Specifically, in fiscal 1999, capital constraints impacted all aspects of the Company's business including: the 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, limited marketing investment and the absence of an integrated and focused retail strategy.
Commencing in June 1999, the Company took 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, Mrs. Hochman and a number of new senior executives addressed the foregoing operating issues by implementing 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, instituting a replenishment and forecasting capability to improve fulfillment and maximize revenue, and developing an integrated and focused retail strategy.
Although significant progress has been made in addressing the operating issues which current management began addressing in fiscal 1999, the Company's results of operations continue to be hampered by the negative impact of the capital constraints experienced by the Company for the last three fiscal years including limited marketing investment, poor reporting systems and restrictions on piece goods and raw materials purchases. In addition, results of operations in fiscal 2001 were negatively impacted by weakness in the overall economy and the apparel industry.
At December 29, 2001, availability under the Company's Revolving Credit Facility was an overadvance of ($5,206). Pursuant to certain amendments to the Loan and Security Agreement executed in March 2002, the Lender has provided the Company with additional borrowing capacity of varying amounts through December 31, 2002 based on the Company's forecasted monthly business plans through fiscal year 2002, plus an additional $3,000 in excess availability to a maximum overadvance of $10,987 (the "Overadvance"). Based on the aforementioned Overadvance from its lender, the Company believes it will have sufficient liquidity in fiscal year 2002 to operate the business in the normal course, contingent upon achievement of its forecasted monthly business plans, taking into account the $3,000 in additional availability above the requirements of its business plan, as described above. (See Managements' Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.)
The Company is currently seeking to raise additional capital through the sale of debt or equity securities. The Company presently anticipates that the proceeds from any such sale, if successful, will
be used for general working capital purposes. (See Managements' Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.)
The Company designs, manufactures, markets and/or licenses several leading brands of women's activewear, dancewear and legwear. Danskin(-Registered Trademark-), Zen Sport-TM- from Danskin(-Registered Trademark-), Round-the-Clock(-Registered Trademark-), Freestyle(-Registered Trademark-) and Danskin Girl-TM- are the Company's principal proprietary brands. The Company also manufactures women's legwear under the Ellen Tracy(-Registered Trademark-), Givenchy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) brands and women's bodywear under New York City Ballet(-Registered Trademark-) and Denise Austin(-Registered Trademark-) brands pursuant to license agreements. In addition to its branded merchandise, the Company manufactures and markets private label merchandise, principally legwear, for many major retailers, including most full line department stores. The Company currently operates as two divisions: Danskin Division for activewear and Pennaco for legwear.
Danskin(-Registered Trademark-) is a leading brand of women's activewear, legwear, and dancewear in the United States, enjoying a total brand awareness factor of over 80% among target women. According to the Women's Wear Daily 100 Study, Danskin ranks 6th in consumer perception for the Activewear Category. The Company manufactures and sells activewear, dancewear and legwear to girls and women under the Danskin(-Registered Trademark-) label and New York City Ballet(-Registered Trademark-) and to large-size women under the Danskin Plus(-Registered Trademark-) label. Although known for its design of seasonal fashion offerings and its wide range of colors, currently approximately 75% of the Danskin Division's net revenues are attributable to basic styles, with black being the most popular color. The Company currently licenses the Danskin(-Registered Trademark-) brand to manufacturers of women's underwear, women's and girl's socks and women's fitness equipment and accessories. In addition, the Company licenses the Freestyle(-Registered Trademark-) diffusion line to manufacturers of women's and girl's activewear, women's and girl's socks and girl's intimate apparel. The Danskin Division currently produces approximately 36% of its activewear products at its plant in York, Pennsylvania and is one of the only major suppliers of branded women's activewear with substantial domestic manufacturing capacity. The Company believes that its domestic manufacturing allows it to respond to customer orders quickly and also allows its designers to respond quickly to market trends.
The Company's Danskin Division operates two full-priced stores and 32 outlet stores in 18 different states. The Company's outlet stores, in addition to offering in-line merchandise, provide a distribution channel for irregulars and excess inventory.
Pennaco hosiery is widely recognized for its quality, fit and innovation. Pennaco is one of the oldest manufacturers of hosiery in the United States and the second largest supplier of sheer hosiery to domestic, full line department stores and apparel specialty stores, as well as being a leading supplier of private label hosiery to these stores. The Company markets Round-the-Clock(-Registered Trademark-), a proprietary brand, which has been in the market since 1919, as well as the Ellen Tracy(-Registered Trademark-), Givenchy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) licensed brands of hosiery.
STRATEGY
The Company's market includes products intended for a woman's active lifestyle, including activewear, dancewear and legwear. The Company has developed a diversified portfolio of quality branded and private label products that can be offered to consumers at varying price points through its various channels of distribution. The Company's objectives are: (i) expand its portfolio of products in order to become a complete apparel and accessories resource for the active woman by capitalizing on the strong name recognition of its proprietary and licensed brands, (ii) expand its distribution channels both domestically and internationally, and (iii) reduce SKU's to eliminate unprofitable products and focus the activewear line for a more compelling presentation to retailers and consumers.
Key elements of the Company's strategy include the following:
EXPANSION OF DANSKIN(-REGISTERED TRADEMARK-) PRODUCT LINES
The Company believes that innovative product is the key to the success and longevity of Brand Danskin(-Registered Trademark-). The first company to bring Supplex(-Registered Trademark-)Lycra(-Registered Trademark-) performance fabric to the market, Danskin has expanded its Supplex(-Registered Trademark-) Lycra(-Registered Trademark-) fabric line by continually offering new fabric innovations. Supplex(-Registered Trademark-) Rib and Heathered Supplex(-Registered Trademark-) are textured fabrics that combine style with technology, while Woven Supplex(-Registered Trademark-) offers the benefit of Supplex(-Registered Trademark-) fabric in off the body silhouettes that take advantage of the lifestyle trend toward loose, cover-up activewear.
Because Danskin believes that innovation based on consumer need drives consumer interest, the Company has introduced the O2 Performance-TM- category. O2 Performance-TM- successfully combines the soft comfortable hand of cotton that women prefer with the advanced moisture management technology of Coolmax(-Registered Trademark-) Polyester. The core fabric for this category is proprietary, carrying both the Cotton Council and DuPont(-Registered Trademark-) Coolmax(-Registered Trademark-) trademarks. The Company also continues to capitalize on the success of Dry Zone-TM- by product innovation in performance t-shirts and shells. Dry Zone-TM-fabrics are designed to regulate body temperature in multi-climate conditions. The fabric category combines technological innovation with comfort and style, the hallmark of Danskin(-Registered Trademark-) active product.
To continue to move Brand Danskin(-Registered Trademark-) beyond its traditional stretch bodywear platform, the Company expanded its offering of Yoga garments for Holiday 2001 to address this fast-growing fitness trend, leveraging the success of Zen Sport-TM- from Danskin(-Registered Trademark-) launched in 1999. Both Danskin Yoga and Zen Sport-TM- from Danskin(-Registered Trademark-) respond to a woman's need for stretch apparel that is suited to low impact activities such as yoga, meditation and stretch exercises, satisfying the need for comfort while reinventing the way we define fitness wear. Danskin Yoga is designed and marketed to meet the specific needs of the sporting goods and moderate department store channels of distribution. Danskin was awarded "Innovative Product of the Year" by The Sports Authority during its annual Vendor Leadership Conference in early year 2002 for its Yoga products.
Innovation meets heritage and tradition with the introduction of New York City Ballet(-Registered Trademark-) dance apparel, scheduled to debut in stores in Fall 2002. New York City Ballet and Danskin, both world renowned for uncompromising quality, will introduce contemporary dance apparel dedicated to "beauty, innovation and quality." Danskin's New York City Ballet product introduces cotton lycra seamless leotard's superior stretch, comfort and advanced technology. The four-way stretch of seamless product, with its unlimited range of motion, redefines stretch dance apparel. The unique fabrication and product assortment of New York City Ballet(-Registered Trademark-) tiers Brand Danskin(-Registered Trademark-) dance apparel, allowing the Company to expand its position on innovation.
Danskin legwear under the New York City Ballet(-Registered Trademark-) label will also allow the Company to tier product and offer innovation in legwear. First to the marketplace with Coolmax(-Registered Trademark-) tights, this product is sleek, durable and technologically focused to provide maximum moisture management and comfort carrying the DuPont(-Registered Trademark-) Coolmax(-Registered Trademark-) trademark.
Danskin also reached agreement with Denise Austin to endorse Danskin products and has created an innovative new line of active apparel, Denise Austin(-Registered Trademark-)by Danskin(-Registered Trademark-). Ms. Austin, a fitness inspiration for millions of American women, will wear Danskin(-Registered Trademark-) products on Lifetime Television, where she appears daily on two shows, as well as when taping her videos. Denise also sells Denise Austin(-Registered Trademark-) by Danskin(-Registered Trademark-) apparel on QVC Network for the Company.
INTERNATIONAL SALES EXPANSION
The Company believes that Brand Danskin(-Registered Trademark-) enjoys strong recognition in many foreign markets, and that the Company has not taken full advantage of this opportunity. The Company has targeted
international markets as a potential source of growth in fiscal 2002 and beyond. The Company has brought on a Vice President, International to focus on driving international growth, primarily through distribution channel expansion throughout Western Europe. Penetration of sales per female capita, even at half the level of the United States could yield significant upside revenue potential for the Company. Activewear sales of other manufacturers/suppliers have been significant in international markets. However, the Company's sales in the market have been primarily related to its dance products. A recent fact-finding study, commissioned by the Company, found strong retailer interest in carrying Danskin's Activewear line. Export net sales over the past three full fiscal years were $4,800 for fiscal 1999, $4,400 for fiscal 2000, and $3,700 for fiscal 2001. The Company remains optimistic of the opportunities available to it through International distribution expansion.
LICENSING OF THE DANSKIN(-REGISTERED TRADEMARK-) NAME AND DIFFUSION MARKS
The Company currently licenses the Danskin(-Registered Trademark-) brand to manufacturers of women's and girl's underwear, women's and girl's socks, and women's fitness equipment and accessories. The Company believes that there is a significant opportunity to license the Danskin(-Registered Trademark-) name for additional product categories, including such categories as swimwear, body care products, eyewear, dance shoes, accessories (bags, watches, headwear), toddler playwear, footwear and nutritional supplements. The Company believes that selective licensing enhances the value of the brand, by expanding the opportunities for retail purchases of its brands, affording cross-marketing and merchandising opportunities and providing additional product categories for sale in Company-owned stores. The Company is presently in discussions with a number of additional potential licensees for various product categories.
In fiscal 2001, the Company signed a multi-year license agreement with Jacques Moret, Inc., for the manufacture of the Freestyle(-Registered Trademark-) line of women's and girl's activewear and bodywear for distribution to all 991 Target Stores retail locations throughout the United States commencing June 2001. Danskin retains design approval over all product manufactured and distributed by Jacques Moret. In addition, the Company also signed a multi-year license agreement with Renfro Corporation for women's and girl's socks as well as with Delta Galil Industries for girl's underwear and is in discussion with other potential licensees for other product categories. The Freestyle(-Registered Trademark-) lines are represented by product that is distinctly different from both the current Brand Danskin(-Registered Trademark-)offering and the current Target offering. The women's and girl's lines offer Target's clientele fashion and function at a value that will exceed consumer expectation levels.
The Company believes that the Target opportunity coupled with the new licenses for Brand Danskin(-Registered Trademark-), are a significant step in the development of the Company's branding strategy and its transformation from strictly a manufacturer to a brand manager and marketer. The Company believes that the credibility and power of Brand Danskin(-Registered Trademark-) will allow it to seek enhanced distribution of Brand Danskin(-Registered Trademark-) products, as well as its diffusion lines, through its in-house efforts and additional strategic licensing opportunities.
COMPANY-OWNED STORE STRATEGY
Recognizing that the Company's retail stores provide a platform for capitalizing on the strong brand awareness enjoyed by Brand Danskin(-Registered Trademark-), provide a channel of distribution where the Company can showcase its products, and act as a laboratory for product innovation, the Company has revitalized its retail operations, including the hiring of a dedicated management team, closing under-performing locations, downsizing certain locations, remerchandising the stores, installing a point of sale system in all locations to provide critical inventory and sales information and implementing visual merchandising programs in all locations to achieve a consistent and identifiable retail impression and presence.
OUTLET STORES. During fiscal 2001, capital constraints continued to severely impact the retail operations of the Company. Management has taken steps to evaluate the performance of its retail outlet locations. The Company's efforts are designed to transform its outlet stores to smaller, efficient specialty outlet stores, which represent the overall Danskin(-Registered Trademark-) product line. In order to achieve this, the Company has downsized certain locations, changed the stores' merchandise mix and fulfillment practices to provide for the automatic replenishment of basic product as determined by model stock levels, allowed for the purchase of in-line seasonal merchandise, and has implemented focused store merchandising and imaging programs that improve the stores' overall product presentation with a focus on improved presentation of key items.
FULL PRICE RETAIL STORES. The Company presently operates two full-price retail stores under the Danskin(-Registered Trademark-) name: Columbus Avenue in New York City and Prudential Center in Boston, Massachusetts. The Company anticipates opening a third full price location in Westport, Connecticut in the second quarter of 2002.
The Company continues to believe that the recognition of Brand Danskin(-Registered Trademark-), along with the brand's reputation for fit, comfort and durability, provide the Company with an opportunity to successfully open additional full price Danskin(-Registered Trademark-) stores in freestanding metropolitan and upscale downtown locations. Such stores would offer the Danskin(-Registered Trademark-) consumer a wider assortment of Danskin(-Registered Trademark-) merchandise by carrying an inventory representative of the entire Danskin(-Registered Trademark-) apparel line consisting of approximately 1,500 SKU's, contrasted with only approximately 150 SKU's maintained at any one time by even the largest retailer of Danskin(-Registered Trademark-) apparel products, as well as the other lifestyle products which are available under the Danskin(-Registered Trademark-) brand. In addition to expanding a channel of distribution for the Company's products, the Company believes that these stores would be an effective form of consumer advertising and help "showcase" the full assortment of its product offerings. While management believes that there are ample opportunities for selective national expansion of its full price retail strategy, it is presently focusing on, and has made substantial progress under, its "right-sizing" initiatives, improving the operations and performance of its current retail store base, refining its formula which it can then successfully apply to additional store locations.
E-COMMERCE. The Company continues to pursue a number of strategies for the marketing and distribution of its products over the Internet. The Company's ".com" strategy is discussed below. In addition to its planned Internet activities, the Company has joined forces with a number of e-commerce partners for the distribution of its Brand Danskin(-Registered Trademark-) products, and anticipates that such ventures will have a positive effect on the Company's revenues while providing critical exposure for its proprietary and licensed brands. The Company believes that the Internet will also provide it with a distribution channel that will allow it to offer the full complement of its Brand Danskin(-Registered Trademark-) product lines, while reaching a broader audience than is presently available to it in any existing channel of distribution.
ESTABLISHMENT OF PENNACO AS A COMPLETE LEGWEAR RESOURCE
Despite continued capital constraints, as well as reduction in the size of hosiery departments, Pennaco continues to be the number two hosiery resource (behind Sara Lee Corporation) in most domestic, full line department stores, and enjoys a reputation for the fit, innovation and sheer quality of its products, private label offerings, reliable shipping performance and brand diversity. The Company is also a major supplier of private label sheer hosiery sold by these department stores as well as national chain stores and specialty stores. With the focus on innovation and developing market right products and programs, the Company has developed initiatives for each of its legwear brands to take advantage of the opportunities for niche products and in growing specialty and dot.com channels of distribution. With the addition of the Ellen Tracy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) labels during fiscal 2000, the repositioning of the Ellen Tracy(-Registered Trademark-) and Givenchy(-Registered Trademark-) brands as well as an expanded casual and private label presence, the Company has completed the process of recreating itself as a complete legwear resource.
PRODUCTS
ACTIVEWEAR
The Company designs, manufactures and markets several leading brands of women's and girl's activewear (including bodywear, cover-ups and outerwear), performance legwear and dancewear under the Danskin(-Registered Trademark-), Danskin Girl-TM-, Zen Sport-TM- from Danskin(-Registered Trademark-), Everywear-TM-, New York City Ballet(-Registered Trademark-) and Denise Austin(-Registered Trademark-) by Danskin(-Registered Trademark-).
Danskin realizes approximately 75% of its activewear revenues from basic styles, with black being the single most popular color. Activewear products are generally designed in four seasonal fashion groupings, with a monthly introduction of new styles or colors. Under management's "right-sizing" initiatives, and in an effort to improve margins and minimize operating complexity, the Company has made significant progress in eliminating low-volume and unprofitable SKU's from its product offerings. The total number of SKU's for activewear, per season, is approximately 5,600. Danskin(-Registered Trademark-) activewear products sell at retail prices ranging from $8.50 to $84.00.
LEGWEAR
Pennaco is one of the oldest manufacturers of hosiery in the United States and is the second largest supplier of women's sheer hosiery and legwear to domestic, full line department stores and apparel specialty stores. The Company is also a leading supplier of private label hosiery to department stores as well as national chains and specialty stores. Approximately 33% of the Company's annual legwear revenues consist of sales of its private label merchandise. Pennaco hosiery is widely recognized for its quality, fit and innovation. Through its proprietary brand, Round-the-Clock(-Registered Trademark-), the Company was the first manufacturer to introduce multiple sizes and colors in pantyhose, and was a pioneer in the application of spandex (Lycra(-Registered Trademark-)) yarns to hosiery.
The Company also manufactures and sells licensed brands of hosiery under the Ellen Tracy(-Registered Trademark-), Givenchy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) labels, which, together represented approximately 52% of legwear revenues for the fiscal year ended December 29, 2001.
Givenchy(-Registered Trademark-) has been a leading brand since its introduction by Pennaco in 1979. The Givenchy(-Registered Trademark-) license agreement covers the United States, Canada and Mexico and expires on December 31, 2004. Givenchy(-Registered Trademark-) sheer hosiery retails in a price range of $4.50 to $25.00.
The Company's agreement with Ellen Tracy(-Registered Trademark-) extends through December 31, 2003, and grants the Company worldwide distribution rights for hosiery, tights, socks and trouser socks under the Ellen Tracy(-Registered Trademark-), Linda Allard(-Registered Trademark-) and Linda Allard for Ellen Tracy(-Registered Trademark-) labels. Ellen Tracy(-Registered Trademark-)products retail in a price range of $5.00 to $16.00.
The Company's agreement with JONES APPAREL GROUP for the Evan Picone(-Registered Trademark-) label grants the Company distribution rights in North America for hosiery through December 31, 2003. Evan Picone(-Registered Trademark-) products retail in a price range of $2.95 to $10.00
Although the Company is required to maintain a high number of legwear SKU's because of the complex packaging requirements of its private label customers, it knits only 73 styles. Product is held in an undyed state and is dyed, finished and packaged in accordance with forecasted demand. Over the past year, the Company has aggressively reduced both the number of legwear styles and SKU's it produces.
MARKET SEGMENTATION
ACTIVEWEAR
The Company sells its activewear products to approximately 3,170 accounts, representing over 5,000 stores. These products are targeted towards different segments of the wholesale market. Danskin(-Registered Trademark-) and Danskin Plus(-Registered Trademark-) (activewear for the large sized woman) products are marketed to major sporting goods stores, such as The Sports Authority, Academy, Garts and Oshman's Sporting Goods, full line department stores, including Kohl's, Saks, Dillard's, Nordstrom, Federated Department Stores (including Bloomingdale's and Bloomingdale's by Mail), Belk Stores, Marshall Field's, Carson's, Parisian's and many smaller sporting goods and specialty stores. The Company continues to re-evaluate its product offerings to gain additional penetration in the activewear market in all classes of trade.
LEGWEAR
The Company sells its legwear products to approximately 600 accounts, representing over 1,800 stores. The customer base for its legwear consists primarily of full line department stores and apparel specialty stores, including Federated Department Stores (including Macy's and Bloomingdale's), May Co. stores (including Kaufmans, Filenes, Hecht, Famous Barr, Robinson May, Foleys, Meier and Frank and Lord & Taylor), Dillards, Dayton Hudson, Marshall Field's, Nordstrom, Saks Fifth Avenue, Sears and Talbot's (including its catalog).
The Company provides a diversity of legwear products to its customer base at each price/quality level, and seeks market niches for product expansion. Within the legwear market, the market is divided principally by retail price points, with designer brands such as Ellen Tracy(-Registered Trademark-) and Givenchy(-Registered Trademark-) occupying the upper price point positions with generally higher gross margins, additional brands, such as Round-the-Clock(-Registered Trademark-) and Evan Picone(-Registered Trademark-), occupying the middle price point positions and private label products at varied price points, depending upon the retailer's brand image.
STORE OPERATIONS
FULL PRICE RETAIL
The Company has operated a full price retail store under the Danskin(-Registered Trademark-) name on Columbus Avenue in New York City since November 1994. The store covers approximately 3,000 square feet and is designed exclusively for women, offering a wide assortment of Danskin(-Registered Trademark-) products. During fiscal 2000, the Company undertook a refurbishment of its Columbus Avenue location, which has resulted in increased revenues in this location. The Company also operates a full price store in Prudential Center in Boston, Massachusetts and anticipates opening a third full price store in Westport, Connecticut in the second quarter of 2002. While the Company believes that the full price store concept will be applicable in other major metropolitan areas and downtown locations in the United States, it continues to focus on improving the operations and performance of its current retail store base.
OUTLETS
The Company currently operates 32 outlet stores located in 18 different states, situated in areas where the Company believes they generally do not compete with the Company's principal channels of distribution. They range in size from approximately 1,800 to 7,500 square feet, with the average being approximately 3,100 square feet. Although these stores have traditionally provided the Company with a channel of distribution for closeout merchandise, the Company has moved to providing more in-line merchandise in its outlet store, resulting in improved inventory turns and margins. The Company has also improved the operations of its retail stores through improved personnel and staffing, store downsizings and the closing of unprofitable stores, among other factors, which have resulted in lower store operating expenses.
OPERATIONS
ACTIVEWEAR
The Company manufactures approximately 36% of its activewear products in its 275,000 square foot facility in York, Pennsylvania, and is one of the only major suppliers of branded women's activewear with substantial domestic manufacturing capacity. The manufacturing capabilities of this facility include knitting, cutting, sewing, dyeing, and finishing. The Company believes that manufacturing domestically allows it to maintain an overall shorter lead-time. This allows the Company to respond to customer orders in a reasonable amount of time and also allows its designers to respond quickly to market trends. This enables Danskin to defer authorization of fabric purchasing and cutting until buyers have seen product samples. In addition, the Company redirected its York facility to operate principally as a bottoms manufacturer, with state of the art cutting and sewing, which has enabled the Company to achieve longer, more efficient runs. The York facility is also the Company's focal point for product development.
In order to complement the York facility, the Company operates a sewing facility in Mexicali, Mexico, operating under NAFTA. This facility produces activewear at significantly enhanced margins. The Mexico facility, along with contractors in the Mexicali, Mexico region, provide the Company with manufacturing expansion opportunities, while retaining the quick response and flexibility afforded by being a domestic manufacturer. Approximately 28% of the Company's activewear product is produced in Mexico.
The Company continues to pursue its strategy of diversifying the manufacturing of its activewear product offerings by using offshore manufacturing to purchase packaged finished goods. As a result, it expects to source an increasing proportion of its total production through offshore contractors. Currently, approximately 36% of the activewear manufacturing is package-sourced offshore.
With all three sources of manufacturing, the Company is continually striving to reduce total lead times, raw material inventories, and work in process inventory levels. Continually evaluating and changing current processes, plant layout changes, and organizational changes are helping to attain these objectives.
The York facility has dyeing capabilities which enable the Company to hold basic garments in greige (undyed state), and then garment dye based on the release of customer orders. This allows the Company to minimize inventory risk, minimize finished goods inventory, and reduce the time required to react to customer spikes in demand. Distribution of Activewear is made from Danskin's 120,000 square foot facility in York, Pennsylvania.
LEGWEAR
The Company manufactures the majority of its sheer and casual legwear at its Grenada, Mississippi facility. The Company's additional manufacturing capacity needs are met through long-term relationships with manufacturers in Mexico and Italy. Experienced senior managers have joined Pennaco in the past year and are pursuing a number of initiatives to raise efficiencies and profitability. Specifically, Pennaco is in the process of compressing its manufacturing square footage to gain increased efficiencies, reduce inventories and achieve dramatic improvements in cycle times. Significant headcount reductions and renegotiated terms with suppliers have led the way to improving the cost structure of the facility. A key ingredient to the plant initiatives has been an extremely stable and willing workforce. The Company's legwear distribution facilities are also located in Grenada, Mississippi.
The Company continues to process a substantial and increasing portion of its customer orders through EDI programs, which permit the electronic receipt of purchase orders and, in some cases, the electronic transmission of invoices. In addition, the Company has an established a "Quick Response
Program" for certain high volume styles, which has enhanced its EDI replenishment capabilities and has enabled it to ship products within three to five days of receiving an order.
SALES
The Company's domestic sales force consists of approximately 17 sales people; 6 of whom are responsible for marketing the Company's activewear product lines and 11 of whom are responsible for marketing the Company's legwear product lines to department stores, apparel specialty stores, sporting goods retailers and smaller specialty stores. The Company has an inside Sales and Customer Service Department that supplements area coverage and provides assistance to accounts. The Company periodically reviews the structure of its sales force and makes adjustments based on the Company's needs.
The activewear sales force is headed up by the Vice President, General Manager of Brand Danskin(-Registered Trademark-). Reporting to the Vice President, General Manager are four sales Vice Presidents. Each Vice President is responsible for a distinct customer class of trade. The Company's major classes of trade distinctions are Sporting Goods, Department Stores, Dance and Active Specialty Stores and better Specialty Stores. The Company employs a direct sales force responsible for the Sporting Goods and Department Store classes of trade. The Specialty Store class of trade is handled by an independent sales force. Currently, Danskin has contracts with eighteen independent representatives, who are currently managing twenty-four field representatives. In addition, Danskin employs a sales person solely responsible for the private label and closeout businesses. Sales account executives are compensated on a straight salary basis, and independent sales representatives are compensated on a commission basis.
The Pennaco sales force is comprised of Company employees whose responsibilities are structured around the Division's major accounts. To drive the Division's revenue, the Company has, among other steps, recently adjusted the compensation structure for the Pennaco sales force to be comprised of a combination of base salary and commission.
The Company emphasizes its commitment to customer service through a staff of approximately 40 area merchandisers, located throughout the country, whose principal responsibility is field merchandising of legwear products in department stores. These representatives are present in the stores during peak consumer traffic periods; they merchandise the selling fixtures, instruct store personnel about effective selling, conduct seminars, interact directly with consumers and are available to support in-store events and promotions, all with the goal of maximizing sales of the Company's products. To a lesser extent, they also merchandise the Company's activewear products in department stores and certain sporting goods stores.
Export sales are generally made to international distributors, with the exception of Canada, where the Company utilizes independent sales representatives to market Danskin(-Registered Trademark-) activewear directly. In addition, the Company recently signed an agreement with an independent distributor for the distribution of the Zen Sport-TM- Brand in Canada. The Canadian sales force is managed by an employee of Danskin Canada, the Company's wholly owned subsidiary.
MARKETING
BRAND DANSKIN(-REGISTERED TRADEMARK-)
The Company uniquely supports women's and girls' active lifestyles through its product lines. The overall marketing strategy is to provide Danskin(-Registered Trademark-)branded products that dramatically exceed consumers' expectations for fashion, fit and femininity, and support her active lifestyle while maximizing the presence and support of Brand Danskin(-Registered Trademark-) at retail. The Company has redesigned and updated the hangtag system and packaging on licensed product to improve feature and benefit communication for
the consumer at point-of-sale. New hangtags on Danskin(-Registered Trademark-) branded apparel are shipping on garments beginning Spring 2002.
Dance is the company's heritage, and a complete program of marketing activities supports these products, including national print advertising, dance spokeswomen (Deanna McBrearty and Saskia Beskow of New York City Ballet), retailer programs for in-store merchandising, sponsorships of major dance companies and projects, and studio sweepstakes promotions. The Company has returned to it's advertising slogan of "What Dancers Wear-TM-" to support it's strong, broad product offering and long history of serving female dancers from their introductory dance classes that begin at age three. Danskin was also the 2001 preferred dancewear and legwear supplier to the world famous Rockettes, as they celebrated their 75th anniversary and is in negotiations to continue that relationship. Additionally, the launch of New York City Ballet(-Registered Trademark-) by Danskin(-Registered Trademark-) will be supported with national print advertising, in-store signage, a consumer gift with purchase and in-store events featuring Saskia Beskow, the line's spokeswoman.
The Company's Activewear lines are primarily supported by the Company's ownership and title sponsorship of the Danskin Women's Triathlon Series, now beginning its 13th year. Over 80,000 women have competed in a "Danskin" as the event is called by participants. Covering seven cities throughout the United States, the Company uses the Series as a promotional event for both retailers and consumers, offering seminars at partner retailer locations for participants prior to the race event in each city. The Company further evidences its support of women's programs by donating a percentage of the series entry fee to the Susan G. Komen Breast Cancer Foundation. Marketing programs to improve in-store merchandising and provide product information to consumers are continuing.
Danskin(-Registered Trademark-) Yoga is a new classification of lifestyle products inspired by the increasing popularity of yoga and other meditative activities, yet versatile enough for wear out of the gym as part of a casual lifestyle. This line began shipping to sporting goods and department stores in Spring 2002. Zen Sport-TM- from Danskin(-Registered Trademark-), the Company's higher-end Yoga line, is currently in all doors of Saks Fifth Avenue, a significant number of Nordstrom doors and many better specialty stores throughout the country, with significant sell-throughs driving a dramatic growth rate for the business. Zen Sport-TM- from Danskin(-Registered Trademark-) and Danskin(-Registered Trademark-) Yoga are supported by in-store collateral and hangtag programs.
The Company requires its licensees to spend a percentage of net sales on marketing and advertising to address the consumer and channel targeted by the particular product. The Company maintains control over all advertising, marketing and other consumer communication to ensure a consistent image and presence.
LEGWEAR
The Company offers a full range of hosiery products through the portfolio of four brands, Ellen Tracy(-Registered Trademark-), Givenchy(-Registered Trademark-), Evan Picone(-Registered Trademark-) and Round the Clock(-Registered Trademark-), as well as retaining the role of a major private label hosiery supplier to the department stores.
Each of the brands offered by the Company offers consumers innovative products that respond to fashion trends and packaging that calls out features and benefits to the time-starved shopper. Givenchy(-Registered Trademark-) has enjoyed sales increases due to an innovative packaging strategy that has significantly improved the image of the brand at retail. The Company executed a packaging change at retail for Ellen Tracy(-Registered Trademark-) in fiscal 2001. Each of the products offered by the Company is supported by in-store signage and in-store merchandisers who insure replenishment of inventory within Danskin's fixturing.
SEASONALITY
The Company's business achieves seasonally higher financial performance in its September fiscal quarter, principally as a result of "back-to-school" purchases. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations Seasonality."
SUPPLIERS
The Company's raw materials consist principally of piece goods and yarn that are purchased by the Company from a number of domestic and foreign textile mills and converters. The Company obtains Lycra(-Registered Trademark-) from DuPont. Although from time to time there have been shortages of Lycra(-Registered Trademark-), such shortages have not adversely affected the Company. The Company does not have long-term formal arrangements with any of its suppliers. Due to capital constraints which continued to be encountered during fiscal 2001, the Company was unable to adequately satisfy its raw material requirements. Management is in the process of negotiating with suppliers to re-instate favorable credit terms which the Company has historically enjoyed. Based on the progress made to date on improving its operations, the Company anticipates that it will adequately be able to satisfy its ongoing raw material requirements.
TRADEMARKS
The Company owns and utilizes a variety of trademarks, the principal ones being Danskin(-Registered Trademark-), Zen Sport-TM- from Danskin(-Registered Trademark-), Danskin Girl-TM-, Round-the-Clock(-Registered Trademark-) and Freestyle(-Registered Trademark-). The Danskin(-Registered Trademark-) trademark is owned by the Company worldwide, except in Japan, and is registered with the United States Patent and Trademark Office and in most other major jurisdictions of the world. In Japan, the trademark is owned by the Company's former licensee, Goldwin, Inc.
Certain of the Company's other trademarks are registered with the United States Patent and Trademark Office and in some foreign jurisdictions as well. The Company regards its trademarks and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products. The Company actively protects its trademarks against infringement.
REGULATION
The Company is subject to various federal, state and local environmental laws and regulations limiting the discharge, storage, handling and disposal of a variety of substances, particularly the federal Water Pollution Control Act, the Clean Air Act of 1970 (as amended in 1990), the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the federal "Superfund" program. The Company cannot, with certainty, assess at this time the impact upon its operations or capital expenditure requirements of future emission standards and enforcement practices under the 1990 amendments to the Clean Air Act.
In connection with the refinancing of its bank loan agreement, in the fourth quarter of fiscal year ended December 27, 1997, the Company engaged an independent environmental consulting firm to conduct assessments of environmental conditions at the Company's manufacturing and distribution facilities in York, Pennsylvania and Grenada, Mississippi. No material environmental problems were discovered in these assessments.
The Company also is subject to federal, state and local laws and regulations relating to workplace safety and worker health, including those promulgated under the Occupational Safety and Health Act ("OSHA"). As part of its OSHA compliance efforts, the Company requires all personnel working in high noise areas and those working in certain areas with high concentrations of dust to wear protective equipment.
The Company believes that it currently is in compliance in all-material respects with existing OSHA standards and environmental laws and regulations. The Company does not believe that there is
a substantial likelihood that further OSHA or environmental compliance will require substantial expenditures or materially affect its operations or competitive position.
EMPLOYEES
As of March 1, 2002, the Company employed approximately 825 persons, of whom 483 were employed at Danskin, 293 were employed at Pennaco and the remainder was employed at the Company's executive offices. At such date, 565 of the Company's employees were paid on an hourly basis, and the remainder were salaried employees. Although there have been attempts to organize certain of its employees in the past, none are currently represented by a union, and employee relations are generally considered to be good.
COMPETITION
The apparel industry is highly competitive. Many of the Company's competitors are larger and have greater financial, distribution, marketing and other resources, and better-established brand names, than the Company. The Danskin(-Registered Trademark-) brand competes with products sold by an array of smaller and larger companies, including Nike, Reebok, Adidas, Champion, and Everlast for activewear, along with Marika, Capezio, Bodywrappers and Mirella for dancewear. Legwear products compete with products sold by a number of other established manufacturers and marketers, the largest of which is the Hanes division of Sara Lee Corporation, while other significant competitors include Kayser-Roth/Golden Lady. The Company does not market its legwear in food or drug stores.
STATEMENTS CONTAINED HEREIN AND IN THE FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES, AND IN ORAL STATEMENTS MADE BY OR WITH THE APPROVAL OF AUTHORIZED PERSONNEL THAT RELATE TO THE COMPANY'S FUTURE PERFORMANCE, INCLUDING, WITHOUT LIMITATION, STATEMENTS WITH RESPECT TO THE COMPANY'S ANTICIPATED RESULTS OF OPERATIONS OR LEVEL OF BUSINESS FOR 2002 OR ANY OTHER FUTURE PERIOD, SHALL BE DEEMED FORWARD-LOOKING STATEMENTS WITHIN THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS A NUMBER OF FACTORS AFFECTING THE COMPANY'S BUSINESS AND OPERATIONS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND CERTAIN ASSUMPTIONS, REFERRED TO BELOW, ARE INDICATED BY WORDS OR PHRASES SUCH AS "ANTICIPATES," "ESTIMATES," "PROJECTS," "MANAGEMENT EXPECTS," "THE COMPANY BELIEVES," "IS OR REMAINS OPTIMISTIC," OR "CURRENTLY ENVISIONS" AND SIMILAR WORDS OR PHRASES. THESE FACTORS INCLUDE, AMONG OTHERS, CHANGES IN 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.
