UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 1996. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-6666 SALANT CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3402444 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1114 Avenue of the Americas, New York, New York 10036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 221-7500 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 whether the registrant has filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No As of May 9, 1996, there were outstanding 14,746,234 shares of the Common Stock of the registrant. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations Condensed Consolidated Balance Sheets Condensed Consolidated Statements of Cash Flows Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURE Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share data) Three Months Ended March 30, April 1, 1996 1995 ----------------------------------- Net sales $ 99,193 $ 103,801 Cost of goods sold 76,612 81,334 -------------------------- Gross profit 22,581 22,467 Selling, general and administrative expenses (21,961) (20,726) Royalty income 1,128 1,753 Goodwill amortization (649) (641) Division restructuring costs (Note 3) (161) -- Other income 18 60 --------- --------- Income from operations before interest and income taxes 956 2,913 Interest expense, net 3,847 4,571 ---------------------------------------------------- Loss from operations before income taxes (2,891) (1,658) Income taxes 22 41 ----------------------------------- Net loss $ (2,913) $ (1,699) ========= ================ Net loss per share $ (0.19) $ (0.11) =================================== ========= Weighted average common stock and common stock equivalents outstanding 15,041 15,008 =================================== See Notes to Condensed Consolidated Financial Statements. Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) March 30, December 30, April 1, 1996 1995 1995 (Unaudited) (*) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,385 $ 1,400 $ 1,907 Accounts receivable, net 30,166 35,290 31,032 Inventories (Note 2) 121,451 119,120 149,240 Prepaid expenses and other current assets 5,008 5,016 5,472 ----------------------------------------------------------------------------------------------------- Total current assets 158,010 160,826 187,651 Property, plant and equipment, net 24,204 24,526 28,351 Other assets 70,708 70,368 70,806 --------------------------------------------------------------------------------------------------------------- Total assets $ 252,922 $ 255,720 $ 286,808 ===================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable $ 16,995 $ 14,422 $ 44,664 Accounts payable 28,357 26,755 34,459 Accrued liabilities 17,310 20,397 14,003 Net liabilities of discontinued operations 145 311 339 Reserve for business restructuring (Note 3) 989 1,569 -- ------------------------------------------------------------------------------- Total current liabilities 63,796 63,454 93,465 Long term debt 110,015 110,040 109,908 Deferred liabilities 11,196 11,373 13,475 Shareholders' equity Common stock 15,275 15,275 15,242 Additional paid-in capital 107,071 107,071 107,017 Deficit (50,737) (47,824) (50,025) Excess of additional pension liability over unrecognized prior service cost (2,185) (2,185) (773) Accumulated foreign currency translation adjustment 105 130 113 Less - treasury stock, at cost (1,614) (1,614) (1,614) ---------- -------------------- ---------- Total shareholders' equity 67,915 70,853 69,960 ------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 252,922 $ 255,720 $ 286,808 ====================================================================================================== (*) Derived from the audited financial statements. See Notes to Condensed Consolidated Financial Statements. Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Three Months Ended March 30, April 1, 1996 1995 ------------------------------ Cash Flows from Operating Activities: Loss from operations $ (2,913) $ (1,699) Adjustments to reconcile loss from operations to net cash used in operating activities: Depreciation 1,132 1,290 Amortization of intangibles 649 641 Loss on disposal of fixed assets 82 -- Changes in operating assets and liabilities: Accounts receivable 5,124 5,551 Inventories (2,331) (24,641) Prepaid expenses and other current assets 8 (208) Other assets (989) (103) Accounts payable 1,602 5,866 Accrued liabilities and reserve for business restructuring (3,667) (4,845) Deferred liabilities (202) (4) ---------------------------------------------------------------------- --------------------- Net cash used in operating activities (1,505) (18,152) -------------------------------------------------------- --------------------- Cash Flows from Investing Activities: Capital expenditures (932) (2,206) Proceeds from sale of assets 40 26 -------------------------------- Net cash used in investing activities (892) (2,180) ---------- --------------------- Cash Flows from Financing Activities: Net short-term borrowings 2,573 20,758 Exercise of stock options -- (7) Other, net (25) -- ---------- --------------------- Net cash provided by financing activities 2,548 20,751 ---------- ---------- Net cash provided by continuing operations 151 419 Cash used in discontinued operations (166) (477) ---------- ---------- Net decrease in cash and cash equivalents (15) (58) Cash and cash equivalents - beginning of year 1,400 1,965 -------------------------------- Cash and cash equivalents - end of quarter $ 1,385 $ 1,907 ================================ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 6,747 $ 7,516 ================================ Income taxes $ 13 $ 106 ================================ See Notes to Condensed Consolidated Financial Statements. SALANT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in Thousands of Dollars, Except Share Data) (Unaudited) Note 1. Basis of Presentation and Consolidation The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Salant Corporation ("Salant") and subsidiaries (collectively, the "Company"). The Company's principal business is the designing, manufacturing, importing and marketing of apparel. The Company sells its products to retailers, including department and specialty stores, national chains, major discounters and mass volume retailers, throughout the United States. The results of operations for the three months ended March 30, 1996 and April 1, 1995 are not necessarily indicative of a full year's operations. In the opinion of management, the accompanying financial statements include all adjustments of a normal recurring nature which are necessary to present fairly such financial statements. Significant intercompany balances and transactions are eliminated in consolidation. Certain reclassifications were made to the 1995 unaudited Condensed Consolidated Statement of Operations to conform with the 1996 presentation. Loss per share is based on the weighted average number of common shares (including, as of March 30, 1996 and April 1, 1995, 349,952 and 761,840 shares, respectively, anticipated to be issued pursuant to the Company's plan of reorganization). Loss per share does not include common stock equivalents, inasmuch as their effect would have been anti-dilutive. Note 2. Inventories March 30, December 30, April 1, 1996 1995 1995 Finished goods $ 82,803 $ 72,850 $ 86,955 Work-in-Process 15,761 15,829 33,557 Raw materials and supplies 22,887 30,441 28,728 ----------- -------------------------------------- $ 121,451 $ 119,120 $ 149,240 =================================== ========= Note 3. Division Restructuring Costs In the first quarter of 1996, the Company recorded a $161 restructuring provision, which related to the closure of certain unprofitable retail factory outlet stores. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the consolidated results of operations and financial condition should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related Notes to provide additional information concerning the financial activities and condition of Salant Corporation ("Salant") and its subsidiary companies (collectively, the "Company"). Results of Operations The following discussion compares the operating results of the Company for the three months ended March 30, 1996 with the operating results for the three months ended April 1,1995. The following table sets forth certain financial data for the three months ended March 30, 1996 and April 1, 1995: (dollars in millions) Three months ended March 30, April 1, 1996 1995 Net sales $ 99.2 $103.8 Gross profit $ 22.6 $ 22.5 Gross margin 22.8% 21.6% Income from continuing operations before interest and income taxes $ 1.0 $ 2.9 First Quarter 1996 Compared to First Quarter 1995 For the first quarter of 1996, net sales amounted to $99.2 million, a 4.4% decrease from net sales of $103.8 million in the first quarter of 1995. (dollars in millions) Net sales and percentage of total Percentage for the three months ended Increase/ March 30, 1996 April 1, 1995 (Decrease) -------------------------------------------------------------------- Men's Apparel $87.2 87.8% $93.7 90.3% (7.0%) Children's Sleepwear and Underwear 4.2 4.3% 3.4 3.2% 26.7% Other Businesses (a) 7.8 7.9% 6.7 6.5% 16.2% ------------------- -------------------- Total $ 99.2 100% $103.8 100% (4.4%) ==================== =================== (a) Includes the Made in the Shade division (a women's junior sportswear business) and the Stores division. Sales of Men's Apparel decreased $6.5 million, or 7.0%. This decrease was primarily attributable to (a) a decrease in sales of men's slacks of $4.1 million, or 25.9%, resulting from the planned reduction in sales of the Thomson pant business during 1996, as disclosed in the 1995 Annual Report on Form 10-K, (b) a decrease in the Company's dress shirt sales of $3.1 million, or 10.0%, primarily as a result of the discontinuation of several dress shirt lines, including Liberty of London, Nino Cerruti and Ron Chereskin, as also disclosed in the 1995 Annual Report on Form 10-K, and (c) a decrease in sales of men's sportswear of $1.9 million, or 7.1%. These decreases were offset by an increase in the sales of men's jeans of $2.7 million, or 32.1%, resulting from a complete quarter of sales of Canyon River Blues, an exclusive brand program for Sears, Roebuck & Co., which was introduced in the latter part of the first quarter of 1995. Sales of Children's Sleepwear and Underwear increased $0.8 million, or 26.7%. This increase related to higher sales of licensed character products. Sales of Other Businesses increased $1.1 million, or 16.2%. This increase related primarily to an increase in sales by the Made in the Shade division. Gross profit as a percentage of net sales increased to 22.8% ($22.6 million) in the first quarter of 1996 from 21.6% of net sales ($22.5 million) in the comparable 1995 quarter. (dollars in millions) Gross profit and gross margin for the three months ended March 30, 1996 April 1, 1995 - ---------------------------------------------------------------------- ------------------ Men's Apparel $19.1 21.9% $19.2 20.5% Children's Sleepwear and Underwear 0.9 21.1% 0.7 19.1% Other Businesses (a) 2.6 33.0% 2.6 38.9% ------ -------- Total $ 22.6 22.8% $ 22.5 21.6% =============== ============= (a) Includes the Made in the Shade division (a women's junior sportswear business) and the Stores division. The increase in gross margin occurred principally in (a) men's apparel, as a result of higher margins on neckwear, dress shirts and Canyon River Blues jeans, and (b) children's sleepwear and underwear, as a result of an increase in licensed character sales, which traditionally earn a higher gross margin. The increase in gross margin over the first quarter of 1995 is due, in part, to the discontinuation of certain lines of merchandise which yielded unsatisfactory margins. Selling, general and administrative expenses as a percentage of net sales increased to 22.1% ($22.0 million), as compared to the first quarter of 1995, when such expenses amounted to 20.0% of net sales ($20.7 million). The increase in such expenses as a percentage of net sales was primarily attributable to certain expenses associated with the installation of store fixtures for Perry Ellis Sportswear and Canyon River Blues shops. These expenses commenced in the second half of 1995. The non-cash portion of these store fixture expense increases accounted for approximately 22% of the total increase in S,G&A expense. Royalty income for the first quarter of 1996 was $1.1 million, compared to $1.8 million in the first quarter of 1995. This decrease resulted primarily from (i) lower sales by licensees in the fourth quarter of the prior year, which resulted in a decrease in royalties received by the Company in the first quarter of the current year, and (ii) the expiration of certain license agreements prior to the first quarter of 1996. The Company recorded a provision for restructuring of $161 thousand related to the closure of certain unprofitable retail factory outlet stores. It is anticipated that the Company will have additional charges in 1996 of (i) $250 thousand relating to these store closings and (ii) $1.5 to $2.0 million relating to the planned closing in 1996 of a manufacturing facility in Thomson, Georgia, as discussed in the 1995 Annual Report on Form 10-K. For the first quarter of 1996, income from continuing operations before interest and income taxes was $1.0 million, or 1.0% of net sales, as compared to $2.9 million, or 2.8% of net sales, in the 1995 first quarter. Income from continuing operations as a percentage of net sales was lower in 1996 primarily as a result of the net sales decrease and the increase in S, G & A expenses, partially offset by the increased gross margin discussed above. (dollars in millions) Income from operations before interest and income taxes, and percentage of net sales for the three months ended March 30, 1996 April 1, 1995 - ---------------------------------------------------------------------- ------------------ Men's Apparel $ 4.4 5.0% $ 4.8 5.2% Children's Sleepwear and Underwear (0.4) (10.6)% (0.6) (18.7)% Other Businesses (a) (1.6) (20.0)% (1.2) (18.9)% -------- ------------- 2.4 2.4% 3.0 2.8% Corporate expenses (2.2) (1.5) Licensing division income, net 0.8 1.4 ------- ------- Income from operations before interest and income taxes $ 1.0 1.0% $ 2.9 2.8% ====== ============== (a) Includes the Made in the Shade division (a women's junior sportswear business) and the Stores division. Net interest expense for the first quarter of 1996 amounted to $3.8 million as compared to $4.6 million in the prior year's first quarter. Lower borrowings accounted for most of the decreased interest expense. As a result of the above, the net loss for the 1996 first quarter was $2.9 million, or $0.19 per share, compared with a net loss of $1.7 million, or $0.11 per share, for the first quarter of 1995. Earnings before interest, taxes, depreciation, amortization and restructuring charges was $2.9 million in the first quarter of 1996, compared to $4.8 million in the first quarter of 1995, a decrease of $1.9 million, or 40.2%. The Company believes this information is helpful in understanding cash flow from operations that is available for debt service, taxes and capital expenditures. This measure is not contained in Generally Accepted Accounting Principles and is not a substitute for operating income, net income or net cash flows from operating activities. Liquidity and Capital Resources The Company is a party to a revolving credit, factoring and security agreement, as amended, (the "Credit Agreement") with The CIT Group/Commercial Services, Inc. ("CIT") to provide seasonal working capital financing, in the form of direct borrowings and letters of credit, up to an aggregate of $135 million, subject to an asset based borrowing formula (the "Maximum Credit"). On March 27, 1996, the Company and CIT executed the Seventh Amendment to the Credit Agreement (the "Amendment"). The Amendment extends the term of the Credit Agreement to March 31, 1997 and provides the Company with the ability to cease factoring at September 20, 1996. The Amendment also increased the Maximum Credit to $135 million during certain periods of 1996, which was consistent with the maximum credit provided in 1995. Interest on direct borrowings is charged monthly at an annual rate of one percent in excess of the base rate of the Chase Manhattan Corporation (the "Prime Rate", which was 8.25% at March 30, 1996). As collateral for borrowings under the Credit Agreement, Salant has granted to CIT a security interest in substantially all of the assets of the Company. As of March 30, 1996, direct borrowings and letters of credit outstanding under the Credit Agreement were $17.0 million and $29.8 million, respectively, and the Company had unused availability of $24.4 million. As of April 1, 1995, direct borrowings and letters of credit outstanding under the Credit Agreement were $44.7 million and $37.9 million, respectively, and the Company had unused availability of $7.3 million. The average interest rate on borrowings for the three months ended March 30, 1996 and April 1, 1995 was 9.4%. The Credit Agreement and the indenture governing the 10 1/2% Senior Secured Notes due December 31, 1998 contain numerous financial and operating covenants, including restrictions on incurring indebtedness and liens, making investments in or purchasing the stock, or all or a substantial part of the assets of another person, selling property, making capital expenditures, and paying cash dividends. In addition, under the Credit Agreement, the Company is required (i) during the year, to maintain minimum levels of working capital and stockholders' equity and to satisfy a maximum cumulative net loss test and (ii) at year end, to satisfy a ratio of total liabilities to stockholders' equity and a fixed charge coverage ratio. At March 30, 1996, the Company was in compliance with all financial covenants as indicated below: Covenant March 30, 1996 Credit Agreement Covenants Level Actual Level Working Capital $ 85.0 million $ 94.2 million Stockholders' Equity $ 60.0 million $ 67.9 million Maximum Loss $(15.0) million $ (2.4) million The Company is also required to reduce its indebtedness (excluding outstanding letters of credit) to $20 million or less for fifteen consecutive days during each twelve month period commencing February 1, 1994. The Company has complied with this covenant for all periods through January 31, 1997. The Company's cash used in operating activities was $1.5 million. This represented a $16.6 million improvement over the first quarter of 1995 and was primarily a result of inventory management improvements. Cash used for investing activities in the first quarter of 1996 was $0.9 million, primarily related to capital expenditures. Cash provided by financing activities in the first quarter of 1996 was $2.5 million, which represented short-term borrowings under the Credit Agreement. This represents a substantial reduction from the $20.8 million of short-term borrowings in the first quarter of 1995. Capital expenditures in the first three months of 1996 were $0.9 million, as compared to $2.2 million in the first three months of 1995. These expenditures were funded primarily from short term borrowings. Capital expenditures for 1996 are anticipated to be approximately $7.7 million. Salant's principal sources of liquidity, both on a short-term and a long-term basis, are provided by operations and borrowings under the Credit Agreement. Based upon its analysis of its consolidated financial position, its cash flow during the past twelve months, and its cash flow anticipated from future operations, Salant believes that its future cash flow and the funds available under the Credit Agreement will be adequate to meet the financing requirements it anticipates in the next twelve months. There can be no assurance, however, that future developments and general economic trends will not adversely affect the Company's operations and, hence, its anticipated cash flow. Factors that May Affect Future Results and Financial Condition. The Company's future operating results and financial condition are dependent on the Company's ability to successfully design, manufacture, import and market apparel. Inherent in this process are many factors that the Company must successfully manage in order to achieve favorable operating results and financial condition including, without limitation, the following: Competition. The apparel industry in the United States is highly competitive and characterized by a relatively small number of multi-line manufacturers (such as the Company) and a large number of specialty manufacturers. The Company faces substantial competition in its markets from manufacturers in both categories. Many of the Company's competitors have greater financial resources than the Company. Apparel Industry Cycles and other Economic Factors. The apparel industry historically has been subject to substantial cyclical variation, with consumer spending on apparel tending to decline during recessionary periods. A decline in the general economy or uncertainties regarding future economic prospects may affect consumer spending habits, which, in turn, could have a material adverse effect on the Company's results of operations and its financial condition. Retail Environment. Various retailers, including some of the Company's customers, have experienced declines in revenue and profits in recent periods and some have been forced to file for protection under the Bankruptcy Code. To the extent that these financial difficulties continue, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. Seasonality of Business and Fashion Risk. The Company's principal products are organized into seasonal lines for resale at the retail level during the Spring, Fall and Christmas Seasons. Typically, the Company's products are designed as much as one year in advance and manufactured approximately one season in advance of the related retail selling season. Accordingly, the success of the Company's products is often dependent on the ability of the Company to successfully anticipate the needs of the Company's retail customers and the tastes of the ultimate consumer up to a year prior to the relevant selling season. Substantial Level of Indebtedness. The Company had indebtedness of $127.0 million as of March 30, 1996. This level of indebtedness could adversely affect the Company's operations because a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest and would, therefore, not be available for other purposes. Further, this level of indebtedness might inhibit the Company's ability to obtain financing in the future for working capital needs, capital expenditures, acquisitions, investments, general corporate purposes or other purposes. Foreign Operations. The Company's foreign sourcing operations are subject to various risks of doing business abroad, including currency fluctuations (although the predominant currency used is the U.S. dollar), quotas and, in certain parts of the world, political instability. Any substantial disruption of its relationship with its foreign suppliers could adversely affect the Company's operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas which limit the amount of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocation could adversely affect the Company's operations. Dependence on Contract Manufacturing. In 1995, the Company produced 64% of all of its products (in units) through arrangements with independent contract manufacturers. The use of such contractors and the resulting lack of direct control could subject the Company to difficulty in obtaining timely delivery of products of acceptable quality. In addition, as is customary in the industry, the Company does not have any long-term contracts with its raw material suppliers or product manufacturers. While the Company is not dependent on one particular product manufacturer or raw material supplier, the loss of several such product manufacturers and/or raw material suppliers in a given season could have a material adverse effect on the Company's performance. Because of the foregoing factors, as well as other factors affecting the Company's operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors are cautioned not to use historical trends to anticipate results or trends in the future. In addition, the Company's participation in the highly competitive apparel industry often results in significant volatility of the Company's common stock price. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Reports on Form 8-K During the first quarter of 1996, the Company did not file any reports on Form 8-K. Exhibits Number Description First Amendment to the Salant Corporation Retirement Plan, dated as of January 31, 1996 10.36 First Amendment to the Salant Corporation Long Term Savings and Investment Plan, effective as of January 1, 1994 27 Financial Data Schedule SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SALANT CORPORATION Date: May 13, 1996 /s/ Richard P. Randall -------------- ---------------------- Richard P. Randall Senior Vice President and Chief Financial Officer (Principal Financial Officer)