudited) ------------------ ------------------ Cash Flows From Operating Activities: Net Loss $ (3,938) $ (8,891) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,372 1,401 Provision for doubtful accounts receivable 244 173 Loss on sale of property, plant and equipment -- 13 Stock grants issued 446 94 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (2,478) 353 (Increase) decrease in inventories (6,402) 1,605 (Increase) decrease in prepaid expenses and other current assets (145) 412 Increase (decrease) in accounts payable 318 (1,202) Increase (decrease) in accrued expenses 3,158 (2,597) -------- -------- Net cash used in operating activities (7,425) (8,639) -------- -------- Cash Flows From Investing Activites: Capital expenditures (1,813) (2,510) -------- -------- Net cash used in investing activities (1,813) (2,510) -------- -------- Cash Flows From Financing Activities: Net receipts under revolving line of credit 9,892 12,110 Sale of Common Stock 3,000 -- Proceeds from new term note -- 943 Proceeds from stock options exercised 49 -- Payments of long-term debt -- (1,610) Expenses associated with issuance of rights (299) -- to purchase Common Stock Interest earned on promissory notes for purchase price of Warrants to purchase Common Stock -- -- Proceeds from warrant notes 15 Payment of Subordinated Debt (3,000) -- Financing costs incurred (45) (131) -------- -------- Net cash provided by financing activities 9,612 11,312 -------- -------- Net increase in Cash and Cash Equivalents 374 163 Cash and Cash Equivalents, Beginning of Period 808 546 -------- -------- Cash and Cash Equivalents, End of Period $ 1,182 $ 709 ======== ======== Supplemental Disclosure of Cash Flow Information: Interest Paid $ 1,647 $ 2,288 Income taxes paid 50 94 Non-Cash Activities Stock grants issued to executives 446 94
These statements should be read in conjunction with the accompanying notes to Consolidated Condensed Financial Statements. 5 Item 1. Financial Statements (continued) Danskin, Inc. and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements (Dollar amounts in thousands except per share amounts) 1. Summary of Significant Accounting Policies Basis of Presentation In the opinion of the management of Danskin Inc. and Subsidiaries (the "Company"), the accompanying Consolidated Condensed Financial Statements have been presented on a basis consistent with the Company's annual 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 25, 1999, as well as its results of operations and its cash flows for the fiscal three and nine month periods ended September 26, 1998 and September 25, 1999, respectively. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Unaudited Consolidated Condensed Financial Statements should be read in conjunction with the Consolidated Condensed Financial Statements, related notes and other information included in the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 26, 1998. Operating results for interim periods may not be indicative of results for the full fiscal year. Inventories Inventories are stated at the lower cost or market on a first-in, first-out basis. Inventories consisted of the following: December 26, 1998 September 25, 1999 (Unaudited) ------------------ Finished Goods $18,735 $17,720 Raw Materials 4,725 5,183 Work-in-Process 6,271 5,308 Packaging Materials 655 570 ------- ------- $30,386 $28,781 Income (Loss) Per Common Share For the nine months ended September 25, 1999 and September 26, 1998, basic and diluted net loss per share was computed based on weighted average common and common equivalent shares outstanding of 20,966,000 and 14,585,000, respectively. Common Stock equivalents are excluded from the basic and diluted net loss per share calculation for both fiscal periods because the effect would be antidilutive. At September 25, 1999, the Company had the following common shares and common share equivalents outstanding: Common Shares 21,022 Preferred Stock 40,000 Warrants/Options 24,622 ------- Total Shares and Share Equivalents Outstanding 85,644 2. Liquidity As reflected in the financial statements, the Company has incurred operating losses during the first nine months of Fiscal 1999, anticipates a loss for Fiscal 1999, and has a working capital deficit of $4,310. The Company continues to manage its short-term cash needs despite restricted credit terms from certain of its vendors and suppliers. Such short-term liquidity has been managed through additional availability provided under the Loan and Security Agreement (Note 3), a company-wide cost reduction program and delaying certain expenditures. The Company is engaged in an equity private placement offering which it presently anticipates will be successfully completed by mid-December 1999. Until such time as the equity financing is completed, the Company expects to continue to manage its short-term cash needs by continuing to implement its cost savings strategy company-wide, continuing to delay expenditures and meeting 6 Danskin, Inc. and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements (continued) (Dollar amounts in thousands except per share amounts) its operating plan for the remainder of Fiscal Year 1999. No assurances can be given, however, regarding the Company's ability to raise sufficient equity capital in the short-term, or to successfully implement its cost savings strategy, delay its expenditures or meet its operating plan for the remainder of Fiscal Year 1999 and beyond. The Company expects to finance its long-term growth, working capital requirements, capital expenditures, management information systems upgrades, development of its planned e-commerce business, and debt service requirements through a combination of cash provided from operations, the aforementioned equity private placement and bank credit lines. No assurances can be given however, regarding the Company's ability to raise sufficient equity to satisfy the aforementioned requirements, including the provision for sufficient working capital to enable the Company to sustain its current and future operations, or that if such additional equity is raised, that the Company's current and future working capital needs or its long-term business or growth objectives will be met. 3. Bank Financing Effective October 8, 1997 (the "Refinancing Closing Date"), the Company entered into a loan and security agreement (as subsequently amended, the "Loan and Security Agreement") with Century Business Credit Corporation ("CBCC" or the "Lender") which matures on October 8, 2002. Pursuant to and in accordance with its terms, the Loan and Security Agreement provides the Company with a term loan facility (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 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 undrawn availability, and a limitation on capital expenditures, respectively. The tangible net worth covenant is calculated by subtracting from total assets all intangible assets and total liabilities. The tangible net worth covenant stipulates that the Company must maintain a tangible net worth of not less than (a) $0.00 as of the end of each of the months of June, July, August, September, October and November of 1999, and (b) $2,000 as of the end of December 1999 and each month thereafter. The Lender has waived compliance with the tangible net worth covenant through and including November 1999. At September 25, 1999, the Company's tangible net worth was approximately ($2,300). The undrawn availability covenant provides that the Company must have undrawn availability of at least $3,000 as of the end of December 1999 and each month thereafter. Undrawn availability at September 25, 1999 was approximately $2,300. The Company expects to be in compliance with the foregoing covenants as a result of cash flow from operations and additional financing which the Company anticipates closing prior to December 31, 1999. On the Refinancing Closing Date, two term loans were advanced to the Company in accordance with the terms of the Term Loan Facility. A term loan in the original principal amount of $5,000 was advanced to the Company and is, with respect to principal, payable in thirty (30) consecutive monthly which commenced on November 1, 1998. A second term loan, in the original principal amount of $5,000 was advanced to the Company and is, with respect to principal, payable in eighteen (18) consecutive monthly installments commencing on May 1, 2001. In February 1999, the Lender advanced a third term loan to the Company in the original principal amount of approximately $940 which is, with respect to principal, payable in equal monthly installments of $16. The Company used the proceeds of such third term loan to purchase certain machinery and equipment for use in its operations. Pursuant to certain amendments to the Loan and Security Agreement executed in fiscal 1999, the Lender increased the Company's availability under the Revolving Credit Agreement by an amount not to exceed $6,210 (the "Additional Collateral Amount"), in support of which certain shareholders and affiliates of the Company, and various third parties, have provided stand-by guarantees, as set forth below, and has provided the Company with $2,150 (the "Overadvance Amount") of additional borrowing capacity through November 30, 1999 and $1,250 through December 31, 1999. 7 7 Danskin, Inc. and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements (continued) (Dollar amounts in thousands except per share amounts) 4. Guarantees In connection with the availability of the Additional Collateral Amount, certain shareholders and affiliates of the Company, and various third parties, issued limited guarantees in favor of the Lender in an aggregate principal amount not to exceed $6,210 (each, a "Guarantee," together, the "Guarantees"). Pursuant to the terms of the Guarantees, each guarantor guarantees the performance of the Company's obligations under the Loan and Security Agreement, and the payment of any and all sums due and owing by the Company to the Lenders under such Agreement, in all cases, limited to the dollar amount of the Guarantee. In accordance with their terms, the Guarantees may be withdrawn at such time as the Company has availability under the Loan and Security Agreement in excess of $6,000, without giving effect to the Additional Collateral Amount. In consideration for the issuance of the Guarantees, the Company has agreed (i) to issue warrants to each guarantor, and (ii) to pay to each guarantor interest on the amount of each Guarantee at a rate not to exceed the difference between (a) the Prime Rate minus 3% and (b) 10% per annum. Each warrant represents the right to purchase one share of Common Stock. The number of warrants issued to each guarantor is based upon a formula which takes into account the number of days that the Guarantee is in place. The exercise price of all warrants to be issued in consideration for a Guarantee shall be equal to $.01; provided, however, that such exercise price will be adjusted to the price prospective investors pay for equity in the Company's planned placement of additional equity as discussed below. See Note 3 and `Liquidity and Capital Resources' 5. Preferred Stock and Subordinated Convertible Debentures In accordance with the terms of a certain Securities Purchase Agreement dated September 22, 1997 (the "Securities Purchase Agreement") entered into by the Company and Danskin Investors, LLC. (the "Investor") the Company has issued $12,000 stated value of Series D Redeemable Cumulative Convertible Preferred Stock (2,400 shares) (the "Series D Stock") of the Company and a seven year warrant to purchase 10 million shares of Common Stock at a per share price of $0.30 (the "Warrant") to the Investor. The 2,400 shares of Series D Stock are convertible into Common Stock, at the option of the holder and, in certain circumstances, mandatorily, at an initial conversion rate of 16,666.66 shares of Common Stock for each share of the Series D Stock so converted, subject to adjustment in certain circumstances. The terms of the Series D Stock also provide that, upon the seventh anniversary of the date of its issuance, the Series D Stock shall 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 D Stock), plus (y) all accrued and unpaid dividends on such shares of Series D Stock to the date of such redemption. Holders of the Series D 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 D 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 D Stock held by such holder, rounded up to the next one-tenth of a share. Holders of the Series D Stock are also entitled to designate a majority of the directors to the Board of Directors of the Company. The Series D Stock has an 8% annual dividend rate, payment of which is deferred through December 31, 1999, and a seven year maturity. If, for any fiscal year beginning with the fiscal year ending December 25, 1999, the Company meets certain agreed upon financial targets, all accrued dividends for such fiscal year will be forgiven and the Series D Stock will automatically convert into 40 million shares of Common Stock. The Investor has 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 may be paid, at the option of the Company, in cash or in additional Common Stock. The issuance of such Common Stock to the Investor shall, in accordance with the agreement, constitute full payment of such dividend. 8 Danskin, Inc. and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements (continued) (Dollar amounts in thousands except per share amounts) 6. Legal Proceedings The Company severed its relationship with Cathy Volker, the Company's former Chief Executive Officer, in June 1999. The Company's and Ms. Volker's respective rights and obligations under Ms. Volker's Employment Agreement, dated as of February 2, 1998, if any, are the subject of a pending arbitration. On November 25, 1996, the Company commenced suit against Herman Gruenwald, former President, Director and Principal shareholder of Siebruck Hosiery, Ltd. ("Siebruck") for damages in the amount of $1,450 in the Superior Court, Montreal. The claim relates to unreported sales in excess of $1,500 arising under a license agreement entered into by and between the Company and Siebruck, which expired on December 31, 1995. Siebruck was placed under the provision of the Canadian Bankruptcy and Insolvency Act. Mr. Gruenwald's statement of defense included a cross-demand against the Company wherein he is claiming damages to his reputation in the amount of Cdn. $3,000. A reasonable evaluation of the claim against the Company cannot be made at this time. However, the Company does not presently anticipate that the ultimate resolution of such claim will be material to its financial condition, results of operations, liquidity, or business of the Company. The Company is a party to a number of other legal proceedings arising in the ordinary course of its 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. 7. Non-Recurring Charges Non-recurring charges of approximately $1,400 for the nine months ended September 26, 1998 consisted of certain executive employee severance costs primarily relating to the termination of the former Chief Executive Officer and resignation of the former Chief Financial Officer. 8. SFAS No. 131 Disclosure Effective December 26, 1998, the Company adopted SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information." The Company is organized based on the products its offers. The Company presently operates under two operating segments: Danskin, which designs, manufactures, markets, and sells activewear, dancewear, bodywear, tights and exercise apparel through wholesale channels to retailers and through the Company's outlet and retail stores; and Pennaco, which currently designs, manufactures, and markets hosiery under the brand names Round-the-Clock (R) and Givenchy (R). Pennaco also manufactures under private labels for select retailers. The Company evaluates performance based on profit or loss from operations before extraordinary items, interest expense and income taxes. The Company allocates corporate administrative expenses to each segment. For the nine months ended September 25, 1999, Danskin was allocated $2,900 and Pennaco was allocated $1,500. For the nine months ended September 26, 1998, Danskin was allocated $3,100 and Pennaco was allocated $2,500. The non-recurring charges of $1,400 for September 1998 were allocated $800 to Danskin and $600 to Pennaco. The Company does not allocate interest expense to the divisions. 9 Danskin, Inc. and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements (continued) (Dollar amounts in thousands except per share amounts) Segment Information Financial information by segment for the nine month periods ended September 26, 1998 and September 25, 1999 is summarized below: Danskin Pennaco Total ------- ------- ----- September 26, 1998 Net Revenues $ 56,628 $ 26,026 $ 82,654 Operating Loss (1,496) (457) (1,953) September 25, 1999 Net Revenues $ 48,221 $ 20,619 $ 68,840 Operating Loss (4,124) (2,258) (6,382) 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. 10 Danskin, Inc. and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar Amounts in thousands, except per share amounts) Cautionary Statements Statements contained in the discussion below, and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, and in oral statements made by or with the approval of the authorized personnel that relate to the Company's future performance, including, without limitation, statements containing the words "believes," "anticipates," "expects," "projects," "currently envisions," and words of similar import, shall be deemed "forward-looking" statements within the meaning of 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 known and unknown risks, uncertainties and certain assumptions. These factors include, among others, changes in regional, global and 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 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; risks associated with the ability of the Company and third party customers and suppliers to timely and adequately remediate any Year 2000 issues; and risks associated with changes in social, political, economic and other conditions affecting foreign sourcing. Given these uncertainties, current and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors, or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. The following discussion and analysis should be read in conjunction with the Unaudited Consolidated Condensed Financial Statements, related notes and other information included elsewhere, in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1998. Results of Operations Comparison of the fiscal three and nine month periods ended September 25, 1999 with the fiscal three and nine month periods ended September 26, 1998. Net Revenues: Net revenues amounted to $21,173 for the three months ended September 25, 1999, a decrease of $6,786, or 24.3% from the prior year three months ended September 26, 1998. Net revenues for the nine months ended September 25, 1999 amounted to $68,840, a decrease of $13,814, or 16.7%, from the prior year nine months ended September 25, 1998. Danskin Activewear net revenues, which include the Company's retail operations, amounted to $15,749 for the three months ended September 25, 1999, a decrease of $3,594, or 18.6%, from $19,343 in the prior year three months ended September 26, 1998. Danskin Activewear revenues amounted to $48,221 for the nine months ended September 25, 1999, a decrease of $8,407, or 14.8%, from $56,628 in the prior year nine month period. Revenues for the three and nine month periods were adversely impacted by a decline in both wholesale and retail revenues, discontinuation of Dance France in the fourth quarter of 1998, as well as, a decline in the rate of fulfillment of customer orders. 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. 11 Danskin, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar Amounts in thousands, except per share amounts) In fiscal 1998, the Company restructured its Danskin sales force to address the multiple channels of trade in which Brand Danskin product is sold. Specifically, each of the department store, sporting goods store and specialty store class of trade has a dedicated sales force. As a further step, and to drive the volume in the specialty store class of trade, the Company recently converted to an independent commissioned sales representative strategy for such channel, and has contracted with independent, fully commissioned sales representatives and agents. The Company believes that this strategy will allow it to more effectively service and grow its specialty store account base resulting in increased revenues. Sales in the Company's retail stores were $5,038 for the three-month period ended September 25, 1999, compared to $6,201 for the same prior year period, and were $12,601 for the nine-month period ended September 25, 1999, compared to $15,283 for the same prior year period. Comparable retail store sales declined 19.9% for the three months ended September 25, 1999 and 17.5% for the nine months ended September 25, 1999. The decline in retail store sales is attributable to, among other factors, the continuing negative effects of the Company's retail inventory reduction plan and the disruptive impact of the implementation of a new inventory management system. The Company also continues to see the effects of the depressed retail environment in the Southern Florida/Orlando market. 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, and to streamline store operations to reduce store operating costs. In addition, the Company is taking the steps necessary to evaluate certain unprofitable or underperforming locations. Pennaco legwear revenues amounted to $5,424 for the three months ended September 25, 1999, a decline of $3,192, or 37.0%, from the prior year three month period. Revenues amounted to $20,619 for the nine months ended September 25, 1999, a decline of $5,407, or 20.8%, from the nine month period ended September 26, 1998. The decline in legwear revenues over the prior year fiscal periods reflects ongoing weekness in the sheer hosiery markets and, in particular, sales of basic, "everyday" sheer hosiery, as well as the expiration of the Anne Klein(R) legwear license at December 31, 1998, which contributed approximately $400 in net revenue in the 1998 third fiscal quarter. Management believes that opportunities exist for margin and revenue improvement in niche and occasioned-oriented sheer hosiery. Accordingly, the Company has initiated a program of product development focused on those product segments. Gross Profit: Gross profit decreased by $4,587 to $6,226 for the three months ended September 25, 1999. Gross profit decreased by $10,698 to $20,863 for the nine months ended September 25, 1999 from $31,561 for the nine months ended September 26, 1998. Gross profit, as a percentage of net revenues, decreased to 29.4% in the three month period ended September 25, 1999 from 38.7% in the same prior year period. Gross profit, as a percentage of net revenues, decreased to 30.3% in the nine month period ended September 25, 1999 from 38.2% in the same prior year period. Danskin Activewear gross profit, as a percentage of net revenue, decreased to 33.8% for the three months ended September 25, 1999 from 41.5% for the three months ended September 26, 1998, and to 33.8% for the nine months ended September 25, 1999 from 40.7% for the nine months ended September 26, 1998. The three and nine month period decreases were primarily a result of a lower sales mix of higher margin Brand Danskin basic product, increased sales of closeout inventory, unfavorable manufacturing variances due to lower volumes, as well as markdowns taken in the Company's retail stores to stimulate sales and reduce inventory. Pennaco legwear gross profit, as a percentage of net revenue, decreased to 16.8% in the three months ended September 25, 1999 from 32.3% in the prior fiscal year period, and decreased to 22.2% in the nine months ended September 25, 1999 from 32.7% in the prior fiscal year period. The lower gross profit level is driven principally by the higher sales mix of lower margin Round-the-Clock(R) Take Two value pack product and legwear continuity programs, coupled with the decline in sales of the higher margin Givenchy(R) product and certain operating inefficiencies due to lower production volume. In addition, markdown allowances given to customers for the liquidation of the Round-the-Clock(R) single packs in the stores has deteriorated the Pennaco margins. In addition to the aforementioned product development programs, the Company has also initiated a program to phase out unprofitable styles within its existing lines. 12 Danskin, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar Amounts in thousands, except per share amounts) Selling, General and Administrative Expenses: Selling, general and administrative expenses, which include retail store operating costs, decreased $2,943, or 25.6%, to $8,544, or 40.3% of net revenues, in the three months ended September 25, 1999, from $11,487, or 41.1% of net revenues for the three months ended September 26, 1998. For the nine-month period ended September 25, 1999, selling, general and administrative expenses decreased $4,830, or 15.1%, to $27,245, or 39.6% of net revenues, from $32,075, or 38.8% of net revenues, for the nine month period ending September 26, 1998. The decrease for the three and nine month periods in Fiscal Year 1999 was principally a result of a reduction in advertising and selling expenditures and corporate expenses. The Company is presently undergoing a review of all its selling, general and administrative expenses in an effort to right-size the infrastructure. This encompasses implementation of a cost-savings strategy to control all expenses and streamline processes to increase efficiencies. As indicated previously, the Company is in the process of streamlining retail store operations to reduce operating costs. Operating Income/Loss: As a result of the foregoing, the loss from operations (i.e., income/loss before interest expense, non-recurring charges and income taxes) amounted to $2,318 for the three months ended September 25, 1999, an increased loss of $1,644 from the operating loss of $674 for the three months ended September 26, 1998. The loss from operations amounted to $6,382 for the nine months ended September 25, 1999, a deterioration of $5,868 from a loss of $514 for the prior fiscal year period. Interest Expense: Interest expense amounted to $985 for the three months ended September 25, 1999 and $669 for the prior fiscal year period. Interest expense amounted to $2,374 for the nine months ended September 25, 1999 and $1,850 for the nine months ended September 26, 1998. The Company's effective interest rate was 10.8% and 9.7% for the three months ended September 25, 1999 and September 26, 1998, respectively, and 9.8% and 9.9% for the nine months ended September 25, 1999 and September 26, 1998, respectively. Non-recurring Charges: Non-recurring charges were $475 for the three month period ending September 26, 1998. These charges consisted of executive employee severance costs primarily relating to the resignation of the former Chief Financial Officer of the Company. Non-recurring charges were $1,439 for the nine month period ended September 26, 1998. The nine month charges consisted of the aforementioned employee expenses related to the resignation of the Chief Financial Officer and certain executive employee severance costs primarily relating to the replacement of the Chief Executive Officer of the Company in March 1998. Income Tax Provision (Benefit): The Company's income tax provision (benefit) rates differed from the Federal statutory rates due to the utilization of net operating losses, the effect of the Alternative Minimum Tax and the effect of state taxes for the three and nine months ended September 25, 1999 and September 26, 1998. The Company's net deferred tax balance was $0 at both September 25, 1999 and December 26, 1998. 13 Danskin, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar Amounts in thousands, except per share amounts) Net Loss: As a result of the foregoing, the net loss was $3,348 for the three months ended September 25, 1999, a decline of $1,486 compared to the net loss of $1,862 for the three months ending September 26, 1998. For the nine months ended September 25, 1999, the net loss was $8,891, compared to a net loss of $3,938 for the prior year fiscal period. Year 2000 Readiness Disclosure The Company commenced a comprehensive program to replace its core management information systems in fiscal 1997. The program involves comprehensive changes to the Company's present hardware and software. In addition to providing certain competitive benefits, completion of the project will result in the Company's information systems being year 2000 compliant. The planning stage of this project has been completed, as well as the systems development phase. Simulated implementation of certain of the key systems is currently in progress. At this time, management does not expect that the replacement of such systems will be fully implemented prior to year 2000. Therefore, the Company has assessed and remediated such systems for year 2000 compliance and is conducting comprehensive testing to ascertain whether such remediation was successful. It expects to complete such testing by November 30, 1999. There can be no assurance, however, that the Company's systems will be rendered year 2000 compliant in a timely manner, either through replacement or remediation, or that the Company will not incur significant unforeseen additional expenses to assure such compliance. Failure to successfully complete and implement the replacement project on a timely basis, or to successfully remediate legacy systems, could have a material adverse impact on the Company's operations. The Company is also evaluating and remediating its non-information systems for year 2000 compliance. It is seeking to obtain year 2000 compliance certification letters from key non-information systems vendors, and has conducted successful test simulations of such systems. Although there can be no assurance, the Company does not presently anticipate that year 2000 issues will pose significant operational problems. The Company does not presently anticipate that the cost to modify its information and non-information technology infrastructure to be Year 2000 compliant will be material to both its financial condition and its results of operations during fiscal 1999. The Company's information technologies staff is currently evaluating and remediating the year 2000 issues within existing systems. Therefore, the cost to evaluate and remediate such systems is principally the related payroll costs for its information systems group. The Company does not have a project tracking system that tracks the cost and time that its own internal employees spend on year 2000 projects. The Company continues to collect information concerning the year 2000 compliance status of its suppliers and customers. It is in the process of contacting its key customers and suppliers to determine if any such supplier or customer has any year 2000 issues which, the Company believes, would have a material adverse effect on the Company. There can be no assurance, however, that the systems of other companies on which the Company relies will be timely converted, or that a failure to successfully convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material impact on the Company's operations. The Company is in the process of developing a contingency plan, which it presently anticipates will include, among other steps, identifying alternative suppliers in the event any of its key suppliers can not offer year 2000 compliance assurance in a timely fashion, and securing alternative manufacturing sources in the event the Company can not remediate any year 2000 issues it discovers in the course of its systems assessments which can reasonably be expected to materially impact its manufacturing ability. The Company anticipates that its contingency planning will be completed by November 30, 1999. The Company's contingency plans will evolve as additional information becomes available. 14 Danskin, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar Amounts in thousands, except per share amounts) The Company does not believe that it can identify its most reasonable likely worst case year 2000 scenario at this time. However, a reasonable worst case scenario would be a failure of a key customer or supplier to successfully address its year 2000 issues for a prolonged period. Without an effective contingency plan, any failure by the Company to timely remediate any year 2000 issues relating to any of its material operating or manufacturing systems would likely have a material adverse effect on the Company's results of operations, although the extent of such effect cannot be reasonably estimated at this time. This document contains Year 2000 Readiness Disclosures as defined in Year 2000 Information and Readiness Disclosure Act, P.L. 105-271 (Oct 19, 1998). Accordingly, this disclosure, in who or in part, is not, to the extent provided in the act, admissible in any state or federal civil action to prove the accuracy or truth of any Year 2000 statements contained herein. Liquidity and Capital Resources The Company's primary liquidity and capital requirements relate to the funding of working capital needs, primarily inventory, accounts receivable, capital investments in operating facilities, machinery and equipment, and principal and interest payments on indebtedness. The Company's primary sources of liquidity have been from bank financing, issuance of convertible securities, vendor credit terms and internally generated funds. Net cash flow used in operations increased by $1,214 to $8,639 for the nine months ended September 25, 1999, from a use of cash in operations of $7,425 in the nine months ended September 26, 1998, principally attributable to the increased operating loss in Fiscal Year 1999, decreases in accounts payable and accrued expenses, offset by decreases in inventories, account receivable and prepaid expenses. Working capital was $(4,310) at September 25, 1999 compared to $6,545 at December 26, 1998. The change in working capital is primarily attributable to an increase of $12,110 in the revolving line of credit to fund operations, payment of term loans and investments in capital expenditures. As reflected in the financial statements, the Company has incurred operating losses during the first nine months of Fiscal 1999, anticipates a loss for Fiscal Year 1999, and has a working capital deficit of $4,310. The Company continues to manage its short-term cash needs despite restricted credit terms from certain of its vendors and suppliers. Such short-term liquidity has been managed through additional availability provided under the Loan and Security Agreement (Note 3), a company-wide cost reduction program and delaying certain expenditures. The Company is engaged in an equity private placement offering which it presently anticipates will be successfully completed by mid-December 1999. Until such time as the equity financing is completed, the Company expects to continue to manage its short-term cash needs by continuing to implement its cost savings strategy company-wide, continuing to delay expenditures and meeting its operating plan for the remainder of Fiscal Year 1999. No assurances can be given, however, regarding the Company's ability to raise sufficient equity capital in the short-term, or to successfully implement its cost savings strategy, delay its expenditures or meet its operating plan for the remainder of Fiscal Year 1999 and beyond. The Company expects to finance its long-term growth, working capital requirements, capital expenditures, management information systems upgrades, development of its planned e-commerce business, and debt service requirements through a combination of cash provided from operations, the aforementioned equity private placement and bank credit lines. No assurances can be given however, regarding the Company's ability to raise sufficient equity to satisfy the aforementioned requirements, including the provision for sufficient working capital to enable the Company to sustain its current and future operations, or that if such additional equity is raised, that the Company's current and future working capital needs or its long-term business or growth objectives will be met. 15 Danskin, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar Amounts in thousands, except per share amounts) Strategic Outlook The Company's business strategy is to capitalize on and enhance the consumer recognition of brand Danskin(R) and products by continuing to develop new and innovative activewear, casual wear 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's strategy is to regain leadership and market share in core apparel segments such as dance, and to upgrade its information systems to facilitate manufacturing and shipping efficiencies. 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 (through retail partners), 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 supersheer products, value-oriented multipacks, plus size offerings, socks, trouser socks and tights. The Company's business strategy with respect to the Pennaco division is to exploit its significant manufacturing expertise and the diversity of its product offerings to achieve strategic alliances with its key retail partners with respect to both its branded and private label products to enable it to maintain its industry position in a contracting sheer hosiery market. The Company is also in the process of exploring its alternatives for the marketing and distribution of its activewear and legwear products over the Internet. The Company believes that the Internet will provide it with an alternative and expanded channel of distribution that would allow it to offer the full complement of its product lines to a significantly broader audience than is presently available to it in any existing channel of distribution. In addition to the foregoing, the Company is seeking to increase its presence at retail by exploring various licensing opportunities of Brand Danskin(R) as well as seeking to increase its presence in various international markets. There can be no assurance 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. 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 an applicable percentage) and, therefore, the Company is subject to market-risk in the form of interest rate fluctuations. 16 Danskin, Inc. and Subsidiaries PART II - OTHER INFORMATION Item 1. Legal Proceedings See Note 7 in the Notes to Unaudited Consolidated Condensed Financial Statements in Part I - Financial Information of this Quarterly Report on Form 10-Q. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Financial Data Schedule. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DANSKIN, INC. November 15, 1999 By: /s/ Donald Schupak ------------------------------------ Donald Schupak Chairman of the Board November 15, 1999 By: /s/ Jeffrey Sentz ------------------------------------ Jeffrey Sentz Controller (Principal Financial Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-25-1999 DEC-27-1998 SEP-25-1999 709,000 0 12,992,000 1,057,000 28,781,000 44,349,000 11,012,000 9,943,000 56,553,000 48,659,000 0 0 11,386,000 210,000 (13,716,000) 56,553,000 68,840,000 68,840,000 47,977,000 47,977,000 27,245,000 0 2,374,000 (8,756,000) 135,000 (8,891,000) 0 0 0 (8,891,000) (0.46) (0.46)
-----END PRIVACY-ENHANCED MESSAGE-----