10-K 1 a2074574z10-k.txt FORM 10-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) ~~/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]~~

FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001 OR ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED].~~

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 Identification No.) incorporation or organization) 530 SEVENTH AVENUE, NEW YORK, NEW YORK 10018 (Address of principal executive (Zip Code) offices)

Registrant's telephone number, including area code: (212) 764-4630 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE, AND ASSOCIATED RIGHTS ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this annual report on Form 10-K or any amendment to this Form 10-K. __ As of March 1, 2002, the aggregate market value of the Common Stock held by non-affiliates of the registrant was $1,509,290. Such aggregate market value was computed by reference to the closing price of the Common Stock as quoted by the National Quotation Bureau on such date. As of March 1, 2002, there were 68,945,454 shares of the registrant's Common Stock outstanding, excluding 1,083 shares held by a subsidiary. Unless the context indicates otherwise, the term "Company" refers to Danskin, Inc. and, where appropriate, one or more of its subsidiaries. DOCUMENTS INCORPORATED BY REFERENCE -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- DANSKIN, INC. AND SUBSIDIARIES TABLE OF CONTENTS

PAGE ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 1314 Item 3. Legal Proceedings........................................... 1314 Item 4. Submission of Matters to a Vote of Security Holders......... 14 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters....................................... 1415 Item 6. Selected Consolidated Financial Data........................ 1415 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 1719 Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 32 Item 8. Financial Statements and Supplementary Data................. 2932 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 2932 PART III Item 10. Directors and Executive Officers of the Registrant.......... 3033 Item 11. Executive Compensation...................................... 3336 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 3740 Item 13. Certain Relationships and Related Transactions.............. 3942 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 4043 SIGNATURES............................................................ 4245 CONSOLIDATED FINANCIAL STATEMENTS..................................... F-1 FINANCIAL STATEMENT SCHEDULES......................................... S-1

1 PART I (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ITEM 1. BUSINESS Danskin, Inc. and Subsidiaries (the "Company") has made significant progress under current management in its "right-sizing" reorganization plan implemented over the last three fiscal years. Despite being negatively impacted by capital constraints during this timeframe, the Company has benefited from substantial operational improvements and successes in reaching new customers and channels of distribution as well as expansion of its licensing efforts. The Company's financial results for fiscal year 2001 were negatively impacted by capital constraints coupled with the general downturn in the economy and apparel industry. The Company's management remains confident that progress will continue in its reorganization efforts. 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 2 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. 3 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 4 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. 5 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. 6 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. 7 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. 8 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 9 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 10 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. 11 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 12 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. 13 ITEM 2. PROPERTIES The Company leases its principal executive offices and showroom located at 530 Seventh Avenue in New York City. Such lease provides for an average annual base rent of $736 and expires in December 2008. The Danskin plant is located in York, Pennsylvania and contains office space, inventory storage space and a shop area where a significant portion of the Company's activewear products are developed and manufactured. This facility is owned by the Company. Danskin also leases a distribution facility in York, Pennsylvania. Such lease provides for annual rent of $511 and expires in September 2002. The Company is currently renegotiating the lease for the distribution facility. The Pennaco mill is located in Grenada, Mississippi and contains office space and inventory storage space where substantially all of the hosiery products manufactured by the Company are produced. The Company leases this facility from the City of Grenada for a nominal rent through the year 2065. The distribution center is also leased from the City of Grenada for annual rent of $333, under a lease that expires in December 2008. The Company also has committed to lease space for 34 retail stores at annual rents ranging from $13 to $340 under leases expiring during the fiscal year ending 2002 through fiscal year 2007. Thirteen outlet store leases expire in 2002 and the Company is reviewing whether to continue in such locations if available. The Company continually reviews the operations and profitability of its retail locations and will make lease renewal determinations based upon such review. The Company may, based upon such review, attempt to negotiate additional lease terminations. The Company believes that its facilities provide adequate levels of capacity for current levels of production as well as for reasonable levels of growth. None of the Company's properties is leased from an affiliated entity. Substantially all of the Company's properties and other assets are pledged to Century Business Credit Corporation ("CBCC") to secure the Company's obligations under the Loan and Security Agreement with CBCC. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources" and Note 11 in the Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS On November 25, 1996, the Company commenced suit against Herman Gruenwald, former President, Director and Principal shareholder of Siebruck Hosiery, Ltd. ("Siebruck") for damages in the amount of $1,450 in the Superior Court, Montreal. The claim relates to unreported sales in excess of $1,500 arising under a license agreement entered into by and between the Company and Siebruck, which expired on December 31, 1995. Siebruck was placed under the provision of the Canadian Bankruptcy and Insolvency Act. Mr. Gruenwald's statement of defense included a cross-demand against the Company wherein he is claiming damages to his reputation in the amount of Cdn. $3,000. The matter is presently pending before the Superior Court and a reasonable evaluation of the claim against the Company, or the timing of its resolution, cannot be made at this time. However, the Company does not presently anticipate that the ultimate resolution of such claim will be material to its financial condition, results of operations, liquidity, or business of the Company. The Company is a party to a number of other legal proceedings arising in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, individually or in the aggregate, have a material adverse affect on the financial condition, results of operations, liquidity or business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Bid quotations for the Company's Common Stock may be obtained from the National Quotation Bureau, and the Common Stock is traded in the over-the-counter market. The following table presents the quarterly high and low bid quotations during the last two fiscal years. The Common Stock trades solely in the over-the-counter market. The quotations set forth below, therefore, reflect the inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

HIGH LOW -------- -------- FISCAL YEAR ENDED DECEMBER 3029, ~~2000~~2001 Three-month period ended March.............................. $ 0.95190 $ 0.55145 Three-month period ended June............................... 0.59210 0.39165 Three-month period ended September.......................... 0.43190 0.27075 Three-month period ended December........................... 0.28100 0.16040 FISCAL YEAR ENDED DECEMBER 2530, ~~1999~~2000 Three-month period ended March.............................. $ 10.3195 $ 0.5655 Three-month period ended June............................... 10.2559 0.6339 Three-month period ended September.......................... 0.8143 0.27 Three-month period ended December........................... 10.0628 0.2416

As of December 29, 2001, the number of stockholders of record of the Company's Common Stock was approximately 210. The Company has not declared any cash dividends with respect to the Common Stock subsequent to the effective date of its initial public offering, August 19, 1992. The Company's Loan and Security Agreement with CBCC prohibits the payment of dividends without the lender's consent. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated operating data for the five fiscal twelve months ended December 27, 1997, December 26, 1998, December 25, 1999, December 30, 2000, and December 29, 2001 and the financial position for each of the periods ending, have been derived from the consolidated financial statements of the Company. The data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the 15 Consolidated Financial Statements, including the Notes thereto, of the Company, appearing elsewhere in this Annual Report on Form 10-K.

FISCAL YEARS ENDED DECEMBER ---------------------------------------------------- ~~1996~~ 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net revenues Danskin...............................~~...~~ $ 8081,~~608~~831 $ 8174,~~158~~100 $ 7361,~~468~~119 $ 6057,~~643~~282 $ 5654,~~694~~989 Pennaco...............................~~...~~ ~~47,537~~ 40,~~828~~901 35,~~273~~324 27,~~327~~373 2728,~~960~~011 26,769 -------- -------- -------- -------- -------- Total...............................~~...~~ ~~128~~122,~~145~~732 ~~121~~109,~~986~~424 ~~108~~88,~~741~~492 8785,~~970~~293 8481,~~654~~758 -------- -------- -------- -------- -------- Cost of goods sold Danskin...............................~~...~~ 4952,~~056~~888 5245,~~314~~369 44,~~805~~374 4338,~~902~~582 3835,~~065~~289 Pennaco...............................~~...~~ ~~34,554~~ 29,~~508~~744 23,~~623~~802 21,~~387~~553 22,046 21,~~831~~600 -------- -------- -------- -------- -------- Total...............................~~...~~ 8382,~~610~~632 8169,~~822~~171 6865,~~428~~927 6560,~~289~~628 5956,~~896~~889 -------- -------- -------- -------- -------- Gross profit Danskin...............................~~...~~ ~~31,552~~ 28,~~844~~943 28,~~663~~731 16,~~741~~745 18,~~629~~700 19,700 Pennaco...............................~~...~~ 1211,~~983~~157 11,~~320~~522 115,~~650~~820 5,~~940~~965 65,~~129~~169 -------- -------- -------- -------- -------- Total...............................~~...~~ ~~44,535~~ 40,~~164~~100 40,~~313~~253 22,~~681~~565 24,~~758~~665 24,869 -------- -------- -------- -------- -------- Selling, general and administrative expenses................................. ~~42,026~~ 40,~~174~~110 42,~~112~~052 36,~~312~~196 29,~~864~~771 29,096 Non-recurring charges (income) (1)......... -- 300 2,419 795 (510) 1,700 Interest expense........................... 4,~~721 4,~~278 2,513 5,462 3,289 4,051 -------- -------- -------- -------- -------- Loss before provision for income taxes and extraordinary item....................... (~~2,212) (~~4,588) (6,731) (19,888) (7,885) (9,978) Provision for income taxes ~~(2)~~................ ~~2,777~~ 245 190 20 20 40 -------- -------- -------- -------- -------- Loss before extraordinary item............. (4,~~989) (4,~~833) (6,921) (19,908) (7,905) (10,018) Extraordinary item (32)..................... -- 5,245 -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) ~~income~~.......................... ~~(4,989)~~ 412 (6,921) (19,908) (7,905) ~~========~~(10,018) ~~========~~-------- ~~========~~-------- ~~========~~-------- ~~========~~-------- -------- Preferred Stock dividend................... ~~202~~ 425 1,114 1,078 1,369 1,795 -------- -------- -------- -------- -------- (Loss) ~~income~~ applicable to Common Stock........... $ (~~5,191) $ (~~13) $ (8,035) $(20,986) $ (9,274) $(11,813) ======== ======== ======== ======== ======== BASIC AND DILUTED NET INCOME (LOSS) PER SHARE Net loss per share before extraordinary item (43)................................. $ (0.8066) $ (0.6650) $ (0.5089) $ (0.8913) $ (0.1317) Net income per share for extraordinary item (32)................................~~......~~ ~~-- $~~ 0.66 -- -- -- -- Net loss per share after extraordinary item..................................... ~~(0.80)~~$ (0.00) $ (0.50) $ (0.89) $ (0.13) ~~========~~$ ~~========~~(0.17) ~~========~~-------- ~~========~~-------- ~~========~~-------- -------- -------- Weighted average number of common shares outstanding.............................. ~~6,513~~ 7,942 16,168 23,493 73,688 68,947 ======== ======== ======== ======== ======== Working Capital (deficit).................~~...........~~ $ ~~24,559 $~~ 19,070 $ 6,545 $ 8,235 $ 286 $ (6,940) Total assets............................... ~~66,940~~ 55,022 57,706 47,888 48,852 41,000 Long-term debt (excludes current obligations)............................. ~~31,589~~ 9,667 6,674 11,500 10,558 11,000 Total debt (54)............................. ~~41,558~~ 21,539 24,703 21,541 33,679 38,247 Total stockholders' equity (deficit)....... ~~801~~ 1,681 (3,900) 5,874 (3,124) (16,739)

------------------------ (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE NUMBERS) (1) Non-recurring charges for fiscal 2001 were $1,700 related to the write-off of costs incurred for the purchase of computer hardware and software and system programming costs by external consultants. The Company placed this project on hold until adequate capital could be raised. However, with the Company's continuing cash constraints, management is unable to determine 16 when, or if, this project will be resumed. As a result, the Company has written off the previously capitalized cost of $1,700 in fiscal 2001. Non-recurring income was $510 for fiscal 2000. The income consisted of a net recovery of $426 for an outstanding amount owed the Company for the sale of a trademark, $220 resulting from securing a subtenant for the Company's former corporate offices in New York City, in respect of which the Company previously recognized a loss in fiscal year 1999. The aforementioned income was partially offset by $136 for severance pay to a former executive. Non-recurring charges for fiscal year 1999 were $795. These charges consisted of an additional provision for remaining lease obligations for the former corporate offices in New York City, and establishment of a reserve against an outstanding amount owed the Company for the sale of a trademark. Non-recurring charges of $2,419 for the fiscal year ended December 26, 1998 consisted of costs related to certain executive employee severance costs, provision established for the remaining net lease obligation for the former corporate offices in New York City and write-offs of non-operating assets, offset by the recognition of a receivable and the gain on the sale of the Reading, PA outlet store. Non-recurring charges of $300 for the fiscal year ended December 27, 1997 consisted of certain executive employee severance costs. (2) The recognized gain of $5,245 represents the difference between (a) the recorded value of the Company's obligations under the term loan portion of its previous secured credit facility with First Union National Bank of North Carolina ("First Union") and (b) the fair value of the securities issued in connection with the refinancing of such facility and concurrent recapitalization, less the write-off of deferred finance charges relating to the First Union Loan Agreement and the costs incurred in connection with such recapitalization and refinancing. This gain was applied against the Company's net operating loss carry forward, available after offset may be subject to limitation under the change of control provisions of the Internal Revenue Code. (3) In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share", which requires presentation of basic earnings per share (EPS) and diluted earnings per share and requires the restatement of EPS for all prior periods reported. The Company adopted this statement as of December 27, 1997. In September 1997, (i) the Board of Directors declared a stock dividend on the Common Stock equal to one share of Common Stock for each 11.99 shares of Common Stock held of record as of the close of business on September 22, 1997 (these shares were retroactively applied in the accompanying financial statements for the earnings per share calculation) and (ii) the Board of Directors redeemed the rights issued pursuant to the Rights Agreement, dated as of June 5, 1996, between the Company and First Union, as rights agent, for $.01 per right in cash to holders of Common Stock held of record as of the close of business on September 22, 1997. Also in September 1997, 1,630,000 Stock Options were granted to certain key personnel, 1,050,000 of which were exercisable immediately. (4) Pursuant to an amendment executed in March 2002 (the "March Amendment"), CBCC has agreed to provide the Company with additional borrowing capacity of varying amounts through December 31, 2002, to meet borrowing levels required by the Company's forecasted monthly business plans plus an additional $3,000 in excess availability through December 2002, to a maximum overadvance in fiscal 2002 of $10,987 (the "Overadvance"). The revolving credit obligations totaled $26,447 as of December 29, 2001. In connection with the March Amendment, the Company agreed (i) to pay CBCC 5% of net royalties earned by the Company on licensing agreements entered into after February 28, 2002, with payments not to exceed $500 in any fiscal year. Payments will continue until the earlier of (i) December 31, 2005, and (ii) such time as the Company has $3,000 in undrawn availability. 17 The Loan and Security Agreement was previously amended in August 2001 (the "August Amendment") to reduce the required amortization by $142 per month from December 2001 through December 2002. In accordance with the August Amendment, the Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of (i) $50 on the first day of September 2001 and on the first day of each month thereafter through December 2002, and (ii) $192 commencing on the first day of January 2003 and on the first day of each month thereafter. In accordance with the amortization requirement prior to the August Amendment, the Company paid an aggregate of $550 to CBCC through August 1, 2001, reducing the outstanding principal amount of the Term Loan to $10,950. Pursuant to the August Amendment, CBCC agreed to re-lend the $550 to the Company, thereby making the full $11,500 amount of the Term Loan Facility available to the Company. In connection with certain previous amendments, the Company agreed: (i) to pay CBCC a fee equal to $25 on May 1, 2001, and an additional fee of $25, plus the amount of the previous month's fee, on the first of each month thereafter, and (ii) to issue 250,000 warrants to CBCC with a share price equal to the closing price of the Company's Common Stock on the date of issuance, on the first of each month, commencing May 1, 2001. Under the terms of the agreement with CBCC, the accrual of said additional payment will terminate at such time as the Company raises $4,790 of additional capital. This obligation is evidenced by a promissory note payable January 1, 2004. Therefore, in accordance with this understanding, through December 29, 2001, the Company has incurred $525 in additional fees to CBCC and has issued 2,250,000 warrants to CBCC with share prices ranging from $0.06 to $0.185 per share. In December 1999, in connection with the Company's issuance of Series E Convertible Preferred Stock, the Loan and Security Agreement with CBCC was amended (the "December Amendment") to, among other things, (i) extend the maturity date of the facility from October 8, 2002 to December 8, 2004, and (ii) increase the amount available under the Term Loan Facility to $11,500. Effective October 8, 1997, the Company entered into the Loan and Security Agreement with CBCC, which presently provides for loans to the Company maturing on December 31, 2005, thereby refinancing all amounts owing to First Union. Proceeds of the Loan and Security Agreement were used to pay all of the Company's indebtedness to First Union and to establish working capital lines of credit. In connection with the closing of the Loan and Security Agreement, the Company paid CBCC a facility fee equal to $300. At the closing, two term loans were advanced to the Company in the aggregate principal amount of $10,000. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion provides an assessment of Danskin, Inc. (the "Company") results of operations, capital resources and liquidity which should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this report. The operating results of the periods presented were not significantly affected by inflation. The consolidated financial statements include the accounts of the Company and its two divisions, Danskin and Pennaco. RECENT EVENTS The Company has made significant progress under current management in its "right-sizing" reorganization plan implemented over the last three fiscal years. Despite being negatively impacted by capital constraints during this timeframe, the Company has benefited from substantial operational improvements and successes in reaching new customers and channels of distribution as well as expansion of its licensing efforts. The Company's financial results for fiscal year 2001 were negatively impacted by capital constraints coupled with the general downturn in the economy and apparel industry. The Company's management remains confident that progress will continue in its reorganization efforts. 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 19 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 Liquidity and Capital Resources.) FISCAL YEAR END The Company's fiscal year ends on the last Saturday in December. RESULTS OF OPERATIONS (COMPARISON OF THE 52-WEEK FISCAL YEAR ENDED DECEMBER 29, 2001 WITH THE 53-WEEK FISCAL YEAR ENDED DECEMBER 30, 2000) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET REVENUES Net revenues for the fiscal year ended 2001 amounted to $81,758 a decrease of $3,535, or 4.1% from $85,293 for the fiscal year ended 2000. Danskin activewear net revenues, which include the Company's retail operations, decreased $2,293, to $54,989 or 4.0%, in fiscal 2001 from $57,282 in fiscal 2000. The decreased revenues are primarily due to lower sales in the retail and outlet stores as a result of fewer stores and decreased traffic in existing stores, lower private label and closeout sales and the effect of the extra week in the fiscal year ended 2000. Weakness in the overall economy and drop in consumer confidence and spending in the aftermath of the September 11 terrorist attack had a negative effect on the Company's results during the fourth quarter of fiscal 2001. These decreases were partially offset by higher sales for the Danskin-Registered Trademark- brand and the Zen Sport line for the fiscal year ended 2001. 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 or "EDI") in an effort to drive its basic replenishment business, to increase open-to-buy-levels and to seek out new customers and new channels of distribution. Sales in the Danskin Division's retail stores were $12,543 for fiscal 2001, a decrease of $1,307 or 9.4% from $13,850 for fiscal 2000, which included an extra week of sales. Comparable retail store sales declined 5.0% for 2001. The retail and outlet stores have been impacted by softness in the marketplace for its existing stores resulting in lower customer traffic and sales. As of December 29, 2001, the Company has two full price stores, 29 permanent outlet stores and three temporary stores in 18 states. There is a net four fewer stores during fiscal 2001 versus fiscal 2000 resulting in lower total retail sales for the current year. In addition, the extra week of sales for fiscal 2000 contributed to the shortfall in sales. To address these declines, and to enhance the performance of its retail stores, the Company continues to improve store product offerings, to renegotiate existing leases to achieve optimum store size, to streamline store operations to reduce operating costs and to set up an automatic stock replenishment system to maximize inventory turns. In addition, the Company is continuing to take steps necessary to evaluate certain unprofitable or under-performing locations. In this regard, during the fiscal year ended December 29, 2001, the Company has closed two permanent outlet stores. In addition, during fiscal 2001, the Company opened four temporary stores, with month-to-month leases, to generate additional volume during the Back-to-School sales period. Sales for these temporary stores for fiscal 2001 were $452. Of the four temporary stores opened during the fiscal year, one store was closed in December 2001 and another store was closed in January of 2002. Pennaco legwear revenues amounted to $26,769 for fiscal 2001, a decrease of $1,242, or 4.4%, from the prior fiscal year sales of $28,011. The decrease in legwear revenues versus the prior fiscal year is primarily attributable to the lower sales for the Givenchy(-Registered Trademark-) and Round the Clock(-Registered Trademark-) brands due to continued weakness in the sheer hosiery market. In addition, sales for Custom Collection or private 20 label customers were significantly lower for fiscal 2001 compared to fiscal 2000. These decreases were partially offset by incremental sales generated from the Ellen Tracy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) brands, licensed to the Company in May 2000 (discussed below). In addition, fiscal 2000 included an extra week of sales compared to fiscal 2001. Net revenues for the Ellen Tracy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) products for fiscal 2001 were $4,002 and $5,838, respectively compared to $3,214 and $3,811 respectively for fiscal 2000. The Ellen Tracy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) brands did not commence shipping until the latter half of the second quarter of fiscal 2000. Management believes that the Company is positioned to take advantage of consolidation opportunities in the hosiery industry. In this regard, effective May 5, 2000, the Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen Tracy(-Registered Trademark-) label among others. The agreement provides that Pennaco has the exclusive right and license to use the Ellen Tracy(-Registered Trademark-) trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of legwear in the United States and Canada. The license was previously held by Ridgeview, Inc. In a separate transaction, Pennaco obtained an exclusive license for the manufacture and sale of sheer hosiery and knee highs under the Evan Picone(-Registered Trademark-) label. This agreement provides that Pennaco has the exclusive right and license to use the Evan Picone(-Registered Trademark-) trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of sheer hosiery and knee highs in the United States and Canada. The license was previously held by Ridgeview, Inc. The Company presently anticipates that, together, the sales of product under the Evan Picone(-Registered Trademark-) and Ellen Tracy(-Registered Trademark-) labels will generate revenue of approximately $10,000 on an annualized basis. Sales of product under these licenses began during the second fiscal quarter 2000. Total sales for the Evan Picone(-Registered Trademark-) and Ellen Tracy(-Registered Trademark-) labels for fiscal year 2001 were $9,840. Management believes that opportunities exist for margin and revenue improvement for market right products and programs in niche and occasion-oriented sheer hosiery and through expanded distribution. Accordingly, the Company has initiated a program of product development focused on these product segments and is focusing on expanding distribution into new wholesale accounts both domestic and international. In addition, opportunities exist for niche products and in the growing specialty and dot.com channel segments, as well as in a more focused strategy by management. GROSS PROFIT Gross profit increased by $204 or 0.8% to $24,869 for fiscal 2001 compared to $24,665 for fiscal 2000 despite overall lower level of sales for the Company. Gross profit, as a percentage of net revenues, increased to 30.4% for fiscal 2001 compared to 28.9% for fiscal 2000. Danskin activewear gross profit, as a percentage of net revenues, increased to 35.8% for fiscal 2001 versus 32.6% of net revenues for fiscal 2000. The fiscal year 2001 improvement in margins was primarily due to a higher mix percentage of Danskin brand product versus lower margin private label products and closeout sales, increased royalty income, decreased design and product development expenses and reduced overall product cost due to cost reductions and improved efficiencies in the Company's manufacturing facility and more efficient offshore sourcing of production. The Danskin Division's retail stores' gross profit, as a percent of net revenues, for fiscal 2001 was 55.4% compared to 54.2% for fiscal 2000. The fiscal 2001 improvement is principally attributable to better inventory controls, an improved assortment of higher margin products and lower levels of aged inventory. Pennaco legwear gross profit was $5,169 or 19.3% of net revenues for fiscal 2001, a decrease of $796 or 13.3% from the fiscal 2000 gross profit of $5,965 or 21.3% of net revenues. The gross profit decrease for fiscal 2001 is primarily attributable to unfavorable manufacturing variances generated at 21 the Grenada, MS facility related to reduced production volumes for the Round-the-Clock(-Registered Trademark-) and Givenchy(-Registered Trademark-) brands and custom collection customers as well as incremental costs incurred from integrating the Evan Picone(-Registered Trademark-) and the Ellen Tracy(-Registered Trademark-) licenses described above. SELLING, GENERAL AND ADMINISTRATION EXPENSES The Company continues to review its selling, general and administrative expenses to reduce expenses and its infrastructure to right-size the organization. This encompasses implementation of a cost-savings strategy to control all expenses and streamline processes to increase efficiencies. The result is accountability and improved business processes, as well as significant head count reductions at all divisions. As indicated previously, the Company has also streamlined retail operations to reduce operating costs. Selling, general and administrative expenses, which include retail store operating costs including rents, decreased $675 or 2.3%, to $29,096, or 35.6% of net revenues in fiscal 2001 compared to $29,771 or 34.9% of net revenues for fiscal 2000. The net decrease for fiscal 2001 was the result of lower retail/ outlet store expenses related to having four fewer stores compared to fiscal 2000, partially offset by higher selling, marketing, sales promotions and distribution expenses for the wholesale business. The increased selling and marketing expenses are primarily attributable to hiring additional sales management and independent sales representatives to increase geographic coverage, grow the brands and increase channels of distribution. Selling, general and administration expenses, excluding retail store operating costs, increased $141, or 0.7%, to $19,518, or 28.2% of net revenues, for fiscal 2001, from $19,377, or 27.1% of net revenues, for fiscal 2000. NON-RECURRING CHARGES (INCOME) Non-recurring charges for fiscal 2001 were $1,700 primarily related to the write-off of costs incurred for the purchase of computer hardware and software and system programming costs by external consultants. The Company placed this project on hold until adequate capital could be raised, however with the Company's continuing cash constraints, management is unable to determine when or if this project will be resumed. As a result, the Company has written off the previously capitalized cost of $1,700 in fiscal 2001. Non-recurring income for fiscal 2000 was $510, primarily a result of a net recovery of $426 for an outstanding amount owed the Company for the sale of a trademark and $220 resulting from securing a subtenant for the Company's former corporate offices in New York City, which the Company previously recognized a loss in fiscal 1999. The aforementioned income was partially offset by $136 for severance pay to a former executive. INTEREST EXPENSE Interest expense amounted to $4,051 for fiscal 2001 and $3,289 for fiscal 2000. The higher interest expense for fiscal 2001 is due primarily to an average higher level of debt and higher financing expenses related to the Overadvance, partially offset by lower interest rates. Fiscal 2001 interest expense includes non cash charges for warrants issued in accordance with modifications of the Company's debt agreements of $140, as compared to $0 in 2000, as well as bank fees of $525 in 2001 compared to $0 in 2000. The Company's effective interest rate was 10.6% for fiscal 2001 versus 11.2% for fiscal 2000. INCOME TAX PROVISION The Company's income tax provision rates differed from the Federal statutory rates due to the incurrence of net operating losses for which the benefit was offset by valuation allowances and the effect of state taxes for the fiscal years 2001 and 2000. The Company's net deferred tax balance was $0 at both fiscal 2001 and 2000. 22 The Company has undergone a change of ownership within the meaning of Internal Revenue Code Section 382. As a result of this change in ownership, the future utilization of the Company's net operating loss (NOL) carryforward will be limited. Under these rules, the amount of the Company's NOL carryforward that can be used in each subsequent year is limited to an annual amount. This annual limitation is determined by multiplying the value of the Company on the date of the ownership change by the Federal long-term interest rate of approximately 5.5%. NET LOSS As a result of the foregoing, the net loss was $10,018 for fiscal 2001 compared to the net loss of $7,905 for fiscal 2000. (COMPARISON OF THE 53-WEEK FISCAL YEAR ENDED DECEMBER 30, 2000 WITH THE 52-WEEK FISCAL YEAR ENDED DECEMBER 25, 1999) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET REVENUES Fiscal 2000 was a "transition" year for the Company. In this regard, management has undertaken steps to eliminate unprofitable business and products and cut infrastructure to maximize financial results and minimize risk. In addition, the Company has taken steps to expand distribution with the addition of new customers and licenses, and increase volume in the specialty store class of trade, increase retail store profitability and is positioned to take advantage of consolidation opportunities in the hosiery industry. Net revenues for the fiscal year ended 2000 amounted to $85,293, a decrease of $3,199, or 3.6% from $88,492 for the fiscal year ended 1999. Danskin activewear net revenues, which include the Company's retail operations, decreased $3,837, to $57,282 or 6.3%, in fiscal 2000 from $61,119 in fiscal 1999. The decreased revenues are primarily the result of lower sales volumes in private label businesses, international accounts, the discontinued packables line and fewer company retail and outlet stores. This decrease was partially offset by the extra week in fiscal 2000 compared to fiscal 1999. The Company's marketing of activewear wholesale products continues to address the trend toward casual wear and emphasizes fashion and dancewear product offerings complementing the Company's basic replenishment products. In addition, the Company continues to work with its major retail partners to increase the percentage of orders of basic product placed via electronic re-order/fulfillment programs (Electronic Data Interchange or "EDI") in an effort to drive its basic replenishment business, to increase open-to-buy-levels and to seek out new customers and new channels of distribution. Sales in the Company's retail stores were $13,850 for fiscal 2000, a decrease of $3,050 or 18.0% from 1999 sales of $16,900. Comparable retail store sales declined 4.7% for 2000. The decline in retail store sales is attributable to the capital constraints encountered during fiscal 1999, resulting in inventory imbalances and promotional requirements, all of which have been addressed by management, offset by the extra week in fiscal 2000. To address these declines, and to enhance the performance of its retail stores, the Company continues to improve store product offerings, to renegotiate existing leases to achieve optimum store size, to streamline store operations to reduce operating costs and to set up an automatic stock replenishment system. In addition, the Company is continuing to take steps necessary to evaluate certain unprofitable or under-performing locations. In this regard, as of the end of December 30, 2000, the Company has five fewer stores than as of December 25, 1999, as the Company has closed six stores and opened one new store over the past year. Pennaco legwear revenues amounted to $28,011 for fiscal 2000, an increase of $638, or 2.3%, from the prior fiscal year sales of $27,373. The increase in legwear revenues versus the prior fiscal year is primarily attributable to the incremental sales generated from the Ellen Tracy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) brands, as discussed below, since May 2000. These increases were partially offset by lower sales in the 23 Round-the-Clock(-Registered Trademark-) and Givenchy(-Registered Trademark-) brands as well as lower levels of closeouts and irregulars compared to fiscal 1999, offset by the extra week in fiscal 2000. Revenues for fiscal 2000 for the Ellen Tracy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) products were $3,214 and $3,811, respectively. Management believes that the Company is positioned to take advantage of consolidation opportunities in the hosiery industry. In this regard, effective May 5, 2000, the Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen Tracy(-Registered Trademark-) label among others. The agreement provides that Pennaco shall have the exclusive right and license to use the Ellen Tracy(-Registered Trademark-) trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of legwear in the United States and Canada. The license was previously held by Ridgeview, Inc. In a separate transaction, Pennaco obtained an exclusive license for the manufacture and sale of sheer hosiery and knee highs under the Evan Picone(-Registered Trademark-) label. This agreement provides that Pennaco shall have the exclusive right and license to use the Evan Picone(-Registered Trademark-) trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of sheer hosiery and knee highs in the United States and Canada. The license was previously held by Ridgeview, Inc. The Company presently anticipates that, together, the sales of product under the Evan Picone(-Registered Trademark-) and Ellen Tracy(-Registered Trademark-)labels will generate revenue of approximately $10,000 on an annualized basis. Sales of product under these licenses began during the second fiscal quarter 2000. Total sales for the Evan Picone(-Registered Trademark-) and Ellen Tracy(-Registered Trademark-) labels for fiscal year 2000 were $7,025. Management believes that opportunities exist for margin and revenue improvement for market right products and programs in niche and occasion-oriented sheer hosiery and through expanded distribution. Accordingly, the Company has initiated a program of product development focused on these product segments and is focusing on expanding distribution into new wholesale accounts. In addition, opportunities exist for niche products and in the growing specialty and dot.com channel segments, as well as in a more focused strategy by new management. Among new niche products being offered is Passion Privee(-Registered Trademark-)which has been well received. GROSS PROFIT Gross profit was $24,665 or 28.9% of net revenues for fiscal 2000, an increase of $2,100 from the fiscal 1999 gross profit of $22,565 or 25.5% of net revenues. Despite improvements made in margins, the margins for the fiscal year ended December 30, 2000 were adversely affected by the capital constraints experienced during fiscal 1999, which resulted in an increased cost of inventory and an aggressive program to dispose of excess and aged inventory. Danskin activewear gross profit, as a percentage of net revenues, increased to 32.6% for fiscal 2000 versus 27.4% of net revenues for fiscal 1999. The fiscal year 2000 improvement in margins was primarily due to an improved mix of high margin Danskin(-Registered Trademark-) brand sales and retail store sales versus the discontinued packables line and lower margin private label programs, decreased design and product development expenses and reduced customer dilution through better control of customer markdown allowances and reduced obsolescence expense when compared to fiscal year 1999. Pennaco legwear gross profit was $5,965 or 21.3% of net revenues for fiscal 2000, an increase of $145 or 2.5% from the fiscal 1999 gross profit of $5,820 or 21.3% of net revenues. The gross profit increase for fiscal 2000 is primarily attributable to the incremental sales from the licensing of the Ellen Tracy(-Registered Trademark-) and Evan Picone(-Registered Trademark-) labels, offset by the lower volume sales from the Round-the-Clock(-Registered Trademark-) and Givenchy(-Registered Trademark-) brands. Despite capital constraints experienced during 2000, Pennaco legwear was able to maintain the same gross profit percentage of sales as achieved in fiscal 1999 through the initiation of a program to phase-out unprofitable styles within its existing lines, implementation of an aggressive cost improvement program at the manufacturing facility and price increases on Round-the Clock(-Registered Trademark-) products. 24 SELLING, GENERAL AND ADMINISTRATION EXPENSES Under new management, the Company has undergone a thorough review of its selling, general and administrative expenses and has reduced expenses and the infrastructure to right-size the organization. This encompassed implementation of a cost-savings strategy to control all expenses and streamline processes to increase efficiencies. The result is accountability and improved business processes, as well as significant head count reductions at all divisions. As indicated previously, the Company is also in the process of streamlining retail operations to reduce operating costs. Selling, general and administrative expenses, which include retail store operating costs including rents, decreased $6,425, or 17.8%, to $29,771, or 34.9% of net revenues in fiscal 2000 compared to $36,196 or 40.9% of net revenues for fiscal 1999. Selling, general and administration expenses, excluding retail store operating costs, decreased $3,124, or 13.9%, to $19,377, or 27.1% of net revenues, for fiscal 2000, from $22,501, or 31.4% of net revenues, for fiscal 1999. The decrease in expenses for 2000 was principally a result of a reduction in sales promotions and advertising, selling and administrative costs, as well as closing unprofitable outlet/retail stores. INTEREST EXPENSE Interest expense amounted to $3,289 for fiscal 2000 and $5,462 for fiscal 1999. Interest expense for fiscal 1999 includes the amortization of warrants issued in connection with the bridge financing amounting to $2,055. The Company's effective interest rate, excluding the warrants, was 11.2% for fiscal 2000 versus 10.4% for fiscal 1999. NON-RECURRING CHARGES (INCOME) Non-recurring income for fiscal 2000 was $510, primarily a result of a net recovery of $426 for an outstanding amount owed the Company for the sale of a trademark and $220 resulting from securing a subtenant for the Company's former corporate offices in New York City, which the Company previously recognized a loss in fiscal 1999. The aforementioned income was partially offset by $136 for severance pay to a former executive. Non-recurring charges for fiscal 1999 were $795. These charges consisted of an additional provision for remaining lease obligations for the former corporate office at 111 West 40th Street in New York City, and establishment of a reserve against an outstanding amount owed the Company for the sale of a trademark. INCOME TAX PROVISION The Company's income tax provision rates differed from the Federal statutory rates due to the net loss in 2000 and 1999 and reflect a provision for minimum state taxes. No benefit has been recorded for generated net operating losses during 2000 and 1999. The Company's net deferred tax balance was $0 at both fiscal 2000 and 1999. The Company has undergone a change of ownership within the meaning of Internal Revenue Code Section 382. As a result of this change in ownership, the future utilization of the Company's net operating loss (NOL) carryforward will be limited. Under these rules, the amount of the Company's NOL carryforward that can be used in each subsequent year is limited to an annual amount. This annual limitation is determined by multiplying the value of the Company on the date of the ownership change by the Federal long-term interest rate of approximately 5.5%. 25 NET LOSS As a result of the foregoing, the net loss was $7,905 for fiscal 2000; an improvement of $12,003 compared to the net loss of $19,908 for fiscal 1999. Fiscal 1999 results were adversely impacted by non-cash charges pertaining to warrants issued and employee stock grants amounting to $2,489. SEASONALITY In the fiscal years ended December 29, 2001 and December 30, 2000, the Spring and Fall season, shipped in the first and third quarter, respectively, continued to generally represent the best volume period for activewear and legwear. The following table summarizes the net revenues, operating loss before non-recurring charges (income), interest and taxes and net loss of the Company before preferred stock dividends, for each of the fiscal March, June, September and December quarters in the last two fiscal years:

~~FOR~~MARCH ~~THE~~JUNE ~~FISCAL~~SEPTEMBER ~~QUARTERS~~DECEMBER ~~ENDED~~ -------- -------- --------- -------- FOR THE FISCAL QUARTERS ENDED ---------- ~~MARCH JUNE SEPTEMBER DECEMBER~~ -------- -------- --------- --------- (DOLLARS IN THOUSANDS) ~~2000~~2001 Net Revenues........................................... $2122,~~031~~093 $2019,~~471~~718 $21,~~392~~718 $ 2118,~~760~~229 Loss before non-recurring (income), interest and taxes................................................ (1,~~232~~118) (1,~~178~~274) ~~(1,256)~~65 (1,~~440~~900) Net loss............................................... (12,~~935~~080) (12,~~268~~226) (21,~~164~~138) (24,~~538~~574) ~~1999~~2000 Net Revenues........................................... $2421,~~141~~204 $2320,~~526~~652 $21,~~173~~554 $ 1921,~~130~~883 Loss before non-recurring ~~charges~~(income), interest and taxes................................................ (21,~~181~~232) (1,~~885~~178) (21,~~318~~256) (71,~~247~~440) Net loss............................................... (21,~~870~~935) (21,~~675~~268) (32,~~348~~164) (112,~~015~~538)~~(1)~~

INFLATION The Company does not believe that the relatively moderate levels of inflation which have been experienced in the United States, Canada and Western Europe in recent years, have had a significant effect on its net revenues. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity and capital requirements relate to the funding of working capital needs, primarily inventory, accounts receivable, capital investments in operating facilities, machinery and equipment, and principal and interest payments on indebtedness. The Company's primary sources of liquidity have been from bank financing, issuance of convertible securities, vendor credit terms and internally generated funds. Net cash flow used in operations decreased by $7,896 to $4,118 for fiscal 2001, from a use of cash in operations of $12,014 in fiscal 2000, principally attributable to the operating loss in fiscal 2001, decreases in accounts payable and accrued expenses, decreases in accounts receivable and inventories. The maximum borrowings under the Company's revolving line of credit were $29,426 during the fiscal year ended December 29, 2001. Availability was an overadvance of ($5,206) as of December 29, 2001. Working Capital was a deficit of ($6,940) at December 29, 2001 compared to $286 at December 30, 2000. The change in working capital is primarily attributable to an increase of $4,068 in the Company's revolving line of credit to fund the net loss, capital expenditures, decreases in accounts payable and accrued expenses offset by decreases in inventory and accounts receivable. As reflected in the Consolidated Financial Statements, the Company has incurred losses for each of the periods presented. However, the Company (i) has implemented a cost savings strategy 26 Company-wide which has resulted in, and the Company believes will continue to produce, reductions in the Company's infrastructure expenses, (ii) has taken actions to increase the revenue of each of its operating segments, including selling to new customers and entering into new licensing arrangements, and (iii) has amended its secured credit facility from time to time, to provide the Company with the liquidity it needs to meet its business plans. In addition, the Company is currently seeking to raise additional capital through the sale of debt or equity securities. The Company presently anticipates that the proceeds from any such sale, if successful, will be used for general working capital purposes. Effective October 8, 1997, the Company entered into a loan and security agreement (the "Loan and Security Agreement") with Century Business Credit Corporation ("CBCC" or the "Lender") which matures on December 31, 2005. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority interest in all present and future assets of the Company. Pursuant to and in accordance with its terms, the Loan and Security Agreement provides the Company with a term loan facility in the aggregate principal amount of $11,500 (the "Term Loan Facility") and a revolving credit facility, including a provision for the issuance of letters of credit (the "Revolving Credit Facility") generally in an amount not to exceed the lesser of (a) $45,000 less the aggregate outstanding principal balance under the Term Loan Facility, or (b) a formula amount based upon the Company's available inventory and accounts receivable levels, minus certain discretionary reserves. The Loan and Security Agreement has been amended from time to time since inception, each time providing the Company with the additional liquidity necessary to meet its business plans. Pursuant to an amendment executed in March 2002 (the "March Amendment"), CBCC has agreed to provide the Company with additional borrowing capacity of varying amounts through December 31, 2002, to meet borrowing levels required by the Company's forecasted monthly business plans, plus an additional $3,000 in excess availability through December 2002, to a maximum overadvance of $10,987 (the "Overadvance"). In connection with the March Amendment, the Company agreed (i) to pay CBCC 5% of net royalties earned by the Company on licensing agreements entered into after February 28, 2002, with payments not to exceed $500 in any fiscal year. Payments will continue until the earlier of (i) December 31, 2005, and (ii) such time as the Company has $3,000 in undrawn availability. The Loan and Security Agreement was previously amended in August 2001 (the "August Amendment") to reduce the required amortization by $142 per month from December 2001 through December 2002. In accordance with the August 2001 Amendment, the Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of (i) $50 on the first day of September 2001 and on the first day of each month thereafter through December 2002, and (ii) $192 commencing on the first day of January 2003 and on the first day of each month thereafter. In accordance with the amortization requirement prior to the August Amendment, the Company paid an aggregate of $550 to CBCC through August 1, 2001, reducing the outstanding principal amount of the Term Loan to $10,950. Pursuant to the August Amendment, CBCC agreed to re-lend the $550 to the Company, thereby making the full $11,500 amount of the Term Loan Facility available to the Company. In addition to its other provisions, the August Amendment also provided that any fees payable by the Company to CBCC on or after August 1, 2001 pursuant to an amendment executed in March 2001, as set forth below, would be evidenced by a promissory note subsequently amended to be payable January 1, 2004, thereby relieving the Company of the requirement of cash payments to CBCC in respect of this obligation through December 2003. In connection with the August Amendment, CBCC requested a "good faith" participation by certain shareholders and affiliates of the Company who agreed to immediately provide the Company with $200 in additional credit support. 27 In connection with the amendment in March 2001, the Company agreed: (i) to pay CBCC a fee equal to $25 on May 1, 2001, and an additional fee of $25, plus the amount of the previous month's fee, on the first of each month thereafter, and (ii) to issue 250,000 warrants to CBCC with a share price equal to the closing price of the Company's Common Stock on the date of issuance, on the first of each month, commencing May 1, 2001. Under the terms of the agreement with CBCC, the accrual of said additional payment will terminate at such time as the Company raises $4,790 of additional capital. Therefore, in accordance with this understanding, through December 29, 2001, the Company has incurred $525 in additional fees to CBCC and has issued 2,250,000 warrants to CBCC with share prices ranging from $0.06 to $0.185 per share. The Loan and Security Agreement contains certain affirmative and negative covenants, including maintenance of tangible net worth and a limitation on capital expenditures, respectively. The tangible net worth covenant is calculated by subtracting from total assets all intangible assets and total liabilities. The Company must maintain a tangible net worth of not less than a net deficit of ($24,156) as of December 29, 2001 and as of the end of each month thereafter and (ii) it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement for any month of less than $0 after giving effect to the Overadvance. At December 29, 2001 the Company's tangible net worth was a deficit of $(17,231.) The maximum borrowings under the Revolving Credit Facility were $29,426 during the fiscal year ended December 29, 2001. Interest on the Company's obligations and under the Loan and Security Agreement generally accrues at a rate per annum equal to the sum of the Prime Rate plus one half of one ( 1/2%) percent and is payable monthly. The Company previously had the option of electing a EuroLoan, pursuant to which interest on the Company's obligations would accrue at a rate per annum equal to the sum of the Eurodollar Rate, as defined in the Loan and Security Agreement, plus two and three quarters percent (2 3/4%). However, as consideration to CBCC in connection with certain previous amendments, the Company agreed to waive its right to elect a Eurodollar Loan until such time as the Company maintains average undrawn availability of at least $1,000 for three consecutive months. In December 1999, the Company issued $15,210 stated value of 9% Series E Senior Step-Up Convertible Preferred Stock (the "Series E Stock"). The 3,042 shares of Series E Stock are convertible into Common Stock, at the option of the holder, at an initial conversion rate of 16,129 shares of Common Stock for each share of Series E Stock so converted, subject to adjustment in certain circumstances. The Series E Stock also contains a "reset" provision which provides that if, at the eighteen (18) month anniversary of the date of issuance (June 8, 2001), the Market Price (generally defined to mean the average closing price of the Common Stock for the twenty day period prior to such date (the "Reset Period")) is less than the Conversion Price ($0.31 per share), the Conversion Price shall be reset to the Market Price. At the Reset Period, the Market Price of the Common Stock was $0.18 per share. Therefore, as a result of the reset provision, the conversion rate for the Series E Stock was adjusted from 16,129 shares of Common Stock to 27,778 shares of Common Stock, for each share of Series E Stock so converted. The terms of the Series E Stock also provide that, at any time after the fifth anniversary of the date of its issuance, the Series E Stock may, at the election of the Company, be redeemed by the Company for an amount equal to the sum of (x) $5,000 per share (as adjusted for any combinations, divisions or similar recapitalizations affecting the shares of Series E Stock), plus (y) all accrued and unpaid dividends on such shares of Series E Stock to the date of redemption. Until the fifth anniversary of the date of its issuance, the Series E Stock has a 9% annual dividend rate, provided that the Company may, at its sole option, pay a portion of such dividend equal to up to 2% per annum in shares of common stock of the Company; provided however, that the Company has an obligation with respect to the holders of the Series E Stock to cause the common stock of the Company to be listed on the Nasdaq Small Cap Market or the Nasdaq National Market as promptly as feasible following the issuance of the Series E Stock. If the Company does not achieve such listing within eighteen 28 (18) calendar months following the issuance date of the Series E Stock, dividends shall accrue prospectively at a rate of 14% per annum, payable in cash only, until such time such listing is effected. Notwithstanding the above, from and after the fifth anniversary of the date of issuance, dividends accrue on the Series E Stock at a rate of 14% per annum, payable only in cash. The Common Stock is not presently listed as required by the terms of the Series E Stock. Therefore, effective June 8, 2001, dividends on the Series E Stock are accruing at a rate of 14% per annum. Simultaneously with the Company's issuance of the Series E Stock, the holders of the Company's Series D Redeemable Cumulative Convertible Preferred Stock (the "Series D Stock") agreed to convert such Series D Stock into Common Stock of the Company in accordance with the terms and conditions of the Series D Stock. The holders of the 2,400 shares of Series D Stock issued by the Company converted such preferred stock into Common Stock at the stated conversion rate of 16,666.66 shares of Common Stock for each share of the Series D Stock so converted. In addition, the Series D Stock had an 8% annual dividend rate, payment of which was deferred through December 31, 1999. The holders agreed that, for the period beginning on the date of issuance of the Series D Stock and ending on December 31, 1999, all dividends accrued on the Series D Stock could be paid, at the option of the Company, in cash or in additional Common Stock of the Company. The Company elected to pay such accrued but unpaid dividends in Common Stock. Therefore, as a result of the conversion of the Series D Stock, the Company issued 46,924,000 shares of Common Stock in respect of the Series D Stock and all accrued but unpaid dividends through the effective date of the conversion. The Company expects to finance its short term growth, working capital requirements, capital expenditures, and debt service requirements principally from the additional capital and liquidity provided by the cash generated from operations, existing credit lines, including the Overadvance as discussed previously, vendor arrangements and by raising additional capital as previously discussed. The Company expects to finance its long-term growth, working capital requirements, capital expenditures, management information systems upgrades, and debt service requirements through a combination of cash provided from operations and bank credit lines. The Company will require additional capital and/or financing, however, for the development of any new business or programs. The following tables summarize the Company's contractual and commercial obligations as of December 29, 2001:

~~NAME~~PAYMENTS ~~AGE~~DUE ~~POSITION~~BY PERIOD ---- -------- ------------------------------------------------------- ~~Donald~~TOTAL ~~Schupak~~LESS (THAN 1)( YEAR 1-3~~)(4)..................~~ 57YEARS ~~Chairman~~4-5 ofYEARS ~~the~~AFTER ~~Board~~5 ~~Carol~~YEARS J.CONTRACTUAL ~~Hochman~~OBLIGATIONS ~~(1)......................~~----- 50---------------- ~~President,~~--------- ~~Chief~~--------- ~~Executive~~------------- ~~Officer~~(DOLLARS ~~and~~IN ~~Director~~THOUSANDS) ~~John~~Long-term ADebt. ~~Sarto~~.........................~~....~~ ~~49 Executive Vice President and Chief Financial Officer Margaret B. Pritchard..................... 38 Secretary~~$11,800 ~~General~~$ ~~Counsel~~800 ~~and Senior Vice President~~$11,000 ~~Business~~0 ~~Development~~0 ~~Andrew~~Capital JLeases. ~~Astrachan (1)(4)~~................ ~~41 Director David Chu~~.........~~........................~~ 460 ~~Director~~0 ~~James~~0 P.0 ~~Jalil~~0 ~~(1)(2).....................~~Operating ~~52 Director Nina McLemore (4)~~Leases......................... 55$12,643 ~~Director~~$3,597 ~~Henry~~$ ~~T. Mortimer~~5,789 ~~Jr. (~~$2~~)................~~,494 ~~58 Director Larry B. Shelton (2)...................... 66 Director~~$763

~~OTHER~~AMOUNT ~~ANNUAL~~OF ~~STOCK~~COMMITMENT ~~ALL~~EXPIRATION ~~OTHER~~PER ~~FISCAL~~PERIOD ~~SALARY BONUS COMPENSATION OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)~~ --------------------------- -------- ------------------------------------- TOTAL AMOUNTS COMMITTED LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS OTHER COMMERCIAL COMMITMENTS ------------- ---------------- --------- --------- ------------- ~~Carol~~(DOLLARS J.IN ~~Hochman~~THOUSANDS) Working Capital Facility............~~............~~ ~~2000~~$26,447 ~~425~~$26,~~000~~447 0 0 0 ~~2,625(1)~~Merchandise ~~President,~~Letters ~~Chief~~of ~~Executive Officer 1999 237,020 86,500 0 5,040,000 232,452(1) John A~~Credit. ~~Sarto~~......~~.....................~~ ~~2000~~$ ~~275,000~~553 ~~53,000~~553 0 0 ~~5,323(2) EVP, Chief Financial Officer 1999 129,112 50,000~~ 0 ~~1,582,400~~Standby ~~1,959(2)~~Letters ~~Margaret~~of BCredit. ~~Pritchard~~..........~~.........~~ ~~2000~~$ ~~220,000~~621 0 0 0 ~~2,200(3) SVP, Secretary, General Counsel 1999 203,077 0 0 550,000 2,036(3) 1998 184,615 75,000 0 125,000 1,173(3)~~$621

29 STRATEGIC OUTLOOK Over the period that the current management team has been in place, significant progress has been made in all aspects of the operation of the business. The Company has undertaken steps to eliminate unprofitable business and products and cut infrastructure to maximize financial results and minimize risk. In addition, the Company has taken steps to expand distribution with the addition of new customers and licenses, and increase volume in the specialty store class of trade, increase retail store profitability and is positioned to take advantage of consolidation opportunities in the hosiery industry. The Company's business strategy is to capitalize on and enhance the consumer recognition of Brand Danskin-Registered Trademark- by continuing to develop new and innovative activewear, dancewear and legwear products that reflect a woman's active lifestyle, and to offer those products to the consumer in traditional and nontraditional channels of distribution. The Company continues to pursue a "Primary Resource Strategy," moving Brand Danskin-Registered Trademark- beyond its traditional stretch bodywear platform. The Company intends to continue to offer new and innovative products that blend technical innovation with comfort and style, broadening the position of Brand Danskin-Registered Trademark- to the consumer beyond "activewear" to one of "active lifestyle." New innovation initiatives launched in 2001 for selling during the Spring and Fall 2002 seasons included O2 Performance-Registered Trademark-, Danskin Yoga and Denise Austin-Registered Trademark- by Danskin-Registered Trademark-. Additionally, the Company launched a new license with New York City Ballet-Registered Trademark- to develop innovative contemporary dance apparel. The Company continues to expand the visibility of Brand Danskin-Registered Trademark- beyond its traditional channels of distribution to alternative channels such as the internet (both direct to consumer selling and select retailer sites), direct mail, and home shopping television channels. The Company's Pennaco hosiery division has developed a diversified portfolio of products under proprietary, licensed and private label brands. These products include sheer and super sheer products, value oriented multipacks, plus size offerings, trouser socks and tights. Most recently, in fiscal year 2000 the Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen Tracy-Registered Trademark- label. In a separate transaction, Pennaco also recently obtained an exclusive license for the manufacture and sale of legwear under the EvanPicone-Registered Trademark- label. The Company's business strategy with respect to the Pennaco division is to continue to develop market right products and programs, exploiting its significant manufacturing expertise, and the diversity of its product offerings, to achieve strategic alliances with its key retail partners to enable it to maintain its industry position in a contracting sheer hosiery market. The Company developed, and is implementing, an integrated Internet strategy in 2001 and beyond. The strategy is predicated upon the strong recognition of Brand Danskin-Registered Trademark- and its lifestyle credibility among women in the dance and physical activity arenas. The Company believes that Brand Danskin-Registered Trademark-'s high recognition and credibility present a unique opportunity to create and implement an Internet site focused on both content and contextual commerce relevant to dance and physical activity. Phase I of Danskin.com was completed during the second quarter of fiscal year 2001, dramatically expanding the consumer's ability to connect with the Company, finding retail locations to purchase Danskin products, directly purchasing plus-sized apparel which is particularly hard to find, and accessing information on the Danskin Women's Triathlon Series, the most popular and largest multisport series in the world exclusively for women, which is beginning its 13th year in 2002. The Triathlon Series is a tremendous content opportunity in its own right with 190 million reach through media exposure, community involvement and participant's inspirational stories. Danskin sponsors "grass roots" programs in each of seven race cities (Seattle, Sacramento, Denver, Austin, Boston, Chicago, Orlando) that will be improved through interactive activities on Danskin.com. The 30 "MentorMentee" program allows first time entrants to receive support and advice from past participants and is only possible in a meaningful way through internet communication. Team Survivor is Danskin's program to support breast cancer survivors with free specialized coaching and training to prepare for the race. For the first time in 2001, Danskin.com enabled participants to register online for a Danskin race. Danskin.com also enhances the sponsorship opportunities available to partners of the Danskin Women's Triathlon Series, including Dove, Ryka, Shape, Timex and Dupont, linking our active women to their websites. Phase II of Danskin.com launched during March 2002 initiating a unique business-to-business site for dance and specialty stores seeking Danskin products. The Company recently introduced a new In-Stock program to address the needs of its retail partners and the dance community. With this new program, Danskin guarantees availability of key products on a yearly basis, with two-week turnaround for shipment. The In-Stock program will enable Danskin to increase its offerings to retailers and consumers who require products that can be reordered for theatrical productions and team uniforms (a quick-growing market for young women). The combination of the In-Stock program and a business-to-business Internet site should significantly increase the Company's business opportunities by providing a strong support to the independent representative sales force serving this channel of distribution. In addition to the foregoing, with the addition of licenses for fitness equipment and socks under the Danskin-Registered Trademark- Brand, along with women's and girl's activewear, and socks and girls intimate apparel under the Freestyle-Registered Trademark- brand, the Company is aggressively seeking to increase its presence at retail by continuing to explore various licensing opportunities for Brand Danskin-Registered Trademark- and Freestyle-Registered Trademark-. The Company also continues to pursue a strategy to increase its presence in international markets. There can be no assurances that the Company will be able to implement these strategies, or that if implemented, that such strategies will be successful. In addition, there can be no assurance that the Company would not be adversely affected by adverse changes in general economic conditions, the financial condition of the apparel industry or retail industry, or adverse changes in retailer or consumer acceptance of the Company's products as a result of fashion trends or otherwise. Moreover, the retail environment remains intensely competitive and highly promotional and there can be no assurance that the Company would not be adversely affected by pricing changes of the Company's competitors. CERTAIN STATEMENTS CONTAINED IN THE DISCUSSION BELOW, INCLUDING, WITHOUT LIMITATION, STATEMENTS WITH RESPECT TO THE COMPANY'S ANTICIPATED RESULTS OF OPERATIONS OR LEVEL OF BUSINESS FOR FISCAL YEAR 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 THE REGIONAL AND GLOBAL ECONOMIC CONDITIONS; RISKS ASSOCIATED WITH CHANGES IN THE COMPETITIVE MARKETPLACE, INCLUDING THE LEVEL OF CONSUMER CONFIDENCE AND SPENDING, AND THE FINANCIAL CONDITION OF THE APPAREL INDUSTRY AND THE RETAIL INDUSTRY, AS WELL AS ADVERSE CHANGES IN RETAILER OR CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCTS AS A RESULT OF FASHION TRENDS OR OTHERWISE AND THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY THE COMPANY'S COMPETITORS; RISKS ASSOCIATED WITH THE COMPANY'S DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE DEPARTMENT STORE AND SPORTING GOODS STORE CUSTOMERS, INCLUDING RISKS RELATED TO CUSTOMER REQUIREMENTS FOR VENDOR MARGIN SUPPORT, AND THOSE RELATED TO EXTENDING CREDIT TO CUSTOMERS; RISKS ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS AND OTHER OWNERSHIP CHANGES IN THE RETAIL INDUSTRY; UNCERTAINTIES RELATING TO THE COMPANY'S ABILITY TO IMPLEMENT ITS GROWTH STRATEGIES; AND RISKS ASSOCIATED WITH CHANGES IN SOCIAL, POLITICAL, ECONOMIC AND OTHER CONDITIONS AFFECTING FOREIGN SOURCING. 31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not trade in derivative financial instruments. The Company's revolving line of credit bears interest at a variable rate (prime plus 1/2%) and, therefore, the Company is subject to market-risk in the form of interest rate fluctuations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required pursuant to Item 8 begin on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the Company's directors and executive officers:

------------------------ (1) Member of Executive Committee. (2) Member of Audit Committee. (3) Member of Compensation Committee. (4) Member of the Nominating Committee. The business experience, principal occupations and employment, as well as the periods of service, of each of the directors and executive officers of the Company during at least the last five years, are set forth below. DIRECTORS CLASS I Directors in Class I will continue to serve as directors until they are proposed for reelection at the next annual meeting of stockholders. CAROL J. HOCHMAN, age 51, became the Chief Executive Officer of the Company in June 1999. Prior to joining the Company, Ms. Hochman served as the Group President for Accessories at Liz Claiborne, Inc. Prior to Liz Claiborne, Ms. Hochman spent six years in the International Division of May Department Stores. NINA MCLEMORE, age 56, has been a director of the Company since September 1997. She is a Senior Managing Partner of Regent Capital Partners, L.P., a private investment firm. She previously served as a member of the Executive Committee of Liz Claiborne, Inc. from 1989 to 1993 and was responsible for acquisitions, start-ups and new business opportunities in 1993. Prior to that, Ms. McLemore was President of Liz Claiborne Accessories from 1980 to 1992. She serves as a Director for Santa Monica Amusements, Inc. and Evercom, Inc. 33 CLASS II Directors in Class II will continue to serve as directors until they are proposed for reelection at the next annual meeting of stockholders. ANDREW J. ASTRACHAN, age 42, has been a director of the Company since September 1997. He is the President and founder of Onyx Partners, Inc., an investment bank. From 1985 to 1990, Mr. Astrachan was employed at Drexel, Burnham & Lambert. Prior to that, he was a Vice President at Salomon Brothers Inc. from 1981 to 1985. JAMES P. JALIL, age 53, has been a director of the Company since September 1997. He has been a senior corporate partner with the law firm of Shustak Jalil & Heller since 1992. Prior to that, Mr. Jalil was a corporate partner at Lane & Mittendorf from 1982 to 1992. HENRY T. MORTIMER, JR., age 59, has been a director of the Company since August 1992. He has been a Managing Director of Financial Security Assurance, Inc., a financial guarantee insurance company since 1985. Previously, he was a Senior Vice President of E.F. Hutton & Co., Inc. in its investment banking department. In addition, he is currently a director of Tipiak, S.A., a French food manufacturing company. CLASS III Directors in Class III will continue to serve as directors until they are proposed for reelection at the next annual meeting of stockholders. DONALD SCHUPAK, age 57, has been a director of the Company since October 1996 and became the Chairman of the Board of Directors in March 1997. He is the Chief Executive Officer of the Schupak Group, an organization that provides strategic planning, management consulting and corporate finance services to a variety of clients. Mr. Schupak founded the Schupak Group in 1980. From September 1988 through September 1990, he served as Chairman, Chief Executive Officer and President of Horn & Hardart Company N/K/A Hanover Direct. From 1971 through 1980, Mr. Schupak was actively engaged in the practice of law with Schupak, Rosenfeld & Fischbein, a New York City law firm founded by Mr. Schupak. LARRY B. SHELTON, age 67, has been a director of the Company since October 1994. He is a retired as President and Chief Operating Officer of Genesco, Inc., an apparel and footwear company, having served in that organization for over 35 years in various management capacities. He has long been active in the apparel industry, having served as Chairman of the Board of The American Apparel Manufacturing Association and as a board member of The Clothing Manufacturers Association. Effective February 26, 2002, David Chu resigned from the Board of Directors. OFFICERS JOHN A. SARTO has been the Executive Vice President and Chief Financial Officer of the Company since January 2000, having previously acted as an internal financial consultant since July 1999. Prior to joining Danskin, Mr. Sarto was Senior Engagement Manager for the Schupak Group, the merchant banking and consulting firm headed by the Company's Chairman, Donald Schupak from December 1998. From 1994 to 1997, Mr. Sarto was the Chief Financial Officer at SLM International, Inc. where he was brought in to help restructure the troubled Canadian sporting goods/ toy company. From 1988 to 1993, Mr. Sarto was the Chief Financial Officer at Brooke Group Ltd., a multi-billion dollar, diversified holding company. Prior to that, Mr. Sarto was Vice President, Corporate Controller of Mastercard International from 1987 to 1988. Mr. Sarto is a Certified Public Accountant. MARGARET B. PRITCHARD has been the Senior Vice President, Business Development of the Company since June 1, 1997. Ms. Pritchard has also been the General Counsel of the Company since October 1, 34 1997, having previously served as the Company's Assistant General Counsel since June 1, 1997. She was appointed Secretary of the Company by the Board of Directors on December 10, 1997. Prior to joining the Company, Ms. Pritchard was associated with the law firm of Fried, Frank, Harris, Shriver & Jacobson in New York. Under Section 16(a) of the Securities and Exchange Act of 1934, the Company's directors, executive officers and holders of more than 10% of the Common Stock are required to report their initial ownership of the Company's equity securities and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established, and the Company is required to disclose any failure to file by these dates with respect to Fiscal 2001. Based on information available to it, the Company does not believe that the Company's officers, directors or 10% holders have changed their ownership positions. BOARD OF DIRECTORS AND BOARD COMMITTEES The Board of Directors formally met two times in fiscal 2001. In addition, individual members of the Board met informally numerous times throughout fiscal 2001 to monitor the Company's activities and operations, in light of the continuing capital constraints experienced by the Company. The Board of Directors has an Executive Committee, an Audit Committee, a Compensation Committee and a Nominating Committee. The Executive Committee is generally empowered to act on behalf of the Board of Directors when the Board is not convened in meeting. The members of the Executive Committee consist of Donald Schupak, Carol J. Hochman, James P. Jalil and Andrew J. Astrachan. The Executive Committee held several informal meetings during fiscal 2001, in light of the capital constraints experienced by the Company. The Audit Committee is generally responsible for recommending the appointment of the Company's independent auditors and overseeing the accounting and internal audit functions of the Company, including reviewing, with the Company's independent auditors, (i) the general scope of their audit services and the annual results of their audit, (ii) the reports and recommendations made to the Audit Committee by the independent auditors, and (iii) the Company's internal control structure. The members of the Audit Committee consist of Larry B. Shelton, Henry T. Mortimer and James P. Jalil. The Audit Committee held one meeting during 2001. The Compensation Committee is generally responsible for reviewing and making recommendations to the Board of Directors concerning remuneration of the Company's key employees, including executive officers. The Compensation Committee also grants stock options pursuant to the Stock Option Plan. Presently, the sole member of the Compensation Committee is Donald Schupak. The Compensation Committee did not take any action during 2001. The Nominating Committee is generally responsible for recommending appropriate individuals to serve as members of the Board of Directors. The members of the Nominating Committee consist of Donald Schupak, Andrew J. Astrachan and Nina McLemore. The Nominating Committee did not meet during 2001. 35 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation earned during the last three fiscal years by the Company's Chief Executive Officer and each other executive officer of the Company (each, a "named executive officer"). The Company had three executive officers during the fiscal year ended December 29, 2001 ("fiscal 2001").

------------------------ (1) Amounts shown as "All Other Compensation" for Ms. Hochman include (i) $230,000 attributable to a stock grant in fiscal 1999, and (ii) a $2,625 contribution by the Company in each of 2000 and 2001, and a $2,452 contribution by the Company in 1999, as the 25% matching contribution for the first 4% of earnings contributed by Mrs. Hochman to the Company's Savings Plan, a tax qualified plan covering full-time salaried employees over the age of 21 (the "Savings Plan"). The Savings Plan allows participants to elect to make contributions, on a pre-tax basis, from 1% to 15% of their compensation, subject to applicable Internal Revenue Code limitations, and the Company is required to make a matching contribution equal to 25% of the participant's contributions up to 4% of such compensation. A participant becomes 33% vested in the matching contributions after three years of service, 66 2/3% after four years of service and 100% after five years of service. (2) Amounts shown as "All Other Compensation" for Mr. Sarto include (i) a premium paid by the Company with respect to a long term disability policy for the benefit of Mr. Sarto in the amount of $900 in each of 2001 and 2000 and $415 in 1999, (ii) a premium paid by the Company in respect of a life insurance policy for the benefit of Mr. Sarto in the amount of $2,835 in each of 2001 and 2000, and (iii) a $2,625, a 1,588 and a $1,544 matching contribution to the Savings Plan in 2001, 2000 and 1999, respectively. (3) Amounts shown as other compensation for Ms. Pritchard include a $2,200, $2,200, and a $2,036 matching contribution to the Savings Plan in 2001, 2000 and 1999, respectively. STOCK OPTION GRANTS IN LAST FISCAL YEAR In fiscal 2001, none of the named executive officers received a stock option grant. 36 AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table shows information for fiscal 2001 respecting stock options for each named executive officer.

------------------------ (1) 951,850 options are presently exercisable. (2) The value of an unexercised option at December 29, 2001 is determined by subtracting the exercise price of such option from the market value of a share of Common Stock on December 29, 2001, as published by the National Quotation Bureau. EMPLOYMENT AGREEMENTS CAROL J. HOCHMAN. Effective June 1999, the Company reached an agreement with Carol J. Hochman concerning the terms and conditions of her employment by the Company as President and Chief Executive Officer of the Company through June 30, 2004, subject to earlier termination for death, resignation or removal. Mrs. Hochman's annual base salary is $425,000. She is entitled to receive an annual performance bonus of up to 100% of her base salary as determined by the Board of Directors, in its sole discretion, based on such quantitative and qualitative initiatives as identified by the Board upon consultation with Mrs. Hochman and upon approval of the budget for the respective fiscal year. Under Mrs. Hochman's agreement, if she resigns her employment for "good reason" (as defined), if the Company terminates her employment without "cause" (as defined), or she resigns by reason of a `change of control' (as defined), the Company will be obligated to continue her base salary payments and benefits for a period of one year, and she will be entitled to a performance bonus in an amount equal to, depending upon the circumstance of her resignation or termination, fifty percent (50%) to one-hundred percent (100%) of the previous year's performance bonus. In accordance with the terms of her employment agreement, effective December 8, 1999, Mrs. Hochman received a grant of one million shares of Common Stock of the Company. In addition, as of December 8, 1999, and in accordance with the terms of her employment arrangement, the Company issued Mrs. Hochman options to purchase 5,040,000 shares of common Stock of the Company for $0.27 per share. The options vest in accordance with a performance based vesting schedule. Specifically, the options are divided into six traunches, each of which will vest approximately ten years from the date of issuance, subject to accelerated vesting if the Company achieves certain EBIT levels. As of December 29, 2001, none of such options vested. JOHN A. SARTO. As of July 8, 1999, the Company entered into an employment agreement with John A. Sarto, employing him as an internal financial consultant through January 2000, and thereafter, as Executive Vice President, Chief Financial Officer of the Company through July 1, 2002, subject to earlier termination for death, resignation or removal. Mr. Sarto's annual base salary is $275,000. He is entitled to receive an annual performance bonus of up to 75% of his base salary as determined by the Board of Directors, in its sole discretion, based on such quantitative and qualitative initiatives as identified by the Board upon consultation with Mr. Sarto and upon approval of the budget for the respective fiscal year. Under Mr. Sarto's agreement, if he resigns his employment for "good reason" (as defined), if the Company terminates his employment without "cause" (as defined), or he resigns by reason of a "change of control" (as defined), the Company will be obligated to continue his base salary 37 payments and benefits for a period of two years, and he will be entitled to a pro rata portion of his performance bonus. In accordance with the terms of his employment agreement, Mr. Sarto received options to purchase 1,582,400 shares of Common Stock of the Company for $0.27. Two hundred and fifty thousand of such options vested on the date of grant. Of the balance of the options, 50% vest 25% a year, and 50% vest in accordance with a performance based vesting schedule. As of December 29, 2001, 583,100 of such options are vested. MARGARET B. PRITCHARD. As of October 26, 1999, the Company entered into an employment agreement with Margaret B. Pritchard, employing her as Senior Vice President, General Counsel of the Company from October 26, 1999 through October 31, 2002, subject to earlier termination for death, resignation or removal. Ms. Pritchard's annual base salary is $220,000. She is entitled to receive an annual performance bonus of up to 50% of her base salary as determined by the Board of Directors, in its sole discretion, based on such quantitative and qualitative initiatives as identified by the Board upon consultation with Ms. Pritchard and upon approval of the budget for the respective fiscal year. Under Ms. Pritchard's agreement, if she resigns her employment for "good reason" (as defined), if the Company terminates her employment without "cause" (as defined), or she resigns by reason of a "change of control" (as defined), the Company will be obligated to continue her base salary payments and benefits for a period eighteen months, and she will be entitled to a pro rata portion of her performance bonus. Over the course of her employment, Ms. Pritchard has received options to purchase an aggregate of 775,000 shares of Common Stock of the Company at strike prices ranging from $0.27 to $1.62. As of December 29, 2001, 368,750 of such options are vested. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION All of the members of the Compensation Committee are non-employee directors of the Company and are not former officers of the Company or its subsidiaries. No executive officer of the Company serves as a member of the Board of Directors or on the compensation committee of a corporation for which any of the Company's directors serving on the Compensation Committee or on the Board of Directors of the Company is an executive officer. COMPENSATION OF DIRECTORS Directors who are employees of the Company are not compensated for serving as directors. Directors who are not employees of the Company receive an annual retainer fee of $12,000, plus fees of $1,000 per day for attendance at meetings of the Board of Directors and $500 per day for attendance at meetings of its committees. Each of the directors appointed to the Board by Danskin Investors, LLC in 1997 has agreed to waive receipt of such amount until such time as they, as a group, direct the Company to the contrary. All non-employee directors of the Company are reimbursed for out-of-pocket expenses. In addition, each non-employee director receives, upon such person's initial election as a director, a grant of an option to purchase 50,000 shares of the Common Stock under the Stock Option Plan at fair market value, exercisable in three equal installments on the first, second and third anniversaries of the grant date. Although Mr. Schupak does not receive a salary from the Company, the Company provides for a payment of $10,000 per month to an entity designated by Mr. Schupak to defray his office overhead, and he is entitled to reimbursement of reasonable travel and other expenses incidental to the performance of his duties as Chairman of the Board of Directors. CERTAIN TRANSACTIONS On September 22, 1997, Donald Schupak (the Chairman of the Board of the Company) purchased from the Company, a Warrant (the "Schupak Warrant") for the purchase of 5,372,315 shares of 38 Common Stock, subject to adjustment, at an exercise price of $.30 a share, subject to adjustment. In consideration of the sale of the Schupak Warrant, Mr. Schupak paid the Company the Warrant Price comprised of (x) $20,000 in cash and (y) the Schupak Promissory Note in the amount of $80,000. The outstanding principal balance of the Schupak Promissory Note bears interest at a rate of 6.55% per annum, to be paid annually on the anniversary of the Contribution Closing Date. The Schupak Warrant may be exercised, in whole at any time or in part from time to time, prior to 5:00 p.m., Eastern Standard Time, on September 22, 2004. In addition, each of David Chu, a former director of the Company, and Nina McLemore, a director of the Company, purchased from the Company, for $14,815 and $29,607 respectively, a warrant for the purchase of 795,900 shares of Common Stock and 1,591,797 shares of Common Stock, respectively, at an exercise price of $.30 per share. Ms. McLemore subsequently assigned 803,400 of such warrants. In accordance with the terms of her employment agreement, effective December 8, 1999, Ms. Hochman received a grant of one million shares of Common Stock of the Company. In connection with an amendment to the Company's Loan and Security Agreement in August 2001, the Company's lender, Century Business Credit Corporation, requested a "good faith" participation in the credit by certain shareholders and affiliates of the Company who agreed to immediately provide the Company with $200 in additional credit support. The additional funds of $200 were received in September 2001 and are accounted for as current portion of long term debt. 39 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of March 1, 2002, regarding the beneficial ownership of the Common Stock by (i) each person known to the Company to beneficially own more than 5% of the Common Stock; (ii) each director and each named executive officer; and (iii) all executive officers and directors of the Company as a group. A person is a beneficial owner if he or she has or shares voting power or investment power. On March 1, 2002, there were outstanding 68,945,454 shares of Common Stock (excluding 1,083 shares held by a subsidiary of the Company) and 3,042 shares of Series E Preferred Stock. BENEFICIAL OWNERSHIP OF SECURITIES AS OF MARCH 1, 2001

BENEFICIAL OWNERSHIP ---------------------------------------------------------------------------- NAME AND ADDRESS AMOUNT AND NATURE OF BENEFICIAL PERCENT OF OUTSTANDING VOTING OF BENEFICIAL OWNER OWNERSHIP SECURITIES ----------------------------- --------------------------------------------- ----------------------------- Marbre Services (1).......... 1618,~~408~~738,~~835~~635 Common Stock 2124.7914% 10100 Santa Monica Blvd 200 Series E Preferred Stock 6.57% Los Angeles, CA 90067 Alpine Associates (2)........ 1617,~~408~~053,~~835~~388 Common Stock 2122.7925% 100 Union Avenue ~~200~~175 Series E Preferred Stock 65.5775% Cresskill, NJ Regent Capital Holdings, 15Inc. 16,~~118~~516,~~515~~395 Common Stock 2021.4390% ~~Inc.~~(3)........................ 120 Series E Preferred Stock 3.94% 505 Park Avenue Suite 1700 New York, New York 10022 S.G. Cowan (4)............... 916,~~677~~666,~~400~~800 Common Stock 1219.3147% 32 Old Slip 600 Series E Preferred Stock 19.72% New York, NY 10004 ~~Charles~~Andrew ~~Dolan~~J. Astrachan (5)......~~......~~ 610,~~451~~883,~~600~~231 Common Stock 814.5637% ~~c/o~~200 ~~Cable Vision 400~~ Series E Preferred Stock 136.1557% ~~1111~~Charles ~~Stewart~~Dolan ~~Avenue Bethpage, NY 11714 Andrew J. Astrachan~~ (6)............ 811,~~526~~111,~~764~~200 Common Stock 1113.6288% ~~200~~c/o Cable Vision 400 Series E Preferred Stock 613.5715% 1111 Stewart Avenue Bethpage, NY 11714 Donald Schupak (7)........... 5,898,315 Common Stock 7.88% 0 Series E Preferred Stock David Chu (8)................ 5,~~096~~588,~~171~~798 Common Stock 7.2185% 610 Park Avenue 40 Series E Preferred Stock 1.31% New York, New York ~~Golden Horn (II) L.P. (9).... 3,958,345 Common Stock 5.69% 360 Post Street 0 Series E Preferred Stock San Francisco, CA 94108~~ Carol J. Hochman (109)......... 2,~~242~~824,~~450~~900 Common Stock 3.1999% 50 Series E Preferred Stock 1.64% Nina McLemore (1110)........... 1,~~022~~039,~~981~~648 Common Stock 1.4749% 0 Series E Preferred Stock James P. Jalil (1211).......... 5683,~~666~~333 Common Stock * 0 Series E Preferred Stock Henry T. Mortimer, Jr. 3663,~~666~~333 Common Stock * (1211)....................... --0 Series E Preferred Stock John A. Sarto (11)........... 583,100 Common Stock * 0 Series E Preferred Stock

40 Margaret B. Pritchard (11)... 368,750 Common Stock * 0 Series E Preferred Stock Larry B. Shelton (11)........ 63,333 Common Stock * 0 Series E Preferred Stock All Directors and............ 27,396,741 Common Stock 31.22% Executive Officers as a 240 Series E Preferred Stock 9.53% Group (10 persons) (12)

-------------------------- * Percentage of shares of Common Stock beneficially owned does not exceed one percent of the class of Common Stock. (1) The amount shown as Common Stock includes (a) 5,555,600 shares of Common Stock issuable upon conversion of the Series E Preferred Stock, and (b) 3,126,667 shares of Common Stock underlying presently exercisable Warrants. Each shares of Series E Preferred Stock entitles the holder thereof to one vote per share for each share of Common Stock that would be issued upon conversion of a share of Series E Preferred Stock (27,778 votes per share). (2) The amount shown as Common Stock includes (a)4,861,150 shares of Common Stock issuable upon conversion of the Series E Preferred Stock, and (b) 2,835,930 shares of Common Stock underlying presently exercisable Warrants. (3) The amount shown as Common Stock includes (a) 3,333,360 shares of Common Stock issuable upon conversion of the Series E Preferred Stock, and (b) 3,126,667 shares of Common Stock underlying presently exercisable Warrants. (4) The amount shown as Common Stock includes 16,666,800 shares of Common Stock issuable upon conversion of the Series E Preferred Stock. (5) The amount shown as Common Stock includes (a) 5,555,600 shares of Common Stock issuable upon conversion of the Series E Preferred Stock, 645,160 of which are held by Mr. Astrachan and 2,580,640 are held by Onyx Partners, of which Mr. Astrachan is a principal, (b) 1,172,398 shares of Common Stock underlying presently exercisable Warrants, and (c) 83,333 shares of Common Stock underlying presently exercisable stock options. (6) The amount shown as Common Stock includes 11,111,200 shares of Common Stock issuable upon conversion of the Series E Preferred Stock. (7) The amount shown as Common Stock includes (a) 5,808,315 shares of Common Stock underlying presently exercisable Warrants, and (b) 90,000 shares of Common Stock underlying presently exercisable stock options. (8) The amount shown as Common Stock includes (a) 1,111,120 shares of Common Stock issuable upon conversion of the Series E Preferred Stock, (b) 1,042,222 shares of Common Stock underlying presently exercisable Warrants, and (c) 83,333 shares of Common Stock underlying presently exercisable stock options. (9) Amounts shown include (a) 436,000 shares of Common Stock underlying a presently exercisable warrant held by Richard Hochman, Ms. Hochman's husband, and (b) 1,388,900 shares of Common Stock issuable upon conversion of the Series E Preferred Stock held by Mr. Hochman. The amounts for Ms. Hochman do not include holdings of Regent Capital Holdings of which Mr. Hochman is a principal. (10) The amount shown as Common Stock includes (a) 818,708 shares of Common Stock underlying presently exercisable Warrants, and (b) 53,333 shares of Common Stock underlying presently exercisable stock options. The amounts shown as Common Stock do not include the holdings of Regent Capital Holdings (see Note 3 above) of which Ms. McLemore is a principal. If such holdings were included, Ms. McLemore would hold 21.56% of the outstanding voting securities of the Company. (11) The amounts shown as Common Stock reflects presently exercisable stock options. (12) The amounts shown as Common Stock includes (a) 8,055,620 shares of Common Stock issuable upon conversion of the Series E Preferred Stock, (b) 9,277,643 shares of Common Stock underlying presently exercisable Warrants, and (c) 1,471,848 shares of Common Stock underlying presently exercisable stock options. 41 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 22, 1997, Donald Schupak (the Chairman of the Board of the Company) purchased from the Company, a Warrant (the "Schupak Warrant") for the purchase of 5,372,315 shares of Common Stock, subject to adjustment, at an exercise price of $.30 a share, subject to adjustment. In consideration of the sale of the Schupak Warrant, Mr. Schupak paid the Company the Warrant Price comprised of (x) $20,000 in cash and (y) the Schupak Promissory Note in the amount of $80,000. The outstanding principal balance of the Schupak Promissory Note bears interest at a rate of 6.55% per annum, to be paid annually on the anniversary of the Contribution Closing Date. The Schupak Warrant may be exercised, in whole at any time or in part from time to time, prior to 5:00 p.m., Eastern Standard Time, on September 22, 2004. In addition, each of David Chu, a former director of the Company, and Nina McLemore, a director of the Company, purchased from the Company, for $14,815 and $29,607 respectively, a warrant for the purchase of 795,900 shares of Common Stock and 1,591,797 shares of Common Stock, respectively, at an exercise price of $.30 per share. Ms. McLemore subsequently assigned 803,400 of such warrants. In connection with an amendment to the Company's Loan and Security Agreement in August 2001, the Company's lender, Century Business Credit Corporation, requested a "good faith" participation in the credit by certain shareholders and affiliates of the Company who agreed to immediately provide the Company with $200 in additional credit support. The additional funds of $200 were received in September 2001 and are accounted for as current portion of long term debt 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) EXHIBITS 1. FINANCIAL STATEMENTS 2. FINANCIAL STATEMENT SCHEDULES The financial statements and financial statement schedules included in this Annual Report on Form 10-K are listed in the accompanying Index to the Financial Statements on Page F-1 of this Form 10-K. All other schedules have been omitted because the required information is shown in the Consolidated Financial Statements or Notes thereto or they are not applicable. 3. EXHIBITS The Exhibits designated by an asterisk are management contracts and compensatory plans and arrangements required to be filed as Exhibits to this Form 10-K.

EXHIBIT NUMBER DESCRIPTION --------------------- ----------- 4.3 Certificate of Designations, Preferences and Rights of 9% Series E Senior Step Up Convertible Preferred Stock of Danskin, Inc. (Incorporated by reference to the Registrant's Form 8-K dated December 21, 1999). 10.5.1 Lease Agreement, dated October 16, 1986, between the Registrant and Robert H. Arnow, relating to leasehold interest at 111 West 40th Street, New York, New York, as amended, and related agreement. (Incorporated by reference to Exhibit 10.5.1 to the Registration Statement.) 10.5.4 Lease Agreement, dated March 22, 1996, between the City of Grenada, Mississippi and the Registrant. (Incorporated by reference to Exhibit 10.5.4 to the Registrant's Form 10-Q for the fiscal quarter ended September 28, 1996.) 10.5.5 Agreements in connection with Industrial Revenue Bond for property located at 1261 South Commerce Street, Grenada, Mississippi, between the City of Grenada, Mississippi and the Registrant (as assignee of International Playtex, Inc.). (Incorporated by reference to Exhibit 10.5.5 to Amendment No. 1.) 10.5.7 Agreement between the Pennaco division and the City of Grenada, Mississippi, relating to the issuance by the City of Grenada of $1,500,000 principal amount of bonds to finance the construction of a distribution center to be owned by the City of Grenada and leased to the Pennaco division. (Incorporated by reference to Exhibit 10.5.7 to Amendment No. 2 to the Registration Statement ("Amendment No. 2").) 10.5.11 Lease Agreement between Paul Klinge A/S and the Registrant. (Incorporated by reference to Exhibit 10.5.11 to Amendment No. 2.) 10.5.12 Addendum to Lease between Henrik Klinge and the Registrant dated August 23, 1996. (Incorporated by reference to Exhibit 10.5.12 to the Registrant's Form 10-Q for the fiscal quarter ended September 28, 1996.) 10.8.1 1992 Stock Option Plan of the Registrant, together with form of Non-Qualified Stock Option Agreement. (Incorporated by reference to Exhibit 10.8.1 to the Registration Statement.) 10.8.1A Amendment No. 1 to the 1992 Stock Option Plan of the Company. (Incorporated by reference to Exhibit 10.8.1A to the Registrant's Form 10-K for the fiscal year ended March 27, 1993.) 10.8.2 Savings Plan of the Registrant, as amended. (Incorporated by reference to Exhibit 4.1 to the Registration Statement of the Registrant on Form S-8 (Reg. No. 33-53852).) 21.1 Subsidiaries of the Registrant. 23.1* Consent of Arthur Andersen LLP. 99.1* Letter to Commissioner Pursuant to Temporary Note 3T to Article 3 of Regulation S-X.

------------------------ * Filed herewith REPORTS ON FORM 8-K None. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 28, 2002 DANSKIN, INC. By: /s/ CAROL J. HOCHMAN ----------------------------------------- Carol J. Hochman CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

~~PAGE~~SIGNATURE CAPACITY IN WHICH SIGNED DATE --------- ------------------------ ~~Report~~---- of/s/ ~~Independent~~CAROL ~~Public Accountants~~J.~~...................~~ FHOCHMAN -2------------------------------------------ ~~Consolidated~~Chief ~~Balance~~Executive ~~Sheets~~Officer asMarch of28, ~~December~~2002 ~~25,~~Carol ~~1999~~J. ~~and~~Hochman ~~December~~/s/ ~~30,~~DONALD ~~2000.........................................~~SCHUPAK F-3------------------------------------------ ~~Consolidated~~Chairman ~~Statements~~ of ~~Operations for~~ the ~~fiscal~~Board ~~years~~March ~~ended~~28, ~~December~~2002 ~~26,~~Donald ~~1998,~~Schupak ~~December~~/s/ ~~25,~~JOHN ~~1999~~A. ~~and~~SARTO ~~December~~------------------------------------------- 30EVP, ~~2000.........................................~~Chief ~~F-4~~Financial ~~Consolidated~~March ~~Statements~~28, of2002 ~~Stockholders'~~John ~~Equity~~A. ~~for~~Sarto ~~the~~Officer ~~fiscal~~/s/ ~~years~~ANDREW ~~ended~~J. ~~December~~ASTRACHAN ~~26,~~------------------------------------------- ~~1998,~~Director ~~December~~March 2528, ~~1999~~2002 ~~and~~Andrew ~~December 30, 2000~~J.~~....................................~~ ~~F-5~~Astrachan ~~Consolidated~~/s/ ~~Statements~~JAMES ofP. ~~Cash~~JALIL ~~Flows~~------------------------------------------- ~~for~~Director ~~the~~March ~~fiscal~~28, ~~years~~2002 ~~ended~~James ~~December~~P. ~~26,~~Jalil ~~1998,~~/s/ ~~December~~NINA ~~25,~~MCLEMORE ~~1999~~------------------------------------------- ~~and~~Director ~~December~~March 3028, ~~2000.........................................~~2002 ~~F-6~~Nina toMcLemore ~~F-7~~/s/ ~~Notes~~HENRY ~~to Consolidated Financial Statements~~T.~~.................~~ ~~F-8~~MORTIMER ~~to F~~-29------------------------------------------ ~~Supplemental~~Director ~~Financial~~March ~~Information:~~28, ~~Unaudited~~2002 ~~Selected~~Henry ~~Quarterly Financial Information~~T.~~.......~~ ~~S-1~~Mortimer ~~Financial~~/s/ ~~Statement~~LARRY ~~Schedule:~~SHELTON ~~Schedule~~------------------------------------------- IIDirector ~~Schedule~~March of28, ~~Valuation~~2002 ~~and~~Larry ~~Qualifying Accounts................................................ S-2~~Shelton

45 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~PAGE ~~25, DECEMBER 30, 1999 2000~~ ------------ ~~------------~~Report ~~ASSETS~~of ~~Current~~Independent ~~assets:~~Public ~~Cash and cash equivalents~~Accountants....................~~.............~~ $F-2 ~~663~~Consolidated $Balance ~~789~~Sheets ~~Accounts~~as ~~receivable, less allowance for doubtful accounts~~ of ~~$1,087 at~~ December 2530, ~~1999~~2000 and ~~$1,039 at~~ December 3029, ~~2000~~2001....................................... ~~9,448 11,598 Inventories~~..~~.............................................~~ ~~24,159 24,353 Prepaid expenses and other current assets................. 1,756 1,709~~ F-~~------~~3 ~~-------~~Consolidated ~~Total~~Statements ~~current assets.................................... 36,026 38,449 Property, plant and equipment -- net~~ of ~~accumulated~~Operations ~~depreciation~~for ~~and~~the ~~amortization~~fiscal ofyears ~~$9,366~~ended at December 25, 1999 ~~and $10~~,~~291~~ at December 30, 2000~~...................~~ ~~10,747~~and 9December 29,~~280~~ ~~Other assets~~2001.............................................. ~~1,115 1,123 ------- ------- Total assets~~....~~..........................................~~ ~~$47,888~~F-4 ~~$48,852~~Consolidated ~~=======~~Statements ~~=======~~of ~~LIABILITIES AND STOCKHOLDERS~~Stockholders' ~~EQUITY~~Equity ~~Current~~for ~~liabilities:~~the ~~Revolving~~fiscal ~~line~~years ofended ~~credit..................................~~December ~~$10~~25,~~041~~ ~~$22~~1999,~~379~~ ~~Current~~December ~~portion~~30, of2000 ~~long-term~~and ~~debt.........................~~December --29, ~~742 Accounts payable~~2001.....................................~~.....~~ ~~7,316~~F-5 ~~6,691~~Consolidated ~~Accrued~~Statements ~~expenses..........................................~~of ~~10,434~~Cash ~~8,351~~Flows ~~-------~~for ~~-------~~the ~~Total~~fiscal ~~current~~years ~~liabilities.................................~~ended 27December 25,~~791~~ 381999,~~163~~ ~~-------~~December ~~------- Long-term debt~~30, ~~net~~2000 ofand ~~current~~December ~~maturities................. 11~~29,~~500~~ ~~10,558 Accrued dividends~~2001......................................... ~~65 1,434 Accrued retirement costs~~.........~~.........................~~ ~~2,658 1,821~~ F-~~------~~6 ~~-------~~to ~~Total long~~F-~~term~~7 ~~liabilities...............................~~Notes ~~14,223~~to ~~13,813~~Consolidated ~~-------~~Financial ~~------- Total liabilities~~Statements..................~~.......................~~ ~~42,014~~F-8 ~~51,976~~to F-~~------~~29 ~~-------~~Supplemental ~~Commitments~~Financial ~~and~~Information: ~~contingencies~~Unaudited ~~Stockholders'~~Selected ~~Equity~~Quarterly ~~(Deficit)~~Financial ~~Series E Cumulative Convertible Preferred Stock, 3,042 shares Liquidation Value of $15,210~~Information........~~.............~~ ~~15,210 15,210 Common Stock, $.01 par value, 250,000,000 shares authorized, 73,985,878 shares issued at December 25, 1999 and 68,946,537 shares issued at December 30, 2000, less~~ S-1~~,083~~ ~~shares~~Financial ~~held~~Statement bySchedule: ~~subsidiary~~Schedule atII ~~December~~Schedule ~~25,~~of ~~1999~~Valuation and ~~December~~Qualifying ~~30, 2000~~Accounts.............................. ~~739 689 Additional paid-in capital~~..................~~..............~~ ~~39,853 38,542 Note receivable from stock sale........................... (1,361)~~ S-~~- Accumulated deficit....................................... (45,532) (54,806) Accumulated other comprehensive loss...................... (3,035) (~~2~~,759) ------- ------- Total Stockholder's Equity (Deficit).................... 5,874 (3,124) ------- ------- Total Liabilities and Stockholders' Equity................ $47,888 $48,852 ======= =======~~

F-1 DANSKIN, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Danskin, Inc.: We have audited the accompanying consolidated balance sheets of Danskin, Inc. (a Delaware Corporation) and Subsidiaries (the "Company") as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 29, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Danskin, Inc. and Subsidiaries as of December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 2001 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 1, 2002 (except with respect to the matters discussed in Notes 1 and 11, as to which the date is March 28, 2002) F-2 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

~~FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED~~ DECEMBER 2630, DECEMBER 2529, ~~DECEMBER 30, 1998 1999~~ 2000 ~~------------~~2001 ------------ ------------ ~~Net~~ASSETS ~~revenues~~Current assets: Cash and cash equivalents.................................~~...........~~ $~~108~~ 789 $ 642 Accounts receivable,~~741~~ less allowance for doubtful accounts of $871,~~970~~039 at December 30, 2000 and $841,~~654~~005 ~~Cost~~at ofDecember ~~goods~~29, ~~sold~~2001................................................ 6811,~~428~~598 6511,~~289~~050 ~~59,896 ---------- ---------- ---------- Gross profit~~Inventories............................................... ~~40,313 22,681~~ 24,~~758~~353 ~~Selling~~20,307 ~~general~~Prepaid expenses and ~~administrative~~other ~~expenses~~current assets................. 421,~~112~~709 361,~~312~~711 ~~29,864~~------- ~~Non~~-~~recurring~~------ ~~charges~~Total ~~(income)~~current assets.................................... 238,~~419~~449 ~~795~~33,710 ~~(510)~~Property, ~~Interest~~plant ~~expense~~and equipment- net of accumulated depreciation and amortization of $10,291 at December 30, 2000 and $10,583 at December 29, 2001...... 9,280 6,179 Other assets.............................................. 21,~~513~~123 51,~~462~~111 ~~3,289~~ -------~~---~~ -------~~---~~ ~~----------~~Total ~~47,044~~assets.............................................. 42$48,~~569~~852 32$41,~~643~~000 ~~Loss~~======= ~~before~~======= ~~income~~LIABILITIES ~~tax~~AND ~~provision~~STOCKHOLDERS' EQUITY Current liabilities: Revolving line of credit.................................. (6$22,~~731)~~379 ~~(19~~$26,~~888)~~447 ~~(7,885)~~Current ~~Provision~~portion ~~for~~of ~~income~~long-term ~~taxes~~debt......................... 742 800 Accounts payable.......................................... ~~190~~6,691 206,385 20Accrued ~~----------~~expenses.......................................... 8,351 7,018 -------~~---~~ -------~~---~~ ~~Net~~Total ~~loss~~current liabilities................................. 38,163 40,650 ======= ======= Long-term debt, net of current maturities................. (610,~~921)~~558 ~~(19~~11,~~908)~~000 ~~(7,905)~~Accrued ~~Preferred~~ dividends......................................... 1,~~114~~434 13,~~078~~229 Accrued retirement costs.................................. 1,~~369~~821 2,860 ------- ------- Total long-term liabilities............................... 13,813 17,089 ------- ------- Total liabilities......................................... 51,976 57,739 ------- ------- ~~Net~~Commitments ~~loss~~and ~~applicable~~contingencies toStockholders' ~~Common~~Equity (Deficit) Series E Cumulative Convertible Preferred Stock, 3,042 shares Liquidation Value of $15,210....................... ~~($8~~15,~~035)~~210 ~~($20~~15,~~986)~~210 (Common Stock, $9.01 par value,~~274)~~ ~~==========~~250,000,000 ~~==========~~shares ~~==========~~authorized, ~~Basic~~68,946,537 shares issued at December 30, 2000 and ~~diluted~~68,946,537 ~~net~~shares ~~loss~~issued ~~per~~at ~~share:~~December ~~Net~~29, ~~loss~~2001, ~~per~~less ~~share~~1,083 shares held by subsidiary at December 30, 2000 and December 29, 2001.............................. 689 689 Additional paid-in capital................................ ~~($0~~38,542 38,702 Accumulated deficit.~~50)~~...................................... (~~$0.89~~54,806) (~~$0.13~~66,619) ~~==========~~Accumulated ~~==========~~other ~~==========~~comprehensive ~~Weighted~~loss...................... ~~average~~(2,759) ~~number~~(4,721) of------- ~~common~~------- ~~shares~~Total ~~outstanding~~Stockholder's Equity (Deficit).................... (3,124) (16,~~168,000~~739) 23------- ------- Total Liabilities and Stockholders' Equity................ $48,~~493,000~~852 73$41,~~688,~~000 =======~~===~~ =======~~=== ==========~~

The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. F-3 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

~~PREFERRED~~FISCAL ~~PREFERRED~~YEAR ~~COMMON~~FISCAL ~~STOCK~~YEAR ~~COMMON~~FISCAL ~~ADDITIONAL~~YEAR ~~PAID-IN~~ENDED ~~NOTE~~ENDED ~~RECEIVABLE~~ENDED ~~SHARES~~DECEMBER ~~STOCK~~25, ~~AMOUNT~~DECEMBER ~~SHARES~~30, ~~STOCK~~DECEMBER ~~AMOUNT~~30, ~~CAPITAL~~1999 ~~FROM~~2000 ~~STOCK~~2001 ~~SALE~~ --------- ---~~----------~~ -------------- ------------- ~~------------------ --------------- Balance, December 27, 1997..... 10,073,207 $101 $20,366 Comprehensive loss~~ Net ~~loss~~revenues................... ~~Minimum pension liabililty adjustment~~............... ~~Total comprehensive loss~~..... ~~Preferred stock dividend~~..... ~~Sales~~$ ~~and~~88,492 ~~contribution~~$ of85,293 ~~Common~~$ ~~Stock~~81,758 toCost ~~Employee~~of ~~Savings~~goods ~~Plan~~sold............... ~~92,403 1 49 Employee Stock Grant~~......... ~~750,000 7 439 Private Offering~~.............. 765,~~864,336~~927 ~~79 2~~60,~~281~~628 ~~Rights Offering.............. 2~~56,~~135,664~~889 ~~21 319 Warrants Issued.............. 29~~ ----- ------- ----------- ---- ------- ~~-------~~Gross ~~Balance, December 26, 1998~~profit..... ~~-- -- 20,915,610 $209 $23,483 -- Comprehensive loss Net loss~~................... ~~Minimum pension liabililty adjustment~~............... ~~Total comprehensive loss~~..... ~~Preferred~~22,565 ~~stock~~24,665 ~~dividend..... Issuance of Series E Preferred Stock............ 3~~24,~~042~~869 15Selling,~~210~~ ~~(437)~~general ~~Conversion~~and ofadministrative ~~Series D Preferred Stock~~expenses............ 4036,~~000~~196 29,~~000~~771 ~~400 11~~29,~~006~~096 ~~Common~~Non-recurring ~~Stock~~charges ~~issued for Series D dividends~~(income)......... ~~6,924,000 69 2,008 Common Stock option exercises~~.................. ~~5,185~~795 4(510) ~~Employee~~1,700 ~~Stock~~Interest ~~Grant~~expense......... ~~1,100,000 11 313 Warrants Issued~~.............. ~~2,165 Stock Sale~~................... 5,~~040,000~~462 ~~50 1~~3,~~311~~289 (14,~~361)~~051 ---------- ------- --- ---------- 42,453 32,550 34,847 ---------- ---------- ---------- ~~Balance,~~Loss ~~December~~before ~~25,~~income ~~1999~~tax provision..... ~~3,042 $15,210 73,984,795 $739 $39,853 ($1,361) Comprehensive loss Net loss~~................... ~~Minimum~~(19,888) ~~pension~~(7,885) ~~liabililty~~(9,978) ~~adjustment...............~~Provision ~~Total~~for ~~comprehensive~~income ~~loss~~taxes..... ~~Preferred stock dividend~~..... ~~Employee Stock Grant~~......... ~~659 Rescind Stock Sale~~........... ~~(5,040,000)~~20 ~~(50)~~20 ~~(1,311)~~40 ~~1,361~~ ----- ------- ----------- ---- ------- ~~-------~~Net ~~Balance, December 30, 2000~~loss..... 3,042 $15,210 68,945,454 $689 $38,542 $ -- ===== ======= =========== ==== ======= ======= ACCUMULATED OTHER COMPREHENSIVE ACCUMULATED DEFICIT INCOME(LOSS) TOTAL ------------------- ------------------ -------- Balance, December 27, 1997..... ~~($16,511) ($2,275) $ 1,681 Comprehensive loss Net loss~~................... ~~(6,921) (6,921) Minimum pension liabililty adjustment~~............... ~~(771) (771) ------- Total comprehensive loss~~..... (719,~~692~~908) ~~------- Preferred stock dividend.....~~ (17,~~114~~905) (110,~~114~~018) ~~Sales~~Preferred ~~and contribution of Common Stock to Employee Savings Plan~~dividends............... ~~50 Employee Stock Grant~~......... ~~446 Private Offering~~............. 21,~~360~~078 ~~Rights~~1,369 ~~Offering..............~~1,795 ~~340 Warrants Issued.............. 29~~ ---------- ---------- ---------- ~~Balance, December 26, 1998..... ($24,546) ($3,046) ($3,900) Comprehensive loss~~ Net loss~~...................~~ ~~(19,908)~~applicable ~~(19,908)~~to ~~Minimum~~Common ~~pension liabililty adjustment~~Stock............... ~~11 11 ------- Total comprehensive loss~~...... $ (1920,~~897~~986) ~~-------~~$ ~~Preferred stock dividend.....~~ (19,~~078~~274) $ (111,~~078~~813) ~~Issuance~~========== of========== ~~Series~~========== EBasic ~~Preferred~~and ~~Stock............~~diluted ~~14,773~~net ~~Conversion~~loss ofper ~~Series~~share: DNet ~~Preferred~~loss ~~Stock............~~per ~~11,406 Common Stock issued for Series D dividends~~share......... ~~2,077 Common Stock option exercises~~.................. ~~4 Employee Stock Grant~~......... ~~324 Warrants Issued~~..~~............~~ ~~2,165~~$ ~~Stock Sale...................~~ (0 ~~-------- ------- ------- Balance, December 25, 1999~~.~~....~~89) ($~~45,532)~~ (~~$3,035~~0.13) $ ~~5,874 Comprehensive loss Net loss...................~~ (~~7,905~~0.17) ~~(7,905) Minimum pension liabililty adjustment............... 276 276~~ ------- ~~Total comprehensive loss..... (7,629)~~ --- ---- ~~Preferred stock dividend..... (1,369) (1,369) Employee Stock Grant......... Rescind Stock Sale...........~~ -------- ------- ---~~----~~ ~~Balance,~~Weighted ~~December~~average ~~30,~~number ~~2000~~of common shares outstanding..... ~~($54~~23,~~806)~~493,000 ~~($2~~73,~~759)~~688,000 ~~($3~~68,~~124)~~947,000 ========== ========== ==========

The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. F-4 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

~~FISCAL~~PREFERRED ~~YEAR~~PREFERRED ~~ENDED~~STOCK ~~FISCAL~~COMMON ~~YEAR~~STOCK ~~ENDED~~COMMON ~~FISCAL~~ADDITIONAL ~~YEAR~~PAID-IN ~~ENDED~~NOTE ~~DECEMBER~~RECEIVABLE ~~26,~~SHARES ~~1998~~AMOUNT ~~DECEMBER~~SHARES ~~25,~~STOCK ~~1999~~AMOUNT ~~DECEMBER~~CAPITAL ~~30,~~FROM ~~2000~~STOCK SALE --------- --------- ------------- ------------ ------------------ ~~Cash~~--------------- ~~Flows~~Balance, ~~From~~December ~~Operating~~26, ~~Activities: Net Loss~~1998.......~~........................................~~ ~~($6~~-- -- 20,~~921)~~915,610 ($~~19,908)~~209 ($723,~~905)~~483 ~~Adjustments~~Comprehensive ~~to reconcile net~~ loss toNet ~~net cash used in operating activities: Depreciation and amortization~~loss.....................~~...~~ ~~1,727~~Minimum ~~2,002~~pension ~~2,000~~liability ~~Write off of certain trademarks~~adjustment................. Total comprehensive loss....... ~~184~~Preferred --stock ~~-- Stock grants issued~~dividend....... Issuance of Series E Preferred Stock........................~~...~~ ~~446~~3,042 ~~324~~15,210 --(437) ~~Provision~~Conversion ~~for~~of ~~doubtful~~Series ~~accounts~~D ~~receivable~~Preferred Stock.............. ~~327~~40,000,000 ~~250~~400 --11,006 ~~Warrants~~Common Stock issued for Series D dividends.................. 6,924,000 69 2,008 Common Stock option exercises.................... ~~-- 2~~5,~~165~~185 --4 ~~Loss~~Employee onStock ~~sale~~Grant..... ~~of property~~1,100,000 ~~plant~~11 ~~and~~313 ~~equipment~~Warrants Issued........ ~~954 58 175 Net gain on sale of trademark~~........ 2,165 Stock Sale..................... --5,040,000 --50 1,311 (~~365~~1,361) ~~Changes~~----- in------- ~~operating~~---------- ~~assets~~---- ~~and~~------- ~~liabilities:~~-------- ~~Decrease~~Balance, ~~(increase)~~December in25, ~~accounts receivable~~1999......... 13,~~090~~042 3$15,~~820~~210 (273,~~150)~~984,795 $739 $39,853 (~~Increase~~$ 1,361) ~~decrease~~Comprehensive inloss ~~inventories~~Net loss..................... ~~(1,672)~~Minimum ~~6,227~~pension ~~(194)~~liability ~~(Increase) decrease in prepaid expenses and other assets~~adjustment................. Total comprehensive loss....... Preferred stock dividend....... Employee Stock Grant............ ~~(698)~~659 ~~898~~Rescind ~~(527)~~Stock ~~Increase (decrease) in accounts payable~~Sale............. ~~397~~ (15,~~124~~040,000) (~~625~~50) ~~Increase~~ (~~decrease) in accrued expenses............ 2~~1,~~693 (3,026~~311) (21,~~423)~~361 ------- -------- ------- ~~Net cash used in operating activities.................. (1,473) (8,314) (12,014)~~ --- ---- -------- -------- ~~Cash~~Balance, ~~Flows~~December ~~From~~30, ~~Investing Activites: Capital expenditures~~2000.......~~..........................~~ (43,~~673)~~042 (2$15,~~836)~~210 ~~(631)~~68,945,454 ~~Proceeds~~$689 ~~from~~$38,542 ~~sale~~$ of-- ~~trademark~~Comprehensive loss Net loss...................... --Minimum --pension ~~600~~liability ~~Proceeds from sale of property, plant and equipment~~adjustment................. Total comprehensive loss..... Preferred stock dividend..... Warrants Issued.................. 160 ----- ------- ~~108~~ ---------- ---- ------- -------- ~~Net~~Balance, ~~cash~~December ~~(used~~29, ~~in) provided by investing activities~~2001....... (43,~~673)~~042 (2$15,~~836~~210 68,945,454 $689 $38,702 $ -- ===== ======= ========== ==== ======= ======== ACCUMULATED OTHER COMPREHENSIVE ACCUMULATED DEFICIT INCOME (LOSS) 77TOTAL ------------------- ----------------- -------- ~~Cash~~Balance, ~~Flows~~December ~~From~~26, ~~Financing~~1998....... ~~Activities:~~($24,546) ~~Net~~($ ~~borrowings~~3,046) (~~repayments~~$ 3,900) ~~under~~Comprehensive ~~revolving~~loss ~~line~~Net ~~of credit~~loss..................... (19,908) (19,908) Minimum pension liability adjustment.................~~.....~~ ~~7,490~~11 ~~(5,988)~~11 ~~12,338~~-------- ~~Repayments~~Total ofcomprehensive ~~long-term debt~~loss....... (19,897) Preferred stock dividend.......~~.........~~ (1,~~326~~078) (21,~~157~~078) ~~(200)~~Issuance ~~Proceeds~~of ~~from~~Series ~~term~~E ~~loans~~Preferred Stock........................~~...~~ ~~-- 4~~14,~~983~~773 --Conversion ~~Sale~~ of ~~Common~~Series D Preferred Stock.............. 11,406 Common Stock issued for Series D dividends.................. 32,~~000~~077 ~~-- -- Expenses associated with issuance of rights to purchase~~ Common Stock option exercises....................~~........~~ ~~(299)~~4 --Employee --Stock ~~Payment of subordinated debt~~Grant..... 324 Warrants Issued.................. (32,~~000)~~165 ~~-- -- Common~~ Stock ~~option exercises~~Sale...................... 49-- 4-------- -------- ~~Issuance~~-------- ofBalance, ~~Series~~December E25, ~~Preferred Stock~~1999.......~~........~~ ~~-- 15~~($45,~~210~~532) --($ ~~Expenses~~3,035) ~~associated~~$ ~~with~~5,874 ~~issuance~~Comprehensive ofloss ~~Series~~Net ~~E Preferred Stock~~loss.....................~~.............~~ --(7,905) (~~437~~7,905) --Minimum ~~Proceeds~~pension ~~from~~liability ~~warrant notes~~adjustment.................~~.......~~ 15276 276 -- ------ ~~Financing~~Total ~~costs~~comprehensive ~~incurred~~loss....... (7,629) Preferred stock dividend.......~~.............~~ (451,369) (~~348~~1,369) ~~(75)~~Employee ~~-------~~Stock ~~-------- ------- Net cash provided by financing activities~~Grant...........~~...~~ ~~5,884~~Rescind ~~11,267~~Stock ~~12,063 ------- -------- ------- Net (decrease) increase in Cash and Cash Equivalents~~Sale... ~~(262) 117 126 Cash and Cash Equivalents, Beginning of Period~~.......... ~~808~~-- ~~546 663~~ -------- -------- -------- ~~Cash~~Balance, ~~and~~December ~~Cash Equivalents~~30, ~~End of period~~2000.......~~........~~ ($54,806) ~~546~~ ($ ~~663~~2,759) ($ ~~789~~3,124) ~~=======~~Comprehensive ~~========~~loss ~~=======~~Net ~~Supplemental Disclosure of Cash Flow Information: Interest Paid~~loss..................... (10,018) (10,018) Minimum pension liability adjustment.................~~....~~ ~~$ 2~~(1,~~282~~962) ~~$ 3~~(1,~~350~~962) $-------- ~~3,104~~Total ~~Income~~comprehensive ~~Taxes Paid~~loss..... (11,980) Preferred stock dividend..... (1,795) (1,795) Warrants Issued..................~~..........~~ 60160 ~~118~~-------- 20-------- ~~Cash~~-------- ~~refunds~~Balance, ~~received~~December ~~for~~29, ~~income taxes~~2001.......~~..........~~ (26$66,619) (63$ 4,721) (40$16,739) ======== ======== ========

The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. F-5 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED DECEMBER 25, 1999 DECEMBER 30, ~~1999~~ 2000 DECEMBER 29, 2001 ----------------- ----------------- ~~Finished~~----------------- ~~Goods~~Cash Flows From Operating Activities: Net Loss............................................... ($1319,~~978~~908) ($15 7,~~090~~905) ~~Work~~($10,018) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................ 2,002 2,000 1,800 Stock grants issued.................................. 324 -- -- Provision for doubtful accounts receivable........... 250 -- -- Warrants issued...................................... 2,165 -- 140 Loss on sale of property, plant and equipment........ 58 175 1,785 Net gain on sale of trademark........................ -- (365) -- Financing fees converted to term loan................ -- -- 300 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable......... 3,820 (2,150) 548 Decrease (increase) in inventories................. 6,227 (194) 4,046 Decrease (increase) in prepaid expenses and other assets........................................... 898 (527) (1,102) (Decrease) in accounts payable..................... (1,124) (625) (306) (Decrease) in accrued expenses..................... (3,026) (2,423) (1,311) -~~process~~------- -------- -------- Net cash used in operating activities.................. (8,314) (12,014) (4,118) -------- -------- -------- Cash Flows From Investing Activities: Capital expenditures................................. (2,836) (631) (281) Proceeds from sale of trademark...................... -- 600 -- Proceeds from sale of property, plant and equipment.......................................... -- 108 39 -------- -------- -------- Net cash (used in) provided by investing activities.... (2,836) 77 (242) -------- -------- -------- Cash Flows From Financing Activities: Net (repayments) borrowings under revolving line of credit........................................... (5,~~339~~988) 12,338 4,~~921~~068 ~~Raw~~Repayments ~~materials~~of long-term debt....................... (2,157) (200) (550) Proceeds from term loans........................... 4,~~365~~983 3-- 750 Common Stock option exercises...................... 4 -- -- Issuance of Series E Preferred Stock............... 15,~~576~~210 ~~Packaging~~-- ~~materials~~-- Expenses associated with issuance of Series E Preferred Stock.................................. ~~477~~(437) ~~766~~-- -- Financing costs incurred........................... (348) (75) (55) -------- -------- ~~$24~~-------- Net cash provided by financing activities.............. 11,~~159~~267 ~~$24~~12,~~353~~063 4,213 -------- -------- -------- Net increase (decrease) in Cash and Cash Equivalents... 117 126 (147) Cash and Cash Equivalents, Beginning of Period......... 546 663 789 -------- -------- -------- Cash and Cash Equivalents, End of period............... $ 663 $ 789 $ 642 ======== ======== ======== Supplemental Disclosure of Cash Flow Information: Interest Paid.......................................... $ 3,350 $ 3,104 $ 3,723 Income Taxes Paid...................................... 118 20 59 Cash refunds received for income taxes................. (63) (40) (9)

The accompanying Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. F-6 DANSKIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NON-CASH ACTIVITIES The Company issued a stock grant of 100,000 shares valued at $0.9375 per share to the EVP-CFO in January 1999. The Company issued a stock grant of 1,000,000 shares valued at $0.23 per share to the CEO in December 1999. The Company issued 12,103,200 warrants in connection with the bridge financing in November 1999 (Note 15) The Company issued 550,000 warrants to CBCC in connection with the refinancing of the Company's secured bank debt (Note 15). In December 1999, Carol Hochman executed a promissory note in the principal amount of $1,361 in connection with her purchase of Common Stock of the Company. In fiscal 2000, and to accommodate a request by Mrs. Hochman, the Company rescinded the share purchase by Mrs. Hochman, cancelled the promissory note, and issued an identical number of options to purchase Common Stock of the Company at $0.27 per share (Note 18). In December 1999, the Company issued a warrant to Utendahl Capital Partners in respect of their participation in the placement of the Company's Series E Stock (Note 15). The Company issued an employee stock grant of 659 shares valued at $0.61 per share in February 2000. During fiscal 2001, the Company issued warrants to purchase 2,250,000 shares of the Company's Common Stock to CBCC at prices ranging from $0.06 to $0.185 per share (Note 11). During fiscal 2001, CBCC converted $300 of financing fees to a term loan in connection with an amendment to the Company's debt agreement. F-7 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. LIQUIDITY Danskin, Inc. has made significant progress under current management in its "right-sizing" reorganization plan implemented over the last three fiscal years. Despite being negatively impacted by capital constraints during this timeframe, the Company has benefited from substantial operational improvements and successes in reaching new customers and channels of distribution as well as expansion of its licensing efforts. The Company's financial results for fiscal year 2001 were negatively impacted by these capital constraints coupled with the general downturn in the economy and apparel industry. The Company's management remains confident that progress will continue in its reorganization efforts. 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 Company's secured credit facility 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 adequacy of the Company's bank facilities is contingent upon the successful attainment of the Company's business plan, taking into account the $3,000 in availability in excess of the requirements of the business plan, discussed above. (Refer to Note 11). F-8 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Danskin, Inc. (the "Company") was incorporated on February 21, 1986 to own and operate the business and assets of two divisions of a corporation acquired on July 22, 1986. The Company currently operates under two divisions: Danskin, which designs, manufactures, markets and/or licenses dance wear, bodywear, tights, exercise apparel, intimate apparel, socks, and fitness equipment and also operates 32 retail stores and two full price stores; and Pennaco, which designs, manufactures and markets hosiery under the brand names Round-the-Clock-Registered Trademark-, Givenchy-Registered Trademark-, Evan Picone-Registered Trademark-, and Ellen Tracy-Registered Trademark- and under private labels for major retailers. BASIS OF PRESENTATION The consolidated financial statements of the Company include the accounts of the Company, including all of its operating divisions, and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications were made to prior year information to conform to the current year presentation. The Company's fiscal year ends on the last Saturday in December. Fiscal 1999 ended on December 25, 1999; fiscal 2000 ended on December 30, 2000; fiscal 2001 ended on December 29, 2001. In addition, fiscal years 1999 and 2001 contained 52 weeks and fiscal year 2000 contained 53 weeks. INVENTORIES Inventories are stated at the lower of cost or market on a first-in, first-out basis. Inventories consist of:

DECEMBER 2530, ~~1999~~ DECEMBER 3029, 2000 ~~---------------------~~2001 ------------~~---------~~ ~~CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE~~ -------- ----~~------~~ ~~--------~~Finished ~~---------- Cash and cash equivalents~~Goods...................................... $15,090 ~~663~~ $14,344 ~~663~~Work-in-process..................................... $4,921 ~~789~~2,729 $Raw ~~789 Revolving line of credit~~materials....................................... ~~(10~~3,~~041)~~576 ~~(10~~2,~~041)~~568 ~~(22,379)~~Packaging ~~(22,379) Long-term debt~~materials................................. ~~(11,500)~~766 ~~(11,500)~~666 ~~(11~~------- ------- $24,~~300)~~353 ~~(11~~$20,~~300)~~307 ======= =======

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Furniture and fixtures, machinery and equipment and buildings are depreciated by the straight-line method over the estimated useful lives of the assets, ranging from 5 to 20 years. Leasehold improvements are amortized by the straight-line method over the related lease terms or the estimated useful life of the asset, whichever is less. F-9 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED The excess of purchase price over fair value of net tangible assets acquired is amortized on a straight-line basis over 20 years. DEFERRED FINANCING CHARGES Deferred financing charges are amortized over the respective terms of debt obtained under financing agreements. CASH EQUIVALENTS The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. TRADEMARKS The Company amortizes capitalized costs to acquire trademarks over the estimated useful life of the trademark, generally 15 years. LOSS PER COMMON SHARE Basic loss per share is calculated by dividing net loss applicable to Common Stock by the weighted average Common Stock outstanding during the period. Diluted net loss per share is calculated by dividing net loss applicable to Common Stock by the weighted average Common Stock and Common Stock equivalents outstanding. Common Stock equivalents, including Convertible Series E Preferred Stock, management options and warrants, are reflected in diluted net loss per share except to the extent they are antidilutive. At December 29, 2001 the Company had the following common shares and common share equivalents outstanding: Common Shares............................................... 68,946,537 Preferred Stock............................................. 84,500,676 Warrants.................................................... 32,783,199 Options..................................................... 13,679,132 ----------- Total Shares and Share Equivalents Outstanding............ 199,909,544 ===========

Due to the net loss for all periods presented, the assumed exercise of common stock equivalents would be antidilutive and thus have not been included as common stock equivalents for purposes of the calculation of diluted earnings per share. REVENUE RECOGNITION Revenue within the wholesale operations is recognized at the time merchandise is shipped from the Company's distribution centers. Retail store revenues are recognized at the time of sale. All revenue is net of returns. F-10 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING AND PROMOTION All costs associated with advertising and promoting products are expensed when the advertising or event takes place. Costs associated with the Company's catalogs are expensed when the catalogs are distributed. Advertising and promotion expenses were $4,575 in fiscal 1999, $2,410 in fiscal 2000, and $2,561 in fiscal 2001. INCOME TAXES The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes," which requires the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. LONG-LIVED ASSETS The Company continually evaluates the carrying value and the economic useful life of its long-lived assets based upon the Company's operating performance and its expected future net cash flows and will adjust the carrying amount of assets which may not be recoverable. The Company does not believe that any impairment exists in the recoverability of its long-lived assets as of the fiscal year end. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value method of accounting for stock options and other equity instruments used for compensation purposes, and requires companies electing to report in accordance with the standard to recognize or disclose such compensation in its financial statements. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company, as permitted, continues to account for such transactions under Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," but discloses in a note to the consolidated financial statements pro forma net income and earnings per share as if the Company had adopted the fair value method of accounting. (Refer to Note 3) FINANCIAL INSTRUMENTS In assessing the fair value of financial instruments at December 30, 2000 and December 29, 2001, the Company has used a variety of methods and assumptions, which were based on estimates of market F-11 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) conditions and risks existing at that time. For certain instruments, including cash and cash equivalents; it was assumed that the carrying amount approximated fair value for the majority of these instruments because of their short maturity. Bank debt obligations are valued at carrying amount due to floating interest rates on such debt. These values merely represent a general approximation of possible value and may never actually be realized. The estimated fair values of the Company's financial instruments are summarized as follows:

~~FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED~~ DECEMBER 2630, ~~1998~~2000 DECEMBER 2529, ~~1999~~2001 ~~DECEMBER 30, 2000~~ ---------------------- ---------------------- ~~----------------------~~CARRYING ~~WEIGHTED~~ESTIMATED ~~WEIGHTED~~CARRYING ~~WEIGHTED~~ESTIMATED ~~EXERCISE~~AMOUNT ~~AVERAGE~~FAIR ~~AVERAGE~~VALUE ~~AVERAGE~~AMOUNT ~~PRICE~~FAIR ~~EXERCISE~~VALUE ~~EXERCISE EXERCISE RANGE # OF SHARES PRICE # OF SHARES PRICE # OF SHARES PRICE~~ --------~~-----~~ ----------- -------- ----------- ~~--------~~Cash ~~-----------~~and ~~--------~~cash ~~Outstanding beginning of year~~equivalents..............~~.......~~ $~~0.27-$7.00~~ ~~759,034~~789 $~~2.2750~~ ~~2,462,776~~789 $~~1.4100~~ ~~5,770,283~~642 $~~0.4550~~ ~~Granted....................~~642 ~~$0.20-$1.93~~Revolving ~~2,370,000~~line ~~$1.5140~~of ~~4,665,000 $0~~credit.~~3020 1,870,000 $0~~.~~3900 Canceled~~.............~~......~~ ~~$0.27-$7.00~~(22,379) (~~573~~22,~~376~~379) ~~$2.4140~~ (126,~~352,308~~447) ~~$1.5610~~ (~~736~~26,~~705~~447) ~~$0.8310~~Long-term ~~Exercised~~debt.................. $0.~~625-$0~~.~~625 (92,882) $0~~.~~6250 (5,185) $0~~.~~6250 -- Outstanding, end of year~~... ~~$0.20-$3.63 2~~(11,~~462,776~~300) ~~$1.4140 5~~(11,~~770,283~~300) ~~$0.4550 6~~(11,~~903,578~~800) ~~$0.3920~~(11,800)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142"). SFAS No. 141 changes the accounting for business combinations, requiring that all business combinations be accounted for using the purchase method and that intangible assets be recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they are separate or capable of being separated from the acquired entity and sold, transferred, licensed, rented or exchanged. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. SFAS No. 142 specifies the financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires that the useful lives of intangible assets acquired on or before June 30, 2001 be reassessed and the remaining amortization periods adjusted accordingly. Previously recognized intangible assets deemed to have indefinite lives shall be tested for impairment. Goodwill recognized on or before June 30, 2001, will be tested for impairment as of the beginning of the fiscal year in which SFAS No. 142 is initially applied in its entirety. The Company is currently assessing the impact of the adoption of these statements. Amortization of goodwill and other intangibles was $21 for the year ended December 31, 2000 and $10 for the year ended December 29, 2001. In September 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets". This Statement addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", but retains SFAS No. 121's fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supercedes the accounting/reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be F-12 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) disposed of, but retains APB No. 30's requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The statement is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The Company plans to adopt SFAS No. 144 effective December 30, 2001. The adoption is not expected to have a material impact on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at fair value. The Statement also requires that changes in derivative fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 was effective for the Company's financial statements in the year 2001. The Company has not entered into any derivatives or hedging activities and, as such, adoption of this statement did not have an impact on its financial statements. 3. STOCK OPTION PLAN On July 1, 1992, the Company's Board of Directors adopted the 1992 Stock Option Plan (the "Plan"). Effective September 18, 1997, the Executive Committee of the Board of Directors of the Company amended the Company's Stock Option Plan to clarify that the Board of Directors retains the discretion to determine the fair market value of the Common Stock with respect to periods when the Common Stock is not actively traded on NASDAQ or any other national exchange or under circumstances where significant transactions in the Common Stock have occurred outside traditional trading venues. As of December 29, 2001, 7,191,933 shares of common stock were reserved for issuance under the Plan. The following table summarizes the activity relating to the Plan as of and for the fiscal year ended December 25, 1999, the fiscal year ended December 30, 2000, and for the fiscal year ended December 29, 2001:

FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED DECEMBER 25, 1999 DECEMBER 30, ~~1999~~ 2000 DECEMBER 29, 2001 ---------------------- ---------------------- ~~Options~~---------------------- ~~exercisable~~WEIGHTED WEIGHTED WEIGHTED EXERCISE AVERAGE AVERAGE AVERAGE PRICE EXERCISE EXERCISE EXERCISE RANGE # OF SHARES PRICE # OF SHARES PRICE # OF SHARES PRICE ------------- ----------- -------- ----------- -------- ----------- -------- Outstanding beginning of year.................... $0.27-$7.00 2,462,776 $1.4100 5,770,283 $0.4550 6,903,578 $0.4190 Granted................... ~~267~~$0.16-$0.93 4,~~916~~665,000 ~~749~~$0.3020 1,~~769~~870,000 ~~Shares~~$0.3900 ~~available~~700,000 ~~for~~$0.2390 grant*Canceled.................. $0.16-$7.00 (1,352,308) $1.5610 (736,705) $0.8310 (786,846) $0.3370 Exercised................. 1$0.625-$0.625 (5,~~650~~185) ~~288~~$0.6250 -- -- -- -- Outstanding,~~355~~ end of year.................... $0.20-$3.00 5,770,283 $0.4550 6,903,578 $0.4190 6,816,732 $0.4100

F-13 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3. STOCK OPTION PLAN (CONTINUED) Options exercisable and shares available for future grant amounted to:

DECEMBER 2530, DECEMBER 3029, ~~1999~~ 2000 2001 ------------ ------------ ~~Land................................................~~Options ~~$ 45 $ 45 Buildings and improvements~~exercisable.......................... ~~1,777 1,801 Machinery and equipment~~.......~~......................~~ 8749,~~818~~769 82,~~671 Furniture and fixtures.............................. 4~~583,~~364~~704 ~~3,967~~Shares ~~Leasehold~~available ~~improvements..............................~~for ~~3,311 3,234 Construction in progress~~grant*.........................~~...~~ 1288,~~798~~355 1375,~~853 ------- ------- 20,113 19,571 ------- ------- Accumulated depreciation and amortization........... (9,366) (10,291) ------- ------- $10,747 $ 9,280 ======= =======~~201

------------------------ * "Shares available for grant" under the Plan is equal to (a) the total number of options available for grant under the Plan, less (b) the sum of (x) options presently exercisable, (y) non-exercisable options, and (z) previously exercised options. The weighted average fair value of total stock options granted during 2001 was $0.06 per share. The fair value of each stock option grant is estimated on the date of grant using a pricing model, which approximates the Black-Scholes pricing model, with the following weighted average assumptions used for grants in 2001: risk-free interest rate of 5.37%; no expected dividend yield; expected life of ten years; and expected volatility of 28.88%; and for grants in 2000: risk-free interest rate of 6.3%; no expected dividend yield; expected life of ten years; and expected volatility of 41.39%. Stock options generally expire 10 years from the grant date or at termination, if earlier. The stock options outstanding at December 29, 2001 have a weighted average exercise price of $0.41 per share. The Company accounts for stock options in accordance with APB No. 25, under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Plan been determined consistent with SFAS No. 123, the Company's pro forma net loss would have been ($10,364) and net loss applicable to Common Stock and net loss per share (basic and diluted) for the fiscal year ended December 29, 2001 would have been ($12,159) and ($0.18) per share, respectively; for the fiscal year ended December 30, 2000, the Company's pro forma net loss would have been ($8,309) and net loss applicable to Common Stock and net loss per share (basic and diluted) would have been ($9,678) and ($0.13) per share, respectively; for the fiscal year ended December 25, 1999, the Company's pro forma net loss would have been ($20,150) and net loss applicable to Common Stock and net loss per share (basic and diluted) would have been ($21,288) and ($0.90) per share, respectively. In accordance with the terms of her employment agreement, Carol J. Hochman, President and Chief Executive Officer, received options to purchase 5,040,000 shares of Common Stock of the Company for $0.27. The options vest approximately ten years from date of issuance, subject to accelerated vesting based upon a performance vesting schedule. The options expire on December 8, 2009. As of December 29, 2001, none of such options are presently vested and exercisable (Refer to Note 18). In accordance with the terms of his employment agreement, John A. Sarto, Executive Vice President and Chief Financial Officer, received options to purchase 1,582,400 shares of Common Stock of the Company for $0.27. Two hundred and fifty thousand of such options vested on the date of grant. Of the balance of the options, 50% vest 25% a year, and 50% vest approximately ten years from date of issuance, subject to accelerated vesting based upon a performance vesting schedule. The options expire on December 8, 2009. As of December 29, 2001, 583,100 of the tenure based options are vested and exercisable; none of the performance based options have vested. F-14 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 4. STOCK MARKET LISTING Bid quotations for the Company's Common Stock may be obtained from the "pink sheets" published by the National Quotation Bureau. The Common Stock is traded in the over-the-counter market. 5. SAVINGS AND PROFIT SHARING PLAN During fiscal 2001, the Company maintained a savings and profit sharing plan (the "Savings Plan") for the benefit of employees meeting certain eligibility requirements. Company profit sharing contributions are made at the discretion of the Board of Directors. Effective April 1, 1987, under a 401(k) vehicle, eligible employees may elect to defer a portion of their base salary, up to the maximum allowed, as a deduction for Federal income tax purposes. The Company will match 25% of each participant's investment, up to 6% of the participant's base salary. Total expense for this plan, for the fiscal years ended December 25, 1999, December 30, 2000 and December 29, 2001, was approximately $147, $122 and $134, respectively. The Company also maintained an hourly savings and profit sharing plan (the "Hourly Savings Plan"), for which the Company will match 10% of each participant's investment up to 6% of base salary, with nominal plan expense. Effective January 1, 2001, the Company merged the Savings Plan and the Hourly Savings Plan into one plan, The Danskin Savings Plan. The Danskin Savings Plan's features mirror the features of the Savings Plan, including the level of the Company match. 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:

DECEMBER 2530, DECEMBER 3029, ~~1999~~ 2000 2001 ------------ ------------ ~~Deferred financing charges (net of accumulated amortization of $315 at December 1999 and $464 at December 2000)~~Land................................................ $ ~~704~~45 $ ~~630~~45 ~~Unrecognized~~Buildings ~~net~~and ~~pension obligation~~improvements.......................... ~~278~~1,801 ~~394~~1,879 ~~Notes~~Machinery ~~receivable~~and equipment............................. 8,671 8,547 Furniture and fixtures.............................. 883,967 893,058 ~~Trademarks~~Leasehold ~~(net~~improvements.............................. of3,234 ~~accumulated~~3,183 ~~amortization~~Construction ofin ~~$482~~progress............................ at1,853 ~~December~~50 ~~1999~~-------- ~~and~~-------- ~~$517~~19,571 at16,762 ~~December~~Accumulated ~~2000)~~depreciation and amortization........... 45(10,291) (10,583) -------- -------- $1 9,~~115~~280 $1 6,~~123~~179 ======== ========

Included within Construction in progress in the fiscal year ended December 30, 2000 is $1,700 relating to external costs incurred in conjunction with a system implementation. The Company has written-off these costs in the fiscal year ended December 29, 2001 (see Note 10). F-15 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 7. OTHER ASSETS Other assets consist of:

DECEMBER 2530, DECEMBER 3029, ~~1999~~ 2000 2001 ------------ ------------ ~~Salaries,~~Deferred ~~wages~~financing ~~and~~charges ~~other~~(net ~~compensation..............~~of accumulated amortization of $464 ~~611~~at December 2000 and $~~1,047~~641 ~~Employee~~at ~~benefits~~December 2001).................................... ~~1,750~~$ ~~815~~630 ~~Accrued~~$ ~~cooperative~~530 ~~advertising~~Unrecognized ~~and~~net ~~promotion~~pension ~~costs~~obligation.................~~............................~~ ~~3,571~~394 ~~2,917~~492 ~~Accrued~~Notes ~~rent~~receivable....................................~~....~~ ~~1,688~~89 ~~959~~89 ~~Other~~Trademarks ~~accrued~~(net ~~expenses~~of accumulated amortization of $517 at December 2000 and $527 at December 2001).......~~.......................~~ ~~2,814~~10 ~~2,613~~0 ------- ------ $101,~~434~~123 $81,~~351~~111 ======= ======

8. ACCRUED EXPENSES Accrued expenses consist of:

~~FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED~~ DECEMBER 2630, DECEMBER 2529, ~~DECEMBER 30, 1998 1999~~ 2000 ~~------------~~2001 ------------ ------------ ~~Net~~Salaries, ~~Sales~~wages and other compensation.............. $1,047 $ 782 Employee benefits................................... ~~$108,024~~815 ~~$87,408~~701 ~~$84,038~~Accrued ~~Royalties~~cooperative advertising and ~~licensing~~promotion ~~fees~~costs............................................. ~~717~~2,917 ~~562~~2,722 ~~616~~Accrued ~~--------~~rent........................................ 959 682 Other accrued expenses.............................. 2,613 2,131 ------- ------- $~~108~~8,~~741~~351 $877,~~970~~018 ~~$84,654~~ ======== ======~~= =======~~

9. NET REVENUES Net revenues consist of:

FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED DECEMBER 25, DECEMBER 30, DECEMBER 29, 1999 2000 2001 ------------ ------------ ~~Revolving~~------------ ~~Line~~Net ~~of Credit~~Sales............................... $10 87,~~041~~408 $2284,~~379~~038 ~~=======~~$80,198 ~~=======~~Royalties, ~~Long-term~~licensing ~~debt:~~fees ~~Term~~and ~~notes~~freight income................................~~..........~~ ~~$11~~1,~~500~~084 ~~$11~~1,~~300~~255 ~~=======~~1,560 ~~=======~~-------- ~~Less current maturities of long~~-~~term~~------ ~~debt~~ ------- ~~742~~$ ~~=======~~88,492 $85,293 $81,758 ======== ~~$11,500 $10,558~~ ======= =======

10. NON-RECURRING CHARGES (INCOME) Non-recurring charges were $795 for the fiscal year ended December 25, 1999. These charges consisted of an additional provision for remaining lease obligations for the former corporate office at 111 West 40th Street in New York City due to the loss of a subtenant, and establishment of a reserve against an outstanding amount owed the Company for the sale of a trademark. F-16 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 10. NON-RECURRING CHARGES (INCOME) (CONTINUED) Non-recurring income was $510 for the fiscal year ended December 30, 2000. The income consisted of a net recovery of $426 for an outstanding amount owed the Company for the sale of a trademark and $220 resulting from securing a subtenant for the Company's former corporate offices in New York City, in respect of which the Company previously recognized a loss in 1999. The aforementioned income was partially offset by $136 for severance pay to a former executive. Non-recurring charges was $1,700 for the fiscal year ended December 29, 2001. In prior years, the Company incurred $1,700 relative to the purchase of computer hardware and software, including system programming costs by external consultants. The Company placed this project on hold until adequate capital can be raised. As a result of the Company's continuing capital constraints, management is unable to determine when or if this project will be resumed. Accordingly, the Company has written off the previously capitalized costs. 11. BANK FINANCING

DECEMBER 2530, ~~1999~~ DECEMBER 3029, 2000 ~~-------------------~~2001 ------------~~-------~~ ~~DANSKIN PENNACO DANSKIN PENNACO~~ -------- ----~~----~~ ~~--------~~Revolving ~~--------~~Line ~~CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning~~ of ~~Year~~Credit................... ~~$ 6,597 $ 8,320 $ 6,282 $ 7,834 Service Cost~~.........~~.....................................~~ 122 0 92 0 Interest Cost............................................. 443 564 458 581 Amendments................................................ 15 136 15 126 Actuarial (Gain)/Loss..................................... (364) (604) 80 133 Benefits Paid............................................. (531) (582) (589) (598) ------- ------- ------- ------- $ 622,~~282~~379 $ 726,~~834~~447 $ 6,338 $ 8,076 CHANGE IN PLAN ASSETS Fair Value of Plan Assets at Beginning of Year............ $ 5,931 $ 6,539 $ 5,376 $ 6,293 Actual Return on Plan Assets.............................. (24) (22) 584 808 Employer Contribution..................................... 0 358 528 402 Benefits Paid............................................. (531) (582) (589) (598) ------- ------- Long-~~------~~term ~~-------~~debt: ~~Fair~~Term ~~Value of Plan assets at End of Year~~notes.................. ~~$ 5,376 $ 6,293 $ 5,899 $ 6,905 Funded Status~~........................~~.....................~~ $ ~~(906) $(1~~11,~~541)~~300 $ ~~(439) $(1~~11,~~171)~~800 Unrecognized Net Transition Asset......................... (120) 0 (66) 0 Unrecognized Prior Service Cost........................... 29 249 41 353 Unrecognized Net Actuarial (Gain)/Loss.................... 1,765 1,390 1,621 1,203 ------- ------- ~~-------~~Less ~~-------~~current ~~Net~~maturities ~~amount recognized..................................... $ 768 $ 98 $ 1,157 $ 385 ======= ======= ======= ======= Amounts recognized in the statement~~ of ~~financial~~long-term ~~position consist of: Prepaid benefit cost~~debt...........~~.........................~~ $742 ~~768~~800 $ 98 $ 1,157 $ 385 Accrued benefit cost.................................... (1,674) (1,639) (1,597) (1,556) Intangible Asset........................................ 29 249 41 353 Accumulated other comprehensive income.................. 1,645 1,390 1,556 1,203 ------- ------- Long------- ------- $ 768 $ 98 $ 1,157 $ 385 ======= ======= ======= ======= ASSUMPTIONS AS OF DECEMBER 31 Discount rate............................................... 7.75% 7.75% 7.50% 7.50% Expected long-term ~~rate of return on assets~~debt................. 8.~~5% 8~~.~~5% 8~~.~~5% 8~~.~~5% COMPONENTS OF NET PERIODIC PENSION COST Service Cost~~.................~~.............................~~ $10,558 ~~122~~ $ 0 $ 92 $ 0 Interest Cost............................................. 443 563 458 581 Expected Return on Plan Assets............................ (478) (548) (447) (529) Amortization of Net Transition (Asset) Obligation......... (53) 0 (53) 0 Amortization of Prior service Cost........................ 2 11,000 ~~3 21 Recognized Actuarial (Gain)/Loss.......................... 100 69 85 42 ------- ------- ------- ------- Net Periodic Pension Cost................................. $ 136 $ 95 $ 138 $ 115~~ ======= ======= ~~======= =======~~

Maturities of term notes are as follows for the year ended: December 2002............................................... $ 800 December 2003............................................... 2,599 December 2004............................................... 8,401 ------- Total....................................................... $11,800 =======

Effective October 8, 1997, the Company entered into a loan and security agreement (the "Loan and Security Agreement") with Century Business Credit Corporation ("CBCC" or the "Lender") which matures on December 31, 2005. The Company's obligations to CBCC under the Loan and Security Agreement are generally secured by a first priority interest in all present and future assets of the Company. Pursuant to and in accordance with its terms, the Loan and Security Agreement provides the Company with a term loan facility in the aggregate principal amount of $11,500 (the "Term Loan Facility") and a revolving credit facility, including a provision for the issuance of letters of credit (the "Revolving Credit Facility") generally in an amount not to exceed the lesser of (a) $45,000 less the aggregate outstanding principal balance under the Term Loan Facility, or (b) a formula amount based upon the Company's available inventory and accounts receivable levels, minus certain discretionary reserves. F-17 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 11. BANK FINANCING (CONTINUED) The Loan and Security Agreement has been amended from time to time since inception, each time providing the Company with the additional liquidity necessary to meet its business plans. Pursuant to an amendment executed in March 2002 (the "March Amendment"), CBCC has agreed to provide the Company with additional borrowing capacity of varying amounts through December 31, 2002, to meet borrowing levels required by the Company's forecasted monthly business plans plus an additional $3,000 in excess availability through December 2002, to a maximum overadvance of $10,987 (the "Overadvance"). In connection with the March Amendment, the Company agreed (i) to pay CBCC 5% of net royalties earned by the Company on licensing agreements entered into after February 28, 2002, with payments not to exceed $500 in any fiscal year. Payments will continue until the earlier of (i) December 31, 2005, and (ii) such time as the Company has $3,000 in undrawn availability. The Loan and Security Agreement was previously amended in August 2001 (the "August Amendment") to reduce the required amortization by $142 per month from December 2001 through December 2002. In accordance with the August 2001 Amendment, the Term Loan Facility is payable, with respect to principal, in equal consecutive monthly installments of (i) $50 on the first day of September 2001 and on the first day of each month thereafter through December 2002, and (ii) $192 commencing on the first day of January 2003 and on the first day of each month thereafter. In accordance with the amortization requirement prior to the August Amendment, the Company paid an aggregate of $550 to CBCC through August 1, 2001, reducing the outstanding principal amount of the Term Loan to $10,950. Pursuant to the August Amendment, CBCC agreed to re-lend the $550 to the Company, thereby making the full $11,500 amount of the Term Loan Facility available to the Company. In addition to its other provisions, the August Amendment also provided that any fees payable by the Company to CBCC on or after August 1, 2001 pursuant to an amendment executed in March 2001, as set forth below, would be evidenced by a promissory note subsequently amended to be payable January 1, 2004, thereby relieving the Company of the requirement of cash payments to CBCC in respect of this obligation through December 2003. In connection with the August Amendment, CBCC requested a "good faith" participation by certain shareholders and affiliates of the Company who agreed to immediately provide the Company with $200 in additional credit support. In connection with the amendment in March 2001, the Company agreed: (i) to pay CBCC a fee equal to $25 on May 1, 2001, and an additional fee of $25, plus the amount of the previous month's fee, on the first of each month thereafter, and (ii) to issue 250,000 warrants to CBCC with a share price equal to the closing price of the Company's Common Stock on the date of issuance, on the first of each month, commencing May 1, 2001. Under the terms of the agreement with CBCC, the accrual of said additional payment will terminate at such time as the Company raises $4,790 of additional capital. Therefore, in accordance with this understanding, through December 29, 2001, the Company has incurred $525 in additional fees to CBCC and has issued 2,250,000 warrants to CBCC with share prices ranging from $0.06 to $0.185 per share. The Loan and Security Agreement contains certain affirmative and negative covenants, including maintenance of tangible net worth and a limitation on capital expenditures, respectively. The tangible net worth covenant is calculated by subtracting from total assets all intangible assets and total liabilities. In accordance with the March Amendment, the Company must maintain a tangible net worth of not F-18 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 11. BANK FINANCING (CONTINUED) less than a net deficit of ($24,156) as of December 29, 2001 and as of the end of each month thereafter and (ii) it shall be an Event of Default if the Company fails to maintain average undrawn availability under the Loan and Security Agreement for any month of less than $0 after giving effect to the Overadvance. At December 29, 2001 the Company's tangible net worth was a deficit of $17,231. The maximum borrowings under the Revolving Credit Facility were $29,426 during the fiscal year ended December 29, 2001. Interest on the Company's obligations and under the Loan and Security Agreement generally accrues at a rate per annum equal to the sum of the Prime Rate plus one half of one ( 1/2%) percent and is payable monthly. The Company previously had the option of electing a EuroLoan, pursuant to which interest on the Company's obligations would accrue at a rate per annum equal to the sum of the Eurodollar Rate, as defined in the Loan and Security Agreement, plus two and three quarters percent (2 3/4%). However, as consideration to CBCC in connection with certain previous amendments, the Company agreed to waive its right to elect a Eurodollar Loan until such time as the Company maintains average undrawn availability of at least $1,000 for three consecutive months. 12. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES In December 1999, the Company issued $15,210 stated value of 9% Series E Senior Step-Up Convertible Preferred Stock (the "Series E Stock"). The 3,042 shares of Series E Stock are convertible into Common Stock, at the option of the holder, at an initial conversion rate of 16,129 shares of Common Stock for each share of Series E Stock so converted, as adjusted for the reset provision discussed below, subject to adjustment in certain circumstances. The Series E Stock also contains a "reset" provision, which provides that if, at the eighteen (18) month anniversary of the date of issuance (June 8, 2001), the Market Price (generally defined to mean the average closing price of the Common Stock for the twenty day period prior to such date (the "Reset Period")) is less than the Conversion Price ($0.31 per share), the Conversion Price shall be reset to the Market Price. At the Reset Period, the Market Price of the Common Stock was $0.18 Per Share. Therefore, as a result of the reset provision, the conversion rate for the Series E Stock was adjusted from 16,129 shares of Common Stock to 27,778 shares of Common Stock, for each share of Series E Stock so converted. The terms of the Series E Stock also provide that, at any time after the fifth anniversary of the date of its issuance, the Series E Stock may, at the election of the Company, be redeemed by the Company for an amount equal to the sum of (x) $5,000 per share (as adjusted for any combinations, divisions or similar recapitalizations affecting the shares of Series E Stock), plus (y) all accrued and unpaid dividends on such shares of Series E Stock to the date of redemption. Holders of the Series E Stock are entitled to vote, together with the holders of the Common Stock and any other class or series of stock then entitled to vote, as one class on all matters submitted to a vote of stockholders of the Company, in the same manner and with the same effect as the holders of the Common Stock. In any such vote, each share of issued and outstanding Series E Stock shall entitle the holder thereof to one vote per share for each share of Common Stock that would be obtained upon conversion of all of the outstanding shares of Series E Stock held by such holder, rounded up to the next one-tenth of a share. Therefore, the issuance of the Series E Stock by the Company was highly dilutive to existing holders of Common Stock. F-19 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 12. PREFERRED STOCK AND SUBORDINATED CONVERTIBLE DEBENTURES (CONTINUED) Until the fifth anniversary of the date of its issuance, the Series E Stock has a 9% annual dividend rate, provided that the Company may, at its sole option, pay a portion of such dividend, equal to up to 2% per annum, in shares of common stock of the Company; provided however, that the Company has an obligation, with respect to the holders of the Series E Stock, to cause the common stock of the Company to be listed on the Nasdaq Small Cap Market or the Nasdaq National Market as promptly as feasible following the issuance of the Series E Stock. If the Company does not achieve such listing within eighteen (18) calendar months following the issuance date of the Series E Stock, dividends shall accrue prospectively at a rate of 14% per annum, payable in cash only, until such time such listing is effected. Notwithstanding the foregoing, from and after the fifth anniversary of the date of issuance, dividends accrue on the Series E Stock at a rate of 14% per annum, payable only in cash. The Common Stock is not presently listed as required by the terms of the Series E Stock. Therefore effective June 8, 2001, dividends on the Series E Stock are accruing at a rate of 14% per annum. Simultaneously with the Company's issuance of the Series E Stock, the holders of the Company's Series D Redeemable Cumulative Convertible Preferred Stock (the "Series D Stock"), agreed to convert such Series D Stock into Common Stock of the Company in accordance with the terms and conditions of the Series D Stock. The holders of the 2,400 shares of Series D Stock issued by the Company converted such preferred stock into Common Stock at the stated conversion rate of 16,666.66 shares of Common Stock for each share of the Series D Stock so converted. In addition, the Series D Stock had an 8% annual dividend rate, payment of which was deferred through December 31, 1999. The holders of the Series D Stock agreed that, for the period beginning on the date of issuance of the Series D Stock and ending on December 31, 1999, all dividends accrued on the Series D Stock could be paid, at the option of the Company, in cash or in additional Common Stock of the Company. Therefore, as a result of the conversion of the Series D Stock, the Company issued 46,924,000 shares of Common Stock in respect of the Series D Stock and all accrued but unpaid dividends through the effective date of the conversion. F-20 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 13. RELATED PARTY ACTIVITIES In connection with the Company's issuance to the Chairman of the Corporation of a warrant to purchase 5,372,315 shares of Common Stock of the Company, in September 1997, the Chairman executed a seven-year promissory note in favor of the Company in the original principal amount of $80. The promissory note bears interest at 6.55% per annum, payable annually. In connection with an amendment to the Company's Loan and Security Agreement, the Company's lender, Century Business Credit Corporation, requested a "good faith" participation in the credit by certain shareholders and affiliates of the Company who agreed to immediately provide the Company with $200 in additional credit support. The additional funds of $200 were received in September 2001 and are accounted for as current portion of long term debt 14. PENSION PLAN The Company sponsors and administers two defined benefit pension plans, the Danskin Division Hourly Employees' Pension Plan and the Pennaco Hosiery Division Hourly Employees' Pension Plan. Substantially all of the hourly employees of the Danskin division and the Pennaco Hosiery division participate in these plans. Benefits under the plans are based on years of service. The Company's funding policy is to contribute the minimum required contribution for each plan year. As of December 30, 2000 and December 29, 2001, the Company recorded a minimum pension liability adjustment to equity of $2,759 and $4,721, respectively. In each of October 1999 and 2000, the Company amended the Danskin Division Hourly Employees' Pension Plan to increase the monthly benefit level for 1998 and 1999, respectively, credited service from $7.00 to $8.00 and amended the Pennaco Hosiery Division Hourly Employees' Pension Plan to increase the monthly benefit level for 1998 and 1999 from $0.00 to $8.00. In addition, the October 2000 amendment for the Pennaco Hosiery Division Hourly Employees' Pension Plan allows new entrants into the Plan through December 31, 1999. Effective April 15, 1997, the Pennaco Division Hourly Employees' Pension Plan was frozen. No person who was not already a participant could become a participant and no additional credited service F-21 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 14. PENSION PLAN (CONTINUED) was granted to any participant. The following table sets forth the plans funded status at December 30, 2000 and December 29, 2001:

~~FISCAL~~DECEMBER ~~YEAR~~30, ~~ENDED~~2000 ~~FISCAL~~DECEMBER ~~YEAR~~29, ~~ENDED~~2001 ~~FISCAL~~------------------- ~~YEAR~~------------------- ~~ENDED~~DANSKIN ~~DECEMBER~~PENNACO ~~26,~~DANSKIN ~~1998~~PENNACO ~~DECEMBER~~-------- 25-------- -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning of Year................... $ 6,282 ~~1999~~$ ~~DECEMBER~~7,834 30$ 6,338 ~~2000~~$ 8,076 Service Cost.............................................. 92 0 89 0 Interest Cost............................................. 458 581 444 606 Amendments................................................ 15 126 15 128 Actuarial Loss............................................ 80 133 83 457 Benefits Paid............................................. (589) (598) (603) (657) ------- ------- ------- ------- $ 6,338 $ 8,076 $ 6,366 $ 8,610 CHANGE IN PLAN ASSETS Fair Value of Plan Assets at Beginning of Year............ $ 5,376 $ 6,293 $ 5,899 $ 6,905 Actual Return on Plan Assets.............................. 584 808 (202) (195) Employer Contribution..................................... 528 402 581 576 Benefits Paid............................................. (589) (598) (603) (657) ------- ------- ------- ------- Fair Value of Plan assets at End of Year.................. $ 5,899 $ 6,905 $ 5,675 $ 6,629 Funded Status............................................. $ (439) $(1,171) $ (690) $(1,982) Unrecognized Net Transition Asset......................... (66) 0 (13) 0 Unrecognized Prior Service Cost........................... 41 353 51 441 Unrecognized Net Actuarial Loss........................... 1,621 1,203 2,340 2,394 ------- ~~Federal~~------- ------- ------- Net amount recognized..................................... $ 1,157 $ 385 $ 1,688 $ 853 ======= ======= ======= ======= Amounts recognized in the statement of financial position consist of: ~~Current~~Prepaid ~~Provision~~benefit cost.................................... $ 01,157 $ 0385 $ 01,688 $ 853 Accrued benefit cost.................................... (1,597) (1,556) (2,378) (2,835) Intangible Asset........................................ 41 353 51 441 Accumulated other comprehensive income.................. 1,556 1,203 2,327 2,394 ------- ------- ------- ------- $ 1,157 $ 385 $ 1,688 $ 853 ======= ======= ======= ======= ASSUMPTIONS AS OF DECEMBER 31 Discount rate............................................... 7.50% 7.50% 7.25% 7.25% Expected long-term rate of return on assets................. 8.5% 8.5% 8.5% 8.5% COMPONENTS OF NET PERIODIC PENSION COST Service Cost.............................................. $ 92 $ 0 $ 89 $ 0 Interest Cost............................................. 458 581 444 606 Expected Return on Plan Assets............................ (447) (529) (494) (577) Amortization of Net Transition (Asset) Obligation......... (53) 0 ~~State:~~(53) ~~Current~~0 ~~Provision~~Amortization of Prior service Cost........................ ~~190~~3 2021 205 38 Recognized Actuarial Loss................................. 85 42 60 42 ------- ------- ------- ------- Net Periodic Pension Cost................................. $~~190~~ 138 $20 115 $20 51 $ 109 ======= ======= ======= =======

F-22 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 15. WARRANTS In November 1999, the Company issued 12,103,200 warrants to Guarantors in consideration for providing stand-by guarantees of the Company's obligations under the Loan and Security Agreement. Each warrant represents the right to purchase one share of Common Stock for $0.27 through May 2009. The number of warrants issued to each Guarantor was based upon a formula which took into account the dollar amount of the Guarantee and the number of days that the Guarantee was in place. These warrants have been accounted for as an increase to additional paid in capital and were amortized as interest expense over the life of the guarantee. (Refer to Note 11 for a discussion of the Guarantees.) In December 1999, in connection with an amendment to the Loan and Security Agreement, the Company issued to CBCC, its secured lender, a warrant to purchase 550,000 shares of the Company's Common Stock at a price of $0.27 per share. This has been accounted for as additional financing fees totaling $110 and additional paid-in-capital. In March 2001, in connection with an amendment to the Loan and Security Agreement, the Company issued a warrant to purchase 250,000 shares of the Company's Common Stock at a price of $0.185 per share. This warrant has been accounted for as additional financing fees and additional paid in capital. The unamortized portion of such fees will be amortized over the remaining life of loan. The Company issued warrants to purchase 250,000 shares of the Company's Common Stock on each of May 1, 2001, June 1, 2001, July 1, 2001, August 1, 2001, September 1, 2001, October 1, 2001, November 1, 2001 and December 1, 2001 at prices ranging from $0.06 to $0.18 per share. (Refer to Note 11). These warrants have been accounted for as additional interest expense totaling $140 and as additional paid in capital. In connection with the placement of the Series E Preferred Stock, the Company issued to Utendahl Capital Partners for its services as placement agent in connection with the sale of certain of the Series E Preferred Stock, a warrant to purchase 119,987 shares of the Company's Common Stock at a price of $0.31 per share. Such warrants were recorded as additions to paid-in capital. 16. INCOME TAXES The provision for income taxes was as follows:

FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED DECEMBER 25, 1999 DECEMBER 30, ~~1999~~ 2000 DECEMBER 29, 2001 ----------------- ----------------- ~~Future Deductible Items: Accounts Receivable Allowance.............. $ 434 $ 493 Inventory Allowance........................ 597 2,557 Non~~-Deductible Accruals.................... 1,658 904 Pension and Retirement Accruals............ 446 591 Net Operating Loss Carry Forward........... 10,688 19,644 Other...................................... 3,412 1,265 -------- -------- ~~17,235~~Federal: ~~25,454~~Current ~~Future Taxable Item Prepaid Expenses~~Provision..........~~.................~~ ~~(301)~~$ ~~(815)~~0 ~~Property,~~$ ~~Plant~~0 &$ ~~Equipment................~~0 ~~393 525~~ --- ----- ---~~-----~~ 92State: ~~(290)~~Current ~~Valuation Allowance~~Provision..........~~................~~ ~~(17,327)~~20 ~~(25,164)~~20 20 --- ----- ---~~-----~~ $20 --$20 $20 -- === ===== ===~~=====~~

F-23 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 16. INCOME TAXES (CONTINUED) The following represented the significant items comprising net deferred taxes as of December 30, 2000 and as of December 29, 2001:

FISCAL YEAR ENDED FISCAL YEAR ENDED ~~FISCAL YEAR ENDED~~ DECEMBER 2630, DECEMBER 2529, ~~DECEMBER 30, 1998 1999~~ 2000 ~~-----------------~~2001 ----------------- ----------------- ~~Statutory~~Accounts ~~Federal~~Receivable ~~Income~~Allowance................ ~~Tax~~$ ~~Rate~~493 $ 630 Inventory Allowance.......................... ~~(34)%~~2,557 ~~(34)%~~670 ~~(34)%~~Non-Deductible ~~State~~Accruals...................... ~~Income~~904 ~~Taxes,~~161 ~~net~~Pension ofand ~~Federal~~Retirement ~~Benefit~~Accruals.............. 3591 --(1,016) --Net ~~Losses~~Operating ~~Not~~Loss ~~Utilized~~Carry Forward............. 3419,644 3424,764 34Other........................................ ~~Losses~~1,265 ~~Utilized~~1,117 Prepaid Expenses............................. --(815) --764 --Property, ~~Alternative~~Plant ~~Minimum~~& ~~Tax~~Equipment.................. --525 525 -- -- ---- --- ----- ~~Effective~~Total ~~Income~~Deferred ~~Tax~~Taxes......................... ~~Rate~~25,164 27,615 Valuation Allowance.......................... 3(25,164) %(27,615) 0-------- %-------- $ 0 %$ 0 === ===== ========

The difference between income tax expense and the tax computed by applying the statutory income tax rate to income before taxes was as follows:

FISCAL ~~YEARS~~YEAR ~~ENDING:~~ENDED ~~AMOUNT~~FISCAL YEAR ENDED FISCAL YEAR ENDED DECEMBER 25, DECEMBER 30, DECEMBER 29, 1999 2000 2001 ----------------- ----------------- ----------------- ~~December~~Statutory ~~2001~~Federal Income Tax Rate........................~~.......................~~ $(34)% ~~4,584~~(34)% ~~December~~(34)% ~~2002...............................................~~State 3Income Taxes,~~030~~ ~~December~~net ~~2003~~of Federal Benefit.............~~..................................~~ ~~2,365~~-- ~~December~~-- ~~2004...............................................~~-- ~~1,791~~Losses ~~December~~Not ~~2005~~Utilized...........~~....................................~~ ~~1,460~~34 ~~Thereafter..................................................~~34 ~~3,336~~34 --- --- --- ~~Total~~Effective ~~minimum~~Income ~~rental~~Tax ~~payments~~Rate.....~~........................~~ ~~$16,566~~0 % 0 % 0 % === === ===

The valuation allowance for the period ended December 25, 1999 increased $2,526 to $17,327. The valuation allowance for the period ended December 30, 2000 increased $7,837 to $25,164. The valuation allowance for the period ended December 29, 2001 increased $2,451 to $27,615. Valuation allowances have been established since management deems it is more likely than not that certain tax benefits will not be realized due to continued losses and limitation of carryforward utilization due to the change in ownership discussed below. Deferred income taxes result primarily from net operating losses, certain inventory adjustments not currently deductible for income tax purposes, the use of accelerated depreciation methods for income tax purposes, accruals and reserves not currently deductible, and differences in reporting pension expense for financial statement and income tax purposes. Net operating loss carryforwards amounting to approximately $62,000 at December 29, 2001 expire during the years 2010 to 2020; annual usage is subject to the limitations discussed below. Approximately F-24 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 16. INCOME TAXES (CONTINUED) $14,000 of the above net operating loss carryforward was generated during the fiscal year ended December 29, 2001. The Company has undergone a change of ownership within the meaning of Internal Revenue Code Section 382. As a result of this change in ownership, the future utilization of the Company's net operating loss (NOL) carryforward will be limited. Under these rules, the amount of the Company's NOL carryforward that can be used in each subsequent year is limited to an annual amount. This annual limitation is determined by multiplying the value of the Company on the date of the ownership change by the Federal long-term interest rate of approximately 5.5%. 17. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS On November 25, 1996, the Company commenced suit against Herman Gruenwald, former President, Director and Principal shareholder of Siebruck Hosiery, Ltd. ("Siebruck") for damages in the amount of $1,450 in the Superior Court, Montreal. The claim relates to unreported sales in excess of $1,500 arising under a license agreement entered into by and between the Company and Siebruck, which expired on December 31, 1995. Siebruck was placed under the provision of the Canadian Bankruptcy and Insolvency Act. Mr. Gruenwald's statement of defense included a cross-demand against the Company wherein he is claiming damages to his reputation in the amount of Cdn. $3,000. The matter is presently pending before the Superior Court and a reasonable evaluation of the claim against the Company cannot be made at this time. However, the Company, or the timing of its resolution, does not presently anticipate that the ultimate resolution of such claim will be material to its financial condition, results of operations, liquidity, or business of the Company. The Company is a party to a number of other legal proceedings arising in the ordinary course of business. Management believes that the ultimate resolution of these proceedings will not, in the aggregate, have a material adverse impact on the financial condition, results of operations, liquidity or business of the Company. TAX AUDITS The Company is not presently the subject of any existing or pending state or federal audits. F-25 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 17. COMMITMENTS AND CONTINGENCIES (CONTINUED) OPERATING LEASES The minimum annual rental commitments under non-cancelable operating leases at December 29, 2001 for office space, manufacturing space, equipment and retail stores were approximately as follows:

FISCAL ~~YEAR~~YEARS ~~FISCAL~~ENDING: ~~YEAR~~AMOUNT ~~FISCAL YEAR ENDED ENDED ENDED DECEMBER 26, DECEMBER 25, DECEMBER 30, 1998 1999 2000~~ ------------ --------~~----~~ --------~~----~~ ~~Minimum~~December ~~rent~~2002............................................... $5 3,~~802~~597 $5December 2003............................................... 2,~~207~~415 $4December 2004............................................... 1,~~455~~868 ~~Contingent~~December ~~rent~~2005............................................... 1,~~054~~506 ~~580~~December ~~544~~2006............................................... ~~------~~1,301 ~~------~~Thereafter.................................................. 1,956 ------- ~~Rent~~Total ~~expense~~minimum rental payments............................... $612,~~856~~643 ~~$5,787 $4,999~~ ====== =~~===== ======~~

The majority of operating leases are for three-year to five-year terms, generally with options to renew for similar terms, except for the corporate office, one full price retail store, and the Pennaco mill and warehouse space which are for terms of 9 to 15 years. Certain leases require the payment of contingent rent based upon sales and other factors. Rent expense was approximately as follows:

FISCAL ~~YEARS~~YEAR ~~ENDING:~~FISCAL ~~ROYALTY~~YEAR ~~EXPENSE~~FISCAL ~~ROYALTY~~YEAR ~~INCOME~~ENDED ENDED ENDED DECEMBER 25, DECEMBER 30, DECEMBER 29, 1999 2000 2001 ------------~~--------~~ ------------~~---~~ -------------- ~~December~~Minimum ~~2001~~rent............................~~........~~ $15,~~031~~207 $4,455 ~~538 December 2002.................................... 1~~$4,~~125~~270 ~~620~~Contingent ~~December 2003~~rent.........................~~...........~~ ~~1,278~~580 ~~820~~544 ~~December~~482 ~~2004....................................~~------ ~~228 120~~ ------ ------ ~~Total~~Rent expense............................~~................~~ $35,~~662~~787 $24,~~098~~999 $4,752 ====== ====== ======

EMPLOYMENT AGREEMENTS The Company has entered into employment agreements that provide for base and incentive compensation, and that are terminable for "cause," as defined, or resignation following a "change of control", as defined. The Company's total minimum commitment pursuant to the term of these agreements for fiscal 2002 and future years totals approximately $3,285 per year, generally through fiscal year 2005, unless employment is terminated in which case total pay will generally continue for 6 to 24 months following such termination. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of accounts receivable from department stores, sporting goods stores and other specialty retailers as well as commercial letters of credit. Although the concentration of risk is limited due to the large number of customers included within the Company's customer base, several of the Company's retail customers have experienced financial difficulties in recent years. These financial difficulties have F-26 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 17. COMMITMENTS AND CONTINGENCIES (CONTINUED) increased the risk of extending credit to such customers. The Company subjects all customers to credit evaluation prior to acceptance and maintains ongoing reviews based on established policies. MINIMUM ROYALTY COMMITMENTS The Company generally enters into licensing arrangements, as a licensee, that provide for minimum annual royalty payments and additional royalty payments based on a percentage of net revenues. The Company also licenses its Danskin-Registered Trademark-, Round-the-Clock-Registered Trademark- and Freestyle-Registered Trademark- names to selected companies. As of December 29, 2001, the Company was committed to certain licensing arrangements as follows:

~~DANSKIN~~FISCAL ~~PENNACO~~YEARS ~~TOTAL~~ENDING: ROYALTY EXPENSE ROYALTY INCOME -------------------- --------------- -------------- ~~2000~~December ~~Net Revenues~~2002....................................~~............~~ $561,~~694~~082 $~~27,960~~ $768 ~~84,654~~December ~~Operating Loss~~2003....................................~~..........~~ ~~(2,619) (~~1,~~977)~~221 ~~(4,596) Identifiable assets at year-end............................. 32,427 16,425 48,852 Depreciation and amortization...............................~~ 1,~~281~~123 ~~534~~December ~~1,815 Capital Expenditures~~2004....................................~~....~~ ~~327~~442 ~~304~~545 ~~631~~December ~~1999 Net Revenues~~2005....................................~~............~~ ~~$60,643~~0 ~~$27,327~~367 $------ ~~87,970 Operating Loss.............................................. (10,887) (3,539) (14,426) Identifiable assets at year~~-~~end.............................~~----- ~~35,151 12,737 47,888 Depreciation and amortization~~Total............................... ~~1,320 484 1,804 Capital Expenditures~~.............~~...........................~~ ~~1,779 1,057~~ $2,~~836~~745 ~~1998 Net Revenues................................................~~ $~~73,468 $35,273 $108,741 Operating Loss.............................................. (~~2,~~671)~~803 ~~(1,547)~~====== (4,218) Identifiable assets at year-end............................. 41,549 16,157 57,706 Depreciation and amortization............................... 1,108 485 1,593 Capital Expenditures........................................ 3,450 1,223 4,673======

NEW LICENSES During the first quarter of fiscal year 2001, the Company signed a multi-year license agreement with Jacques Moret, Inc., for the manufacture of the "Freestyle-Registered Trademark- line of women's and girl's Activewear for distribution to all 991 Target Stores retail locations throughout the United States commencing June 2001. The Company followed with licenses for women's socks under the Freestyle-Registered Trademark- Brand with Renfro Corporation for distribution to Target Stores in the third quarter 2001. In addition, a license for girl's intimate apparel under the Freestyle-Registered Trademark- Brand at Target, signed with Delta Galil, will put product in store in the third quarter of 2002. Effective May 5, 2000, the Company reached an agreement with Ellen Tracy, Inc. pursuant to which Pennaco was granted a license for the manufacture and sale of legwear including sheer hosiery, sheer knee highs, tights, socks and trouser socks under the Ellen Tracy-Registered Trademark- label. The agreement provides that Pennaco shall have the exclusive right and license to use the Ellen Tracy-Registered Trademark- trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of legwear in the United States and Canada. Ridgeview, Inc. previously held the license. The Ellen Tracy-Registered Trademark-minimum royalties for 2002 and 2003 are $350 and $450, respectively. In a separate transaction, Pennaco obtained an exclusive license for the manufacture and sale of sheer hosiery and knee-highs under the Evan-Picone-Registered Trademark- label. The agreement provides that Pennaco shall have the exclusive right and license to use the Evan-Picone-Registered Trademark- trademark in connection with the manufacture, assemblage, sale, marketing and distribution, advertising and promotion of sheer hosiery in the United States and Canada. Ridgeview, Inc. previously held this license as well. The Evan-Picone-Registered Trademark- minimum royalties for 2002 and 2003 are $300 and $350, respectively. F-27 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 18. STOCK ISSUANCES In furtherance of the terms of the Securities Purchase Agreement, on April 28, 1998, the Company filed a Registration Statement on Form S-1 in connection with the registration under the Securities Act of 1933, as amended, of (i) an aggregate of 10,838,124 rights to purchase shares of Common Stock, and (ii) 2,131,889 shares of Common Stock issuable upon exercise of such rights. The Board of Directors established May 8, 1998 as the date of record for holders of Common Stock to participate in such offering. Holders of Common Stock held of record as of the close of business on the record date had the right to purchase, pro rata, 2,131,889 shares of Common Stock at a per share price of $0.30 (the "Rights Offering"). Approximately 8.4 million rights were subscribed for and approximately 1.6 million shares were issued in respect of such rights. In accordance with the terms of the Securities Purchase Agreement executed in 1997 Danskin Investors purchased the rights not subscribed for on primary subscription, totaling 488,289 shares of Common Stock, at $0.30 per share. The Company realized gross proceeds of approximately $640. In addition, on May 27, 1998, the Company, Danskin Investors, and a bond fund purchased 7,864,336 shares of Common Stock, in exchange for approximately $2,400 aggregate principal amount of Remaining Subordinated Notes (the "Stock Sale"). As a result of the Rights Offering and the Stock Sale, the Company issued 10,000,000 shares of Common Stock at $0.30 per share, as contemplated by the Securities Purchase Agreement. In addition, the outstanding principal amount of Remaining Subordinated Notes was satisfied in full. On December 8, 1999, Carol Hochman, the Chief Executive Officer, purchased 5,040,000 shares of Common Stock of the Company for $0.27 per share. Ms. Hochman issued a promissory note, in favor of the Company, in the original principal amount of $1,361 as payment for the shares. Such note receivable was classified as stockholders' equity. In fiscal 2000, and to accommodate a request by Ms. Hochman related to certain personal financial planning, the Company rescinded the share purchase by Ms. Hochman, cancelled the promissory note, and issued an identical number of options to purchase Common Stock of the Company at $0.27 per share. On December 8, 1999, and in accordance with the terms of her employment agreement, Mrs. Hochman received a grant of 1,000,000 shares at $0.23 per share. 19. SEGMENT INFORMATION The Company is organized based on the products that it offers. The Company currently operates under two operating segments: Danskin, which designs, manufactures, markets and sells activewear, dance wear, bodywear, tights and exercise apparel through wholesale channels to retailers and through the Company's outlet and retail stores; and Pennaco, which designs, manufactures and markets hosiery under the brand names Round-The-Clock-Registered Trademark- and Givenchy-Registered Trademark-, Evan Picone-Registered Trademark-, Ellen Tracy-Registered Trademark-, and under private labels for major retailers. The Company evaluates performance based on profit or loss from operations before extraordinary items, interest expense and income taxes. The Company allocates corporate administrative expenses to each segment. The Danskin Division was allocated $3,102 in fiscal 2001, $3,434 in fiscal 2000, and $4,287 in fiscal 1999. Pennaco was allocated $1,535 in fiscal 2001, $1,778 in fiscal 2000, and $2,201 in fiscal 1999. Capital expenditures for corporate administration are included with the Danskin Division. In addition, the Company does not allocate interest expense to the divisions. F-28 DANSKIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 19. SEGMENT INFORMATION (CONTINUED) Financial information by segment for the fiscal years ended December 29, 2001, December 30, 2000, and December 25, 1999 is summarized below:

~~1998~~DANSKIN ~~1999~~PENNACO ~~2000~~TOTAL -------- -------- -------- ~~Total~~2001 ~~segment~~Net ~~depreciation~~Revenues................................................ $ 54,989 $26,769 $ 81,758 Operating Loss.............................................. (2,868) (3,059) (5,927) Identifiable assets at year-end............................. 26,741 14,259 41,000 Depreciation and amortization............................... $ 1,~~593~~134 $480 1,~~804~~614 Capital Expenditures........................................ 109 172 281 2000 Net Revenues................................................ $ 157,~~815~~282 ~~Amortization~~$28,011 of$ ~~deferred~~85,293 ~~financing~~Operating ~~costs~~Loss.............................................. ~~134~~(2,619) ~~198~~(1,977) ~~185~~(4,596) ~~-------~~Identifiable ~~-------~~assets at year-~~-------~~end............................. ~~Consolidated~~32,427 ~~depreciation~~16,425 48,852 Depreciation and amortization............................... $1,281 534 1,~~727~~815 Capital Expenditures........................................ 327 304 631 1999 Net Revenues................................................ $ 261,~~002~~119 $27,373 2$ 88,~~000~~492 ~~=======~~Operating ~~=======~~Loss.............................................. ~~========~~(10,887) (3,539) (14,426) Identifiable assets at year-end............................. 35,151 12,737 47,888 Depreciation and amortization............................... 1,320 484 1,804 Capital Expenditures........................................ 1,779 1,057 2,836

Reconciliation of depreciation and amortization to consolidated totals is as follows:

~~FISCAL~~1999 ~~QUARTERS~~2000 ~~ENDED~~2001 --------~~-----------------------------------------~~ ~~MARCH JUNE SEPTEMBER DECEMBER~~ ---------- ---------- ~~----------~~Total ~~----------~~segment ~~(UNAUDITED)~~depreciation ~~Fiscal~~and ~~year ended December 30, 2000: Net revenues~~amortization.................~~...............~~ $ 211,~~031~~804 $ 20,471 $ 21,392 $ 21,760 ========== ========== ========== ========== Gross profit................................ $ 6,169 $ 6,052 $ 6,651 $ 5,886 ========== ========== ========== ========== Net loss.................................... $ (1,~~935)~~815 $ (1,~~268)~~614 $Amortization ~~(2,164)~~of $deferred ~~(2,538)~~financing ~~========== ========== ========== ========== Net loss applicable to Common Stock~~costs......... ~~$ (2,277) $ (1,610) $ (2,506) $ (2,881) ========== ========== ========== ========== Basic and diluted net loss per share~~........ ~~$ (0~~.~~03) $ (0~~.~~02) $ (0~~.~~03)~~ $198 ~~(0.04)~~185 ~~==========~~186 ~~==========~~------ ~~==========~~------ ~~==========~~------ ~~Weighted~~Consolidated ~~average~~depreciation ~~common shares~~ and ~~share equivalents outstanding~~amortization................... ~~73,986,000 73,987,000 73,987,000 72,768,000 ========== ========== ========== ========== Fiscal year ended December 25, 1999: Net revenues................................~~ $ 24,141 $ 23,526 $ 21,173 $ 19,130 ========== ========== ========== ========== Gross profit................................ $ 8,120 $ 6,517 $ 6,226 $ 1,818 ========== ========== ========== ========== Net loss.................................... $ (2,~~870)~~002 $ (2,~~675)~~000 $ (31,~~348)~~800 ~~$ (11,015)~~ ======~~====~~ ======~~====~~ ========== ========== Net loss applicable to Common Stock......... $ (3,140) $ (2,946) $ (3,619) $ (11,281) ========== ========== ========== ========== Basic and diluted net loss per share........ $ (0.15) $ (0.14) $ (0.17) $ (0.36) ========== ========== ========== ========== Weighted average common shares and share equivalents outstanding................... 21,012,000 21,022,000 21,022,000 30,916,000 ========== ========== ========== ==========

F-29 DANSKIN, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL INFORMATION SELECTED QUARTERLY FINANCIAL INFORMATION (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

~~COLUMN~~FISCAL AQUARTERS ~~COLUMN~~ENDED ~~B COLUMN C COLUMN D COLUMN E~~ ------------ ---------- -------------- -------------- ~~-------------~~MARCH ~~BALANCE~~JUNE ATSEPTEMBER ~~CHARGED~~DECEMBER ~~TO ADDITIONS BEGINNING OF COSTS AND CHARGED TO BALANCE AT DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS (A) END OF PERIOD~~ ----------- ------------ ---------- ----------~~----~~ ~~--------------~~(UNAUDITED) ~~-------------~~ Fiscal year ~~Ended~~ended December 3029, ~~2000~~2001: ~~Allowance~~Net ~~for~~revenues................................ ~~doubtful~~$ ~~accounts~~22,093 ~~receivable~~$ 19,718 $ 21,718 $ 18,229 ========== ========== ========== ========== Gross profit................................ $ 6,288 $ 5,876 $ 7,454 $ 5,251 ========== ========== ========== ========== Net loss.................................... ($ 2,080) ($ 2,226) ($ 1,~~087~~138) ($ --4,574) ========== ========== ========== ========== Net loss applicable to Common Stock......... ($ --2,422) ($ 482,615) ($ 1,~~039~~670) ($ 5,106) ========== ========== ========== ========== Basic and diluted net loss per share........ ($ 0.04) ($ 0.04) ($ 0.02) ($ 0.07) ========== ========== ========== ========== Weighted average common shares and share equivalents outstanding................... 68,947,000 68,947,000 68,947,000 68,947,000 ========== ========== ========== ========== Fiscal year ~~Ended~~ended December 2530, ~~1999~~2000: ~~Allowance~~Net ~~for~~revenues................................ ~~doubtful~~$ ~~accounts~~21,204 ~~receivable~~$ 20,652 $ 21,554 $ 21,883 ========== ========== ========== ========== Gross profit................................ $1 6,~~021~~170 $~~250~~ 6,051 $ --6,625 $~~184~~ 5,819 ========== ========== ========== ========== Net loss.................................... ($ 1,~~087~~935) ($ 1,268) ($ 2,164) ($ 2,538) ====== ==== ========== ========== ========== ~~Fiscal~~Net ~~year~~loss ~~Ended~~applicable ~~December~~to 26Common Stock......... ($ 2,277) ~~1998~~($ ~~Allowance~~1,610) ~~for~~($ ~~doubtful~~2,506) ~~accounts~~($ ~~receivable~~2,881) ========== ========== ========== ========== Basic and diluted net loss per share........ ($ ~~848~~0.03) ($~~327~~ 0.02) ($ --0.03) ($~~154~~ ~~$1,021~~0.04) ========== ========== ========== ========== Weighted average common shares and share equivalents outstanding................... 73,986,000 73,987,000 73,987,000 72,768,000 ========== ========== ========== ==========

S-1 DANSKIN, INC. AND SUBSIDIARIES SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS (DOLLAR AMOUNTS IN THOUSANDS) SCHEDULE II

------------------------ (A) Uncollectible accounts receivable written off, net of recoveries. S-2

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