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 June 28, 1997.
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 August 6, 1997, there were outstanding 14,848,353 shares of the Common
Stock of the registrant.
TABLE OF CONTENTS
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 4. Submission of Matters to a Vote of
Security Holders
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 Six Months Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
Net sales $ 81,391 $ 91,889 $ 169,601 $ 185,434
Cost of goods sold 64,824 74,725 133,246 146,629
-------- -------- --------- ---------
Gross profit 16,567 17,164 36,355 38,805
Selling, general and
administrative expenses (20,806) (21,736) (41,360) (42,985)
Royalty income 1,428 1,399 2,535 2,527
Goodwill amortization (470) (608) (940) (1,220)
Reversal of/(provision for)
restructuring costs (Note 5) 410 (11,417) 1,164 (11,578)
Other income 71 48 188 66
-------- -------- --------- ---------
Loss from continuing operations
before interest, income taxes and
extraordinary gain (2,800) (15,150) (2,058) (14,385)
Interest expense, net 3,941 3,831 7,378 7,556
-------- -------- --------- ---------
Loss from continuing operations before
income taxes and extraordinary gain (6,741) (18,981) (9,436) (21,941)
Income taxes/(benefit) 62 (58) 104 (36)
-------- -------- --------- ---------
Loss from continuing operations before
extraordinary gain (6,803) (18,923) (9,540) (21,905)
Discontinued operations (Note 3):
Income/(loss) from operations before
extraordinary gain (7,361) 61 (8,136) 130
Estimated loss on disposal (580) -- (580) --
Extraordinary gain (Note 4) 600 -- 600 --
-------- -------- --------- ---------
Net loss $(14,144) $(18,862) $ (17,656) $ (21,775)
======== ======== ========= =========
Income/(loss) per share:
Loss per share from continuing
operations $ (0.45) $ (1.25) $ (0.63) $ (1.46)
Income/(loss) per share from
discontinued operations (0.53) -- (0.58) 0.01
Extraordinary gain 0.04 -- 0.04 --
-------- -------- -------- ---------
Net loss per share $ (0.94) $ (1.25) $ (1.17) $ (1.45)
======== ======== ======== =========
Weighted average common stock and common
stock equivalents outstanding 15,118 15,085 15,108 15,063
======== ======== ======== =========
See Notes to Condensed Consolidated Financial Statements.
SALANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
June 28, December 28, June 29,
1997 1996 1996
(Unaudited) (*) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,336 $ 1,498 $ 1,321
Accounts receivable, net 40,391 40,133 37,413
Inventories (Note 2) 123,272 98,497 117,367
Prepaid expenses and other current assets 3,930 3,869 4,497
Net assets of discontinued
operations (Note 3) -- 6,988 9,041
---------- ---------- ----------
Total current assets 168,929 150,985 169,639
Property, plant and equipment, net 28,711 25,173 25,353
Other assets 58,995 59,093 59,973
---------- ---------- ----------
Total assets $ 256,635 $ 235,251 $ 254,965
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 53,432 $ 7,677 $ 31,473
Accounts payable 28,453 27,562 30,829
Accrued liabilities 16,961 17,986 18,202
Current portion of long term debt -- 3,372 --
Reserve for business restructuring (Note 5) 1,344 2,969 4,617
---------- ---------- ----------
Total current liabilities 100,190 59,566 85,121
Long term debt 104,879 106,231 109,545
Deferred liabilities 8,453 8,863 11,130
Shareholders' equity
Common stock 15,394 15,328 15,328
Additional paid-in capital 107,232 107,130 107,121
Deficit (74,803) (57,147) (69,599)
Excess of additional pension liability
over unrecognized prior service cost (3,182) (3,182) (2,185)
Accumulated foreign currency
translation adjustment 86 76 118
Less - treasury stock, at cost (1,614) (1,614) (1,614)
---------- ---------- ----------
Total shareholders' equity 43,113 60,591 49,169
---------- ---------- ----------
Total liabilities and shareholders' equity $ 256,635 $ 235,251 $ 254,965
========== ========== ==========
(*) 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)
Six Months Ended
June 28, June 29,
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Loss from continuing operations $ (9,540) $ (21,905)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation 2,225 2,079
Amortization of intangibles 2,134 2,180
Write-down of fixed assets -- 231
Write-off of other assets -- 6,251
Loss on disposal of fixed assets -- 17
Change in operating assets and liabilities:
Accounts receivable (258) (2,536)
Inventories (24,775) (2,002)
Prepaid expenses and other current assets (61) 410
Other assets -- (1,502)
Accounts payable 891 5,796
Accrued liabilities and reserve for
business restructuring (2,913) 746
Deferred liabilities (1,162) (238)
---------- ----------
Net cash used in operating activities (33,459) (10,473)
---------- ----------
Cash Flows from Investing Activities:
Capital expenditures (5,807) (3,222)
Store fixture expenditures (2,037) (959)
Acquisition -- (694)
Proceeds from sale of assets -- 45
---------- ----------
Net cash used in investing activities (7,844) (4,830)
---------- ----------
Cash Flows from Financing Activities:
Net short-term borrowings 45,755 17,051
Retirement of long-term debt (3,372) --
Exercise of stock options 168 104
Other, net 10 (12)
---------- ----------
Net cash provided by financing activities 42,561 17,143
---------- ----------
Net cash provided by continuing operations 1,258 1,840
Cash used in discontinued operations (1,420) (1,914)
---------- ----------
Net decrease in cash and cash equivalents (162) (74)
Cash and cash equivalents - beginning of year 1,498 1,395
---------- ----------
Cash and cash equivalents - end of quarter $ 1,336 $ 1,321
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,125 $ 7,975
========== ==========
Income taxes $ 101 $ 69
========== ==========
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 and six months ended June 28, 1997 and
June 29, 1996 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 information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
annual report to shareholders for the year ended December 28, 1996.
Income/(loss) per share is based on the weighted average number of common shares
(including, as of June 28, 1997 and June 29, 1996, 323,544 and 344,730 shares,
respectively, anticipated to be issued pursuant to the Company's plan of
reorganization) and common stock equivalents outstanding, if applicable. Loss
per share does not include common stock equivalents, inasmuch as their effect
would have been anti-dilutive.
Note 2. Inventories
June 28, December 28, June 29,
1997 1996 1996
Finished goods $76,150 $57,827 $79,618
Work-in-Process 22,666 14,800 14,968
Raw materials and supplies 24,456 25,870 22,781
------ -------- ----------
$123,272 $98,497 $117,367
======== ======= ========
Note 3. Discontinued Operations
In June 1997, the Company discontinued the operations of the Made in the Shade
division, which produced and marketed women's junior sportswear. The loss from
operations of the division for the three and six months ended June 28, 1997 was
$7,361 and $8,136, respectively which included a second quarter charge of $4,459
for the write-off of goodwill. Net sales of the division were $977 and $2,199
for the three and six months ended June 28, 1997, respectively. Net sales of the
division were $5,121 and $10,769 for the three and six months ended June 29,
1996, respectively.
Additionally, in 1997 the Company recorded a second quarter charge of $580 to
accrue for expected operating losses during the phase-out period through
September 1997. No income tax benefits have been allocated to the division's
1997 losses.
The net assets of the discontinued operations have been reclassified on the
balance sheets as net assets of discontinued operations, and consist principally
of accounts receivable, inventory, goodwill and accounts payable. Net
liabilities of discontinued operations have been included in accrued
liabilities.
Note 4. Extraordinary Gain
In the second quarter of 1997, the Company recorded an extraordinary gain of
$600 related to the reversal of excess liabilities previously provided for the
anticipated settlement of claims arising from the prior chapter 11 proceeding.
Note 5. Division Restructuring Costs
In the second quarter of 1997, the Company reversed a previously recorded
restructuring provision by $410, as these amounts were no longer needed. This
provision was for estimated liabilities related to the previously disclosed
closure of a manufacturing facility.
In the first quarter of 1997, the Company reversed a previously recorded
restructuring provision of $754. The provision was for net liabilities related
to the JJ. Farmer sportswear product line. These net liabilities were settled
for less than the carrying amount, resulting in the reversal of the excess
portion of the provision.
In the second quarter of 1996, the Company recorded a provision for
restructuring of $11,417, consisting of (i) $5,691 in connection with the
decision to sell or license the JJ. Farmer sportswear product line, which charge
is primarily related to the write-off of goodwill and write-down of other
assets, (ii) $2,858 related to the write-off of certain assets related to the
licensing of the Gant dress shirt and accessories product lines, and the accrual
of a portion of the future minimum royalties under the Gant licenses, which are
not expected to be covered by future sales, (iii) $1,842 primarily related to
employee costs in connection with the closing of a manufacturing and
distribution facility in Thomson, Georgia, (iv) $547 primarily relate to
employee costs in connection with the closing of a manufacturing facility in
Americus, Georgia and (v) $479 related primarily to other severance costs.
Note 6. Financing and Factoring Agreements
On August 8, 1997, the Company and The CIT Group/Commercial Services, Inc.
executed the Eleventh Amendment to a revolving credit, factoring and security
agreement. The Eleventh Amendment modified the covenant related to stockholders'
equity, waived a default resulting from the Company's non-compliance with this
covenant as of June 28, 1997, increased the interest rate charged on direct
borrowings by 25 basis points and increased the borrowings allowed against
eligible inventory from 50% to 60% for the additional period of September 1,
1997 through October 25, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Second Quarter of 1997 Compared with Second Quarter of 1996
Net Sales
The following table sets forth the net sales of each of the Company's three
principal business segments for the three months ended June 28, 1997 and June
29, 1996 and the percentage contribution of each of those segments to total net
sales:
Percentage
Three Months EndedIncrease/
June 28, 1997 June 29, 1996 (Decrease)
(dollars in millions)
Men's Apparel $70.3 86% $80.5 87% (12.6%)
Children's Sleepwear
and Underwear 5.5 7% 4.4 5% 24.0%
Retail Outlet Stores 5.6 7% 7.0 8% (19.8%)
--- -- --- ----
Total $81.4 100% $91.9 100% (11.4%)
===== ===== ===== ====
Sales of Men's apparel decreased by $10.2 million, or 12.6%, in the second
quarter of 1997, as compared to the second quarter of 1996. This decrease
resulted from (a) a $5.4 million decrease in sales of men's jeans, primarily
related to a planned reduction in unprofitable programs for department stores,
(b) a $5.1 million reduction in sales of men's slacks, of which $3.7 million was
a planned reduction based upon the Company's decision to eliminate unprofitable
programs, and $1.4 million of the decrease related to manufacturing delays for
the Perry Ellis slack line, (c) a planned $2.0 million reduction in sales of
certain dress shirt lines, which was based upon the Company's decision to
eliminate unprofitable businesses and (d) a $1.7 million decrease in sales of
men's accessories, primarily due to the slow-down of the novelty neckwear
business in the first half of 1997. These sales decreases were partially offset
by a $3.1 million increase in sales of Perry Ellis dress shirts due to the
addition of new distribution and the continued strong acceptance of these
products by consumers.
Sales of children's sleepwear and underwear increased by $1.1 million, or 24.0%,
in the second quarter of 1997, as compared to the second quarter of 1996. This
increase was primarily a result of the continuing expansion of the Joe Boxer
children's product lines.
Sales of the retail outlet stores decreased by $1.4 million, or 19.8%, in the
second quarter of 1997, as compared to the second quarter of 1996. This decrease
was primarily due to a decrease in the number of retail outlet stores, from 71
in June 1996 to 62 in June 1997.
Gross Profit
The following table sets forth the gross profit and gross profit margin (gross
profit as a percentage of net sales) for each of the Company's business segments
for the three months ended June 28, 1997 and June 29, 1996:
Three Months Ended
June 28, 1997 June 29, 1996
(dollars in millions)
Men's Apparel $13.5 19.2% $14.3 17.7%
Children's Sleepwear and
Underwear 0.6 10.3% 0.6 14.2%
Retail Outlet Stores 2.5 44.6% 2.3 32.9%
--- ---
Total $16.6 20.4% $17.2 18.7%
===== =====
The decline in gross profit in the men's apparel segment and for the Company as
a whole was primarily attributable to the reduction in net sales discussed
above. The gross profit margin increase is primarily related to the elimination
of unprofitable programs in 1997, as previously discussed.
The gross profit margin of the retail outlet stores increased primarily as a
result of a decrease in the transfer prices (from a negotiated rate to standard
cost) charged to the retail outlet stores for products made by other divisions
of the Company.
Reversal of/(Provision for) Restructuring Costs
In the second quarter of 1997, the Company reversed a previously recorded
restructuring provision by $0.4 million, as these amounts were no longer needed.
This provision was for estimated liabilities related to the previously disclosed
closure of a manufacturing facility.
In the second quarter of 1996, the Company recorded a provision for
restructuring of $11.4 million, consisting of (i) $5.7 million in connection
with the decision to sell or license the JJ. Farmer sportswear product line,
which charge is primarily related to the write-off of goodwill and write-down of
other assets, (ii) $2.9 million related to the write-off of certain assets
related to the licensing of the Gant dress shirt and accessories product lines,
and the accrual of a portion of the future minimum royalties under the Gant
licenses, which are not expected to be covered by future sales, (iii) $1.8
million primarily related to employee costs in connection with the closing of a
manufacturing and distribution facility in Thomson, Georgia, (iv) $0.5 million
primarily related to employee costs in connection with the closing of a
manufacturing facility in Americus, Georgia and (v) $0.5 million related
primarily to other severance costs.
Income/(Loss) from Continuing Operations Before Interest, Income Taxes and
Extraordinary Gain
The following table sets forth the loss from continuing operations before
interest, income taxes and extraordinary gain for each of the Company's three
business segments, expressed both in dollars and as a percentage of net sales,
for the three months ended June 28, 1997 and June 29, 1996:
Three Months Ended
June 28, 1997 June 29, 1996
(dollars in millions)
Men's Apparel $0.7 1.1% $(12.4) (15.4%)
Children's Sleepwear and
Underwear (1.2) (22.8%) (0.6) (13.9%)
Retail Outlet Stores (1.0) (17.5%) (0.8) (11.1%)
------ ------
(1.5) (1.8%) (13.8) (15.0%)
Corporate expenses (2.4) (2.5)
Licensing division income 1.1 1.1
--- ---
Loss from continuing
operations before
interest, income taxes
and extraordinary gain $(2.8) (8.3%) $(15.2) (16.5%)
====== ======
(a) Includes the reversal of restructuring charges of $0.4 million in the second
quarter of 1997 and a restructuring provision of $11.4 million in the second
quarter of 1996.
The $12.4 million decrease in the loss from continuing operations before
interest, income taxes and extraordinary gain in the second quarter of 1997 was
primarily a result of the absence of the $11.4 million restructuring charge in
the prior year.
Interest Expense, Net
Net interest expense was $3.9 million for the second quarter of 1997 compared
with $3.8 million for the second quarter of 1996.
Discontinued Operations
In the second quarter of 1997, the Company recognized a charge of $7.9 million,
or $(0.53) per share, related to the discontinuance of the Made in the Shade
division. This charge included a write-off of goodwill of $4.5 million and an
accrual of $580 thousand for estimated operating losses during the phase-out
period. The division was closed primarily due to the lack of synergy with the
other businesses of the Company, poor recent performance and low expectations
for future profitability. Net sales of the division for the three months ended
June 28, 1997 and June 29, 1996 were $0.9 million and $5.1 million,
respectively.
Extraordinary Gain
In the second quarter of 1997, the Company recorded an extraordinary gain of
$0.6 million related to the reversal of excess liabilities previously provided
for the anticipated settlement of claims arising from the prior chapter 11
proceeding.
Net Loss
In the second quarter of 1997, the Company reported a net loss of $14.1 million,
or $(0.94) per share, as compared with a net loss of $18.9 million, or $(1.25)
per share, in the second quarter of 1996.
Earnings/(Loss) Before Interest, Taxes, Depreciation, Amortization,
Restructuring Charges, Discontinued
Operations and Extraordinary Gain
Earnings/(loss) before interest, taxes, depreciation, amortization,
restructuring charges, discontinued operations and extraordinary gain was ($1.0)
million ((1.2%) of net sales) in the second quarter of 1997, compared to ($1.4)
million ((1.5%) of net sales) in the second quarter of 1996, an increase of $0.4
million, or 29%. The Company believes this information is helpful in
understanding cash flow from operations that is available for debt service 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.
Year to Date 1997 Compared to Year to Date 1996
Net Sales
The following table sets forth the net sales of each of the Company's three
principal business segments for the six months ended June 28, 1997 and June 29,
1996 and the percentage contribution of each of those segments to total net
sales:
Percentage
Six Months Ended Increase/
June 28, 1997 June 29, 1996 (Decrease)
(dollars in millions)
Men's Apparel $149.8 88% $165.3 89% (9.4%)
Children's Sleepwear and
Underwear 9.9 6% 8.6 5% 14.6%
Retail Outlet Stores 9.9 6% 11.5 6% (13.8%)
--- -- ---- --
Total $169.6 100% $185.4 100% (8.5%)
====== ==== ====== ====
Sales of Men's apparel decreased by $15.5 million, or 9.4%, in the first half of
1997, as compared to the first half of 1996. This decrease resulted from (a) an
$11.2 million reduction in sales of men's slacks, of which $8.8 million was a
planned reduction based upon the Company's decision to eliminate unprofitable
programs and the balance was primarily due to operational difficulties
experienced in the first quarter of 1997 related to the move of manufacturing
and distribution out of the Company's facilities in Thomson, Georgia, (b) a $5.8
million reduction in sales of men's sportswear, which included a $7.3 million
planned reduction based upon the Company's decision to eliminate its JJ. Farmer
and Manhattan sportswear lines, as offset by a $1.5 million increase in sales of
Perry Ellis sportswear product, and (c) a planned $5.6 million reduction in
sales of certain dress shirt lines, which was based upon the Company's decision
to eliminate unprofitable businesses. These sales decreases were partially
offset by a $6.8 million increase in sales of Perry Ellis dress shirts due to
the addition of new distribution and the continued strong acceptance of these
products by consumers.
Sales of children's sleepwear and underwear increased by $1.3 million, or 14.6%,
in the first half of 1997, as compared to the first half of 1996. This increase
was primarily a result of the continuing expansion of the Joe Boxer children's
product lines.
Sales of the retail outlet stores decreased by $1.6 million, or 13.8%, in the
first half of 1997, as compared to the first half of 1996. This decrease was
primarily due to a decrease in the number of retail outlet stores, from 71 in
June 1996 to 62 in June 1997.
Gross Profit
The following table sets forth the gross profit and gross profit margin (gross
profit as a percentage of net sales) for each of the Company's business segments
for the six months ended June 28, 1997 and June 29, 1996:
Six Months Ended
June 28, 1997 June 29, 1996
(dollars in millions)
Men's Apparel $31.0 20.7% $33.4 20.2%
Children's Sleepwear and
Underwear 1.4 13.8% 1.5 17.6%
Retail Outlet Stores 4.0 40.2% 3.9 34.3%
--- ---
Total $36.4 21.4% $38.8 20.9%
===== =====
The decline in gross profit in the men's apparel segment and for the Company as
a whole was primarily attributable to the reduction in net sales discussed
above. The gross profit margin increase is primarily related to the elimination
of unprofitable programs in 1997, as previously discussed.
The gross profit margin of the retail outlet stores increased primarily as a
result of a decrease in the transfer prices charged to the retail outlet stores
for products made by other divisions of the Company.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the first half of 1997
were $41.4 million (24.4% of net sales) compared with $43.0 million (23.2% of
net sales) for the first half of 1996. S,G&A expenses in the first half of 1996
included $1.1 million of charges related to the restructuring of the men's
apparel businesses.
Reversal of/(Provision for) Restructuring Costs
In the first half of 1997, the Company reversed previously recorded
restructuring provisions of $1.2 million. These provisions were for net
liabilities which were settled for less than their carrying amounts.
The cash portion of the remaining reserve for restructuring is expected to be
expended in the following manner: $0.5 million in the last half of 1997, $0.5
million in 1998 and $0.3 million in 1999.
In the first half of 1996, the Company recorded a provision for restructuring of
$11.6 million, consisting of (i) $5.7 million in connection with the decision to
sell or license the JJ. Farmer sportswear product line, which charge is
primarily related to the write-off of goodwill and write-down of other assets,
(ii) $2.9 million related to the write-off of certain assets related to the
licensing of the Gant dress shirt and accessories product lines, and the accrual
of a portion of the future minimum royalties under the Gant licenses, which are
not expected to be covered by future sales, (iii) $1.8 million primarily related
to employee costs in connection with the closing of a manufacturing and
distribution facility in Thomson, Georgia, (iv) $0.5 million primarily related
to employee costs in connection with the closing of a manufacturing facility in
Americus, Georgia and (v) $0.7 million related primarily to other severance
costs.
Income/(Loss) from Continuing Operations Before Interest, Income Taxes
and Extraordinary Gain
The following table sets forth the loss from continuing operations before
interest, income taxes and extraordinary gain for each of the Company's three
business segments, expressed both in dollars and as a percentage of net sales,
for the six months ended June 28, 1997 and June 29, 1996:
Six Months Ended
June 28, 1997 June 29, 1996
(dollars in millions)
Men's Apparel (a) $5.4 3.6% $ (8.1) (4.9%)
Children's Sleepwear and
Underwear (2.2) (22.7%) (1.0) (12.3%)
Retail Outlet Stores (2.6) (26.6%) (2.6) (22.4%)
----- -------
0.6 0.4% (11.7) (6.3%)
Corporate expenses (4.6) (4.6)
Licensing division income 1.9 1.9
--- --------
Loss from continuing
operations before
interest, income taxes
and extraordinary gain $(2.1) (1.2%) $(14.4) (7.8%)
===== ======
(a) Includes the reversal of restructuring charges of $1.2 million in 1997 and a
restructuring provision of $11.6 million in 1996.
The $12.3 million decrease in the loss from continuing operations before
interest, income taxes and extraordinary gain in the first half of 1997 was
primarily a result of the absence of the $11.6 million restructuring charge in
the prior year.
Interest Expense, Net
Net interest expense was $7.4 million for the first half of 1997 compared with
$7.6 million for the first half of 1996.
Discontinued Operations
In the first half of 1997, the Company recognized a charge of $8.7 million, or
$(0.58) per share, related to the discontinuance of the Made in the Shade
division. This charge included a write-off of goodwill of $4.5 million and an
accrual of $580 thousand for estimated operating losses during the phase-out
period. Net sales of the division for the six months ended June 28, 1997 and
June 29, 1996 were $2.2 million and $10.8 million, respectively.
Extraordinary Gain
In the second quarter or 1997, the Company recorded an extraordinary gain of
$0.6 million related to the reversal of excess liabilities previously provided
for the anticipated settlement of claims arising from the prior chapter 11
proceeding.
Net Loss
In the first half of 1997, the Company reported a net loss of $17.7 million, or
$(1.17) per share, as compared with a net loss of $21.8 million, or $(1.45) per
share, in the first half of 1996.
Earnings Before Interest, Taxes, Depreciation, Amortization,
Restructuring Charges, Discontinued Operations and
Extraordinary Gain
Earnings before interest, taxes, depreciation, amortization, restructuring
charges, discontinued operations and extraordinary gain were $1.1 million (0.7%
of net sales) in the first half of 1997, compared to $1.5 million (0.8% of net
sales) in the first half of 1996, a decrease of $0.4 million, or 26.7%. The
Company believes this information is helpful in understanding cash flow from
operations that is available for debt service 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"). The Credit Agreement provides the Company with working capital
financing through September 30, 1998, in the form of direct borrowings and
letters of credit, up to an aggregate of $135 million (the "Maximum Credit"),
subject to an asset-based borrowing formula. 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. On August 8, 1997 the Company
and CIT executed the Eleventh Amendment to the Credit Agreement. The Eleventh
Amendment modified the covenant related to stockholders' equity, waived a
default resulting from the Company's non-compliance with this covenant as of
June 28, 1997, increased the interest rate charged on direct borrowings by 25
basis points and increased the borrowings allowed against eligible inventory
from 50% to 60% for the additional period of September 1, 1997 through October
25, 1997.
Pursuant to the Credit Agreement, the interest rate charged on direct borrowings
is 0.75% in excess of the base rate of The Chase Manhattan Bank, N.A. (the
"Prime Rate", which was 8.5% at June 28, 1997) or 3.00% above the London Late
Eurodollar rate (the "Eurodollar Rate", which was 5.78125% at June 28, 1997).
Pursuant to the Credit Agreement, the Company sells to CIT, without recourse,
certain eligible accounts receivable. The credit risk for such accounts is
thereby transferred to CIT. The amounts due from CIT have been offset against
the Company's direct borrowings from CIT in the accompanying balance sheets. The
amounts which have been offset were $9.7 million at June 28, 1997 and $8.9
million at June 29, 1996.
On June 28, 1997, direct borrowings (including borrowings under the Eurodollar
option) and letters of credit outstanding under the Credit Agreement were $53.4
million and $25.3 million, respectively, and the Company had unused availability
of $13.8 million. On June 29, 1996, direct borrowings and letters of credit
outstanding under the Credit Agreement were $31.5 million and $34.4 million,
respectively, and the Company had unused availability of $21.1 million. During
the first half of 1997, the maximum aggregate amount of direct borrowings and
letters of credit outstanding under the Credit Agreement was $92.8 million at
which time the Company had unused availability of $10.3 million.
During the first half of 1996, the maximum aggregate amount of direct borrowings
and letters of credit outstanding under the Credit Agreement was $85.6 million
at which time the Company had unused availability of $18.3 million.
The instruments governing the Company's outstanding debt contain certain
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 and paying
cash dividends. In addition, under the Credit Agreement, the Company is required
during the year to maintain a minimum level of stockholders' equity and to
satisfy a maximum cumulative net loss test. The following table indicates the
Company's compliance with the two financial covenants contained in the Credit
Agreement:
June 28, 1997
Credit Agreement Covenants Covenant Level (a) Actual Level
Stockholders' Equity no less than $42.5 million $43.1 million
Maximum Loss (b) no more than $(10.0) million $(5.2) million
(a) The covenant levels reflect all modifications in the Credit Agreement made
pursuant to the Eleventh Amendment.
(b) Maximum loss excludes write-offs for goodwill, restructuring expenses or
other unusual or non-recurring expenses during the first two quarters of 1996,
up to a maximum of $13.0 million.
The indenture governing the Company's outstanding Senior Secured Notes requires
the Company to reduce its outstanding indebtedness (excluding outstanding
letters of credit) to $20 million or less for fifteen consecutive days during
each twelve month period commencing on the first day of February. This covenant
has been satisfied for the balance of the term of the Senior Secured Notes.
The Company's cash used in operating activities for the first half of 1997 was
$33.5 million, which reflects a $24.8 million increase in inventories, a
significant portion of which was planned to occur in the first half of 1997.
Cash used for investing activities in the first half of 1997 was $7.8 million,
which represented capital expenditures of $5.8 million and the installation of
store fixtures in department stores of $2.0 million. During the second half of
1997, the Company plans to make additional capital expenditures of approximately
$5.9 million and to spend an additional $0.9 million for the installation of
store fixtures in department stores.
Cash provided by financing activities in the first half of 1997 was $42.6
million, which represented short-term borrowings under the Credit Agreement of
$45.8 million, partially offset by cash used to retire $3.4 million of Senior
Secured Notes.
The Company's principal sources of liquidity, both on a short-term and a
long-term basis, are cash flow from 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 the cash flow anticipated from its
future operations, the Company believes that its future cash flows together with
funds available under the Credit Agreement will be adequate to meet the
financing requirements it anticipates during 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.
The Company's Senior Secured Notes, of which $104.9 million principal amount was
outstanding at June 28, 1997, mature December 31, 1998. The Company does not
expect to generate sufficient cash flow from operations to repay those notes at
maturity and will seek to refinance the notes prior to maturity. There can be no
assurance that the Company will obtain such refinancing or that the terms of
such refinancing, if obtained, will not be less favorable to the Company than
those of the Senior Secured Notes.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS
130") and No. 131 "Disclosure about Segments of an Enterprise and Related
Information", ("SFAS 131"). SFAS 130 established standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 131 establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Both of these
statements are effective for fiscal periods beginning after December 15, 1997.
The Company has not yet determined the impact, if any, of adopting these
standards.
Factors that May Affect Future Results and Financial Condition.
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, there can be no assurance that the statement of the expectation or
belief will result or be achieved or accomplished. The words "believe",
"expect", "estimate", "project", "seek", "anticipate" and similar expressions
may identify forward-looking statements. The Company's future operating results
and financial condition are dependent upon the Company's ability to successfully
design, manufacture, import and market apparel. Taking into account the
foregoing, the following are identified as important factors that could cause
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company:
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. The Company also competes for private label programs with the internal
sourcing organizations of many of its own customers.
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 bankruptcy protection. 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 $158.3
million as of June 28, 1997. 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 1996, the Company produced 61% 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 fabric 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 in the
Company's common stock price.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Company's shareholders was held on May 13, 1997
(the "Annual Meeting"). Subsequent to that date, there have been no other
matters submitted to a vote of the Company's shareholders.
(b) At the Annual Meeting, the shareholders approved the election of four
Directors for a three-year term expiring at the 2000 Annual Meeting of the
Company's shareholders, with the votes for such election as follows:
Director For Withheld
Mr. Nicholas P. DiPaolo 13,871,259 231,032
Mr. Jerald S. Politzer 14,057,344 44,947
Mr. Harold Leppo 13,869,837 232,454
Mr. Edward M. Yorke 13,873,759 228,532
(c) At the Annual Meeting, the shareholders approved the Amended and Restated
1996 Stock Plan, which provides for 800,000 shares of Common Stock for the
granting of options, stock appreciation rights and restricted stock to employees
of the Company and the granting of options to non-employee directors of the
Company. The shares voting for the 1996 Stock Plan were 13,366,861, the shares
voting against were 704,372 and the shares abstaining were 31,058.
(d) At the Annual Meeting, the shareholders ratified the reappointment of
Deloitte & Touche LLP as the Company's independent auditors for the 1997 fiscal
year. The shares voting for the ratification were 14,083,053, the shares voting
against the ratification were 14,367 and the shares abstaining were 4,871.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
During the second quarter of 1997, the Company did not file any reports on Form
8-K.
Exhibits
Number Description
10.44 Employment Agreement, dated as of May 1, 1997, between Todd Kahn and Salant
Corporation.
10.45 Employment Agreement, dated as of August 18, 1997, between
Philip A. Franzel and Salant Corporation.
10.46 Eleventh Amendment to Credit Agreement, dated as of August 8, 1997, to the Revolving
Credit, Factoring and Security Agreement, dated as of September 20, 1993, as amended,
between Salant Corporation and The CIT Group/Commercial Services, Inc.
10.47 Letter Agreement, dated as of July 18, 1997, between Michael A. Lubin, Lubin Delano &
Company and Salant Corporation
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: August 12, 1997 /s/ Thomas W. Busch
-----------------
Thomas W. Busch
Controller
(Principal Accounting Officer)