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 April 4, 1998. 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 11, 1998, there were outstanding 14,964,608 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 Statements of Comprehensive Income 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 3. Defaults Upon Senior Securities 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 April 4, March 29, 1998 1997 --------- --------- Net sales $ 84,887 $ 88,209 Cost of goods sold 67,977 68,422 Gross profit 16,910 19,787 Selling, general and administrative expenses (17,116) (20,555) Royalty income 1,121 1,107 Goodwill amortization (470) (470) Reversal of provision for restructuring (Note 5) 160 754 Other income 61 117 --------- --------- Income from continuing operations before interest and income taxes 666 740 Interest expense, net 3,960 3,435 --------- --------- Loss from continuing operations before income taxes (3,294) (2,695) Income taxes 3 42 --------- --------- Loss from continuing operations (3,297) (2,737) Loss from discontinued operations -- (773) --------- --------- Net loss $ (3,297) $ (3,510) ========= ========= Basic loss per share: Loss per share from continuing operations $ (0.22) $ (0.18) Loss per share from discontinued operations -- (0.05) -------- --------- Basic loss per share $ (0.22) $ (0.23) ========= ========= Weighted average common stock outstanding 15,170 15,041 ========= ========= See Notes to Condensed Consolidated Financial Statements. Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands) Three Months Ended April 4, March 29, 1998 1997 ------- -------- Net loss $ (3,297) $ (3,510) Other comprehensive income, net of tax: Foreign currency translation adjustments 3 11 -------- -------- Comprehensive income $ (3,294) $ (3,499) ======== ======== See Notes to Condensed Consolidated Financial Statements. Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) April 4, January 3, March 29, 1998 1998 1997 (Unaudited) (*) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,683 $ 2,215 $ 1,259 Accounts receivable, net 51,329 45,828 45,201 Inventories (Note 3) 97,274 96,638 109,900 Prepaid expenses and other current assets 5,808 4,218 3,494 Net assets of discontinued operations -- -- 7,471 ---------- ---------- ---------- Total current assets 156,094 148,899 167,325 Property, plant and equipment, net 25,743 26,439 26,959 Other assets 57,153 58,039 59,189 ---------- ---------- ---------- Total assets $ 238,990 $ 233,377 $ 253,473 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable $ 44,625 $ 33,800 $ 32,921 Accounts payable 24,973 27,746 32,963 Accrued liabilities 18,568 16,503 14,432 Current portion of long term debt 104,879 104,879 -- Reserve for business restructuring (Note 5) 1,582 2,764 2,049 ---------- ---------- ---------- Total current liabilities 194,627 185,692 82,365 Long term debt -- -- 104,879 Deferred liabilities 5,354 5,382 9,114 Shareholders' equity Common stock 15,405 15,405 15,339 Additional paid-in capital 107,249 107,249 107,142 Deficit (78,532) (75,235) (60,657) Accumulated other comprehensive income (Note 4) (3,499) (3,502) (3,095) Less - treasury stock, at cost (1,614) (1,614) (1,614) ---------- ---------- ---------- Total shareholders' equity 39,009 42,303 57,115 ---------- ---------- ---------- Total liabilities and shareholders' equity $ 238,990 $ 233,377 $ 253,473 ========== ========== ========== (*) 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 April 4, March 29, 1998 1997 -------- -------- Cash Flows from Operating Activities: Loss from continuing operations $ (3,297) $ (2,737) Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Depreciation 1,158 1,140 Amortization of intangibles 1,227 1,013 Change in operating assets and liabilities: Accounts receivable (5,501) (5,068) Inventories (636) (11,403) Prepaid expenses and other current assets (1,590) 375 Other assets 6 (18) Accounts payable (2,773) 5,401 Accrued liabilities and reserve for business restructuring 1,002 (4,429) Deferred liabilities (28) (1,101) -------- -------- Net cash used in continuing operating activities (10,432) (16,827) Cash used in discontinued operations (119) (1,255) -------- -------- Net cash used in operations (10,551) (18,082) -------- -------- Cash Flows from Investing Activities: Capital expenditures (462) (2,970) Store fixture expenditures (347) (1,093) -------- -------- Net cash used in investing activities (809) (4,063) -------- -------- Cash Flows from Financing Activities: Net short-term borrowings 10,825 25,244 Retirement of long-term debt -- (3,372) Exercise of stock options -- 23 Other, net 3 11 -------- -------- Net cash provided by financing activities 10,828 21,906 -------- -------- Net decrease in cash and cash equivalents (532) (239) Cash and cash equivalents - beginning of year 2,215 1,498 -------- -------- Cash and cash equivalents - end of quarter $ 1,683 $ 1,259 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,195 $ 6,493 ======== ======== Income taxes $ 3 $ 42 ======== ======== 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. Financial Restructuring The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At April 4, 1998 and January 3, 1998, the 10 1/2% Senior Secured Notes due December 31, 1998 (the "Senior Secured Notes") in the amount of $104,879 have been classified as a current liability. At April 4, 1998, the Company's current liabilities exceeded its current assets by $38,693. This factor may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. On March 3, 1998, the Company announced that it had reached an agreement in principle (the "Restructuring Agreement") with its major note and equity holders to convert its existing indebtedness under the Senior Secured Notes into common equity (the "Debt Restructuring"), as further described in the 1997 Annual Report on Form 10-K and the Registration Statement on Form S-4, filed on April 22, 1998. Consummation of the Debt Restructuring is subject to various conditions, and there can be no assurance that the Debt Restructuring will be consummated. If the Company is not able to consummate the Debt Restructuring, it will be unable to continue its normal operations without obtaining additional financing or pursuing alternative restructuring strategies. In contemplation of the Debt Restructuring, the Company elected not to pay the interest payment of approximately $5,500 that was due and payable under the Senior Secured Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Secured Notes by the expiration of the applicable grace period, an event of default occurred with respect to the Senior Secured Notes, entitling the holders to accelerate the maturity thereof. On April 8, 1998, the Trustee under the indenture governing the Senior Secured Notes (the "Indenture") issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Secured Notes, an event of default under the Indenture had occurred on April 1, 1998. If holders of at least 25% in aggregate principal face amount of the Senior Secured Notes accelerate all outstanding indebtedness under the Senior Secured Notes pursuant to the terms of the Indenture, such acceleration could result in the Company becoming subject to a proceeding under the Federal bankruptcy laws. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Note 2. 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 April 4, 1998 and March 29, 1997 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 have been 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 January 3, 1998. Loss per share is based on the weighted average number of common shares (including, as of April 4, 1998 and March 29, 1997, 205,854 and 323,878 shares, respectively, anticipated to be issued pursuant to the Company's 1993 bankruptcy plan of reorganization). Loss per share for the first quarters of 1998 and 1997 did not include common stock equivalents, including 1,319,393 and 1,430,140 stock options, respectively, inasmuch as their effect would have been anti-dilutive. Note 3. Inventories April 4, January 3, March 29, 1998 1998 1997 Finished goods $ 57,859 $ 52,010 $ 65,752 Work-in-Process 21,344 21,405 17,516 Raw materials and supplies 18,071 23,223 26,632 ---------- ---------- ---------- $ 97,274 $ 96,638 $109,900 ======== ======== ======== Note 4. Accumulated Other Comprehensive Income Foreign Currency Minimum Pension Accumulated Other Translation Liability Comprehensive Income Adjustments Adjustment 1998 Beginning of year balance $6 $(3,508) $(3,502) Current period change 3 -- 3 - - ----------- -- ------------ - End of quarter balance $9 $(3,508) $(3,499) == ======== ======== 1997 Beginning of year balance $76 $(3,182) $(3,106) Current period change 11 -- 11 - -- ----------- -- ---------- -- End of quarter balance $87 $(3,182) $(3,095) === ======== ======== Note 5. Division Restructuring Costs 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 closure of 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations First Quarter of 1998 Compared with First Quarter of 1997 Net Sales The following table sets forth the net sales of each of the Company's principal business segments for the three months ended April 4, 1998 and March 29, 1997 and the percentage contribution of each of those segments to total net sales: Percentage Three Months Ended Increase/ April 4, 1998 March 29, 1997 (Decrease) ------------------- -------------------- ---------- (dollars in millions) Men's Apparel (a) $77.0 91% $83.8 95% (8.2%) Children's Sleepwear and Underwear 7.9 9% 4.4 5% 78.8% --- -- ---- -- Total $84.9 100% $88.2 100% (3.8%) ===== ===== ===== ==== (a) Includes the retail outlet stores. Sales of men's apparel decreased by $6.8 million, or 8.2%, in the first quarter of 1998, as compared to the first quarter of 1997. This decrease primarily resulted from planned sales decreases of $8.7 million, including (i) $3.5 million for jeans, both Canyon River Blues and other labels, resulting from higher initial shipments for new programs, which began in the first quarter of 1997, and reduced off-price sales resulting from a lower excess inventory position in the first quarter of 1998, (ii) $2.9 million for dress shirts (other than Perry Ellis) and (iii) $2.1 million related to the closure of the non-Perry Ellis retail stores in the fourth quarter of 1997. In addition to the planned sales decreases, the Company experienced approximately $2.8 million of other sales decreases in various product categories, which were offset by sales increases of Perry Ellis product lines of approximately $3.8 million. Sales of children's sleepwear and underwear increased by $3.5 million, or 78.8%, in the first quarter of 1998, as compared to the first quarter of 1997. This increase was primarily a result of (i) the continuing expansion of the Joe Boxer children's sleepwear and underwear product lines and (ii) an increase in the sale of prior season goods carried over from last year. As previously announced, the Company determined not to continue with its Joe Boxer sportswear line for Fall 1998. This line accounted for net sales of $1.5 million in the first quarter of 1998. The Company will continue with its Joe Boxer sleepwear and underwear product lines. 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 April 4, 1998 and March 29, 1997: Three Months Ended April 4, 1998 March 29, 1997 (dollars in millions) Men's Apparel $16.4 21.3% $19.0 22.7% Children's Sleepwear and Underwear 0.5 6.5% 0.8 18.1% ---- ---- Total $16.9 19.9% $19.8 22.4% ===== ===== The decline in gross profit in the men's apparel segment was primarily attributable to the reduction in net sales discussed above. The decline in gross profit margin was primarily due to the change in sales mix, with increased off-price sales in the first quarter of 1998. These off-price sales are part of the Company's continuing plan to reduce excess and out of season inventory more expeditiously than in prior years, which also helps to improve liquidity. The decline in gross profit margin in children's sleepwear and underwear was primarily attributable to (i) the sale of prior season goods and (ii) the underabsorption of manufacturing costs in the first quarter of 1998 related to the planned shift of production closer to the order taking process. This shift has also resulted in better control over the inventory position of the segment. Selling, General and Administrative Expenses As a result of initiatives begun in 1997, selling, general and administrative ("SG&A") expenses for the first quarter of 1998 decreased to $17.1 million (20.2% of net sales) from $20.6 million (23.3% of net sales) for the first quarter of 1997. The decrease primarily resulted from (a) a $2.0 million decrease related to the closure of the non-Perry Ellis retail stores in the fourth quarter of 1997, and (b) a reduction in advertising expenses of $0.8 million. Reversal of Provision for Restructuring In the first quarter of 1997, the Company reversed a previously recorded restructuring provision of $0.8 million for net liabilities related to the closure of the JJ. Farmer sportswear product line. These net liabilities were settled for less than the carrying amount. The cash portion of the remaining reserve for restructuring is expected to be expended in the following manner: $1.1 million in the last three quarters of 1998 and $0.5 million in 1999. Income from Operations Before Interest and Income Taxes The following table sets forth income from operations before interest and income taxes for each of the Company's business segments, expressed both in dollars and as a percentage of net sales, for the three months ended April 4, 1998 and March 29, 1997 Three Months Ended April 4, 1998 March 29, 1997 (dollars in millions) Men's Apparel (a) $3.8 4.9% $3.0 3.6% Children's Sleepwear and Underwear (1.5) (18.8%) (1.0) (22.5%) ----- ----- 2.3 2.7% 2.0 2.3% Corporate expenses (2.5) (2.1) Licensing division income 0.9 0.8 ---- ---- Income from operations before interest and income taxes $0.7 0.8% $0.7 0.8% ==== ==== (a) Includes the reversal of restructuring charges of $0.2 million and $0.8 million in the first quarter of 1998 and 1997, respectively. Interest Expense, Net Net interest expense was $4.0 million for the first quarter of 1998 compared with $3.4 million for the first quarter of 1997. The increase in interest expense resulted from higher average borrowings during the first quarter of 1998, primarily due to the loss from operations over the past year. Discontinued Operations In the first quarter of 1997, the Company recorded a loss of $0.8 million related to the discontinuance of the Made in the Shade division. Net sales of the division for the three months ended March 29, 1997 were $1.3 million. Net Loss In the first quarter of 1998, the Company reported a net loss of $3.3 million, or $0.22 per share, as compared with a net loss of $3.5 million, or $0.23 per share, in the first quarter of 1997. Earnings Before Interest, Taxes, Depreciation, Amortization and Restructuring Charges Earnings before interest, taxes, depreciation, amortization and restructuring charges was $2.90 million (3.4% of net sales) in the first quarter of 1998, compared to $2.15 million (2.4% of net sales) in the first quarter of 1997, an increase of $0.75 million, or 35%. 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 in the form of direct borrowings and letters of credit, up to an aggregate of $120 million (the "Maximum Credit"), subject to an asset-based borrowing formula. As collateral for borrowings under the Credit Agreement, the Company has granted to CIT a security interest in substantially all of the assets of the Company. On March 3, 1998, the Company announced that it had reached an agreement in principle (the "Restructuring Agreement") with its major note and equity holders to restructure its existing indebtedness (the "Debt Restructuring") under its 10 1/2% Senior Secured Notes, due December 31, 1998 (the "Senior Secured Notes"). Under the Restructuring Agreement, the Company will convert the entire $104.9 million outstanding aggregate principal amount of, and all accrued and unpaid interest on, its Senior Secured Notes into Salant Common Stock. The Restructuring Agreement was entered into by the Company and Magten Asset Management Corp. ("Magten"), the beneficial owner of, or the representative of the beneficial owners of, approximately 67% of the aggregate principal amount of the Senior Secured Notes. Apollo Apparel Partners, L.P., the beneficial owner of approximately 39.6% of Salant Common Stock, is also a party to the Restructuring Agreement and has agreed to vote all of its shares of common stock in favor of the Debt Restructuring. The Restructuring Agreement provides that, among other things, (i) the entire principal amount of the Senior Secured Notes, plus all accrued and unpaid interest thereon, will be converted into 92.5% of the Company's issued and outstanding common stock, and (ii) the Company's existing stockholders will retain 7.5% of Salant Common Stock and will receive seven-year warrants to purchase up to 10% of Salant Common Stock on a fully diluted basis. Stockholder and noteholder approval will be required in order to consummate the Debt Restructuring. The Restructuring Agreement also provides for a ten for one reverse stock split, which will require the approval of the Company's stockholders. In contemplation of the Debt Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Secured Notes on March 2, 1998, subject to a 30 day grace period. Because the Company elected not to pay the interest due on the Senior Secured Notes by the expiration of the applicable grace period, an event of default has occurred with respect to the Senior Secured Notes, entitling the holders to accelerate the maturity thereof. On April 8, 1998, the Trustee under the indenture governing the Senior Secured Notes (the "Indenture") issued a Notice of Default stating that as a result of the Company's failure to make the interest payment due on the Senior Secured Notes, an event of default under the Indenture had occurred on April 1, 1998. If holders of at least 25% in aggregate principal face amount of the Senior Secured Notes accelerate all outstanding indebtedness under the Senior Secured Notes pursuant to the terms of the Indenture, such acceleration could result in the Company becoming subject to a proceeding under the Federal bankruptcy laws. In accordance with the terms of the Restructuring Agreement, Magten has provided a written direction to the Trustee under the Indenture to forbear during the term of the Restructuring Agreement from taking any action in connection with the failure by the Company to make the interest payment on the Senior Secured Notes that was due and payable on March 2, 1998. However, there is no assurance that the holders of 25% or more of the Senior Secured Notes will not decide to accelerate the outstanding indebtedness under the Senior Secured Notes prior to consummation of the Debt Restructuring. In addition, the Company's working capital lender, CIT, agreed to forbear until July 1, 1998, subject to certain conditions, from exercising any of its rights or remedies under the Credit Agreement, arising by virtue of the Company's failure to pay such interest on the Senior Secured Notes. Implementation of the Debt Restructuring will result in the elimination of $11.0 million of annual interest expense to the Company. There can be no assurances, however, that the Debt Restructuring will be consummated. Failure to consummate the Debt Restructuring could result in the acceleration of all of the indebtedness under the Senior Secured Notes and/or the Credit Agreement. Pursuant to the Credit Agreement, the interest rate charged on direct borrowings is 0.75 percent in excess of the base rate of The Chase Manhattan Bank, N.A. (the "Prime Rate", which was 8.5% at April 4, 1998) or 3.00% above the London Late Eurodollar rate (the "Eurodollar Rate", which was 5.7% at April 4, 1998). 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 $10.7 million at April 4, 1998 and $13.3 million at March 29, 1997. On April 4, 1998, direct borrowings (including borrowings under the Eurodollar option) and letters of credit outstanding under the Credit Agreement were $44.6 million and $23.0 million, respectively, and the Company had unused availability of $15.2 million. On March 29, 1997, direct borrowings and letters of credit outstanding under the Credit Agreement were $32.9 million and $32.8 million, respectively, and the Company had unused availability of $12.4 million. During the first quarter of 1998, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $81.1 million at which time the Company had unused availability of $15.2 million. During the first quarter of 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $71.8 million at which time the Company had unused availability of $11.9 million. The instruments governing the Company's outstanding debt 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 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. As previously discussed, at January 3, 1998, the Company was not in compliance with the two financial covenants contained in the Credit Agreement, and has obtained a waiver from CIT, as of January 3, 1998, as provided by an amendment to the Credit Agreement. 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 quarter of 1998 was $10.6 million, which primarily reflects a $5.5 million increase in accounts receivable and the loss from operations of $3.3 million. Cash used for investing activities in the first quarter of 1998 was $0.8 million, which represented capital expenditures of $0.5 million and the installation of store fixtures in department stores of $0.3 million. During 1998, the Company plans to make capital expenditures of approximately $10 million and to spend an additional $1.6 million for the installation of store fixtures in department stores. Cash provided by financing activities in the first quarter of 1998 was $10.8 million, which represented short-term borrowings under the Credit Agreement. 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, provided that the Company consummates the Debt Restructuring and secures an extension of the Credit Agreement or a new working capital facility. There can be no assurance, however, (i) that the Company will consummate the Debt Restructuring and secure an extension of the Credit Agreement or a new working capital facility or (ii) 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. 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: Substantial Level of Indebtedness and the Ability to Restructure Debt. The Company had current indebtedness of $149.5 million as of April 4, 1998. Of this amount, $104.9 million represents the principal amount of the Senior Secured Notes. The Company will not generate sufficient cash flow from operations to repay this amount at maturity. Accordingly, the Company is directing its efforts towards implementing the Debt Restructuring as described above. Given the Company's past inconsistent operating performance, together with the reluctance of investors to invest in apparel companies suffering from high debt-to-equity ratios and the Company's inability to raise funds in the capital markets to re-capitalize the Company, absent the Debt Restructuring, the Company does not believe it will be able to refinance its indebtedness under the Senior Secured Notes. Failure by the Company to consummate the Debt Restructuring as contemplated could result in the acceleration of all of the indebtedness under the Senior Secured Notes and/or the Credit Agreement, and, thus, would be likely to have a material adverse effect on 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 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 Holiday 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. 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. The Company's operations in Asia, including those of its licensees, are subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The Company's risks associated with the Company's Asian operations may be higher in 1998 than has historically been the case, due to the fact that financial markets in East and Southeast Asia have recently experienced and continue to experience difficult conditions, including a currency crisis. As a result of recent economic volatility, the currencies of many countries in this region have lost value relative to the U.S. dollar. Although the Company has experienced no material foreign currency transaction losses since the beginning of this crisis, its operations in the region are subject to an increased level of economic instability. The impact of these events on the Company's business, and in particular its sources of supply and royalty income cannot be determined at this time. Dependence on Contract Manufacturing. In 1997, the Company produced 59% 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. Year 2000 Compliance. The Company has completed an assessment of its information systems ("IS"), including its computer software and hardware, and the impact that the year 2000 will have on such systems and Salant's overall operations. The Company's current software systems, without modification, will be adversely affected by the inability of the systems to appropriately interpret date information after 1999. As part of the process of improving the Company's IS to provide enhanced support to all operating areas, the Company has entered into an interim working agreement with Electronic Data Systems Corporation ("EDS"), which constitutes the initial phase of a long-term contract to outsource its IS. Such long-term outsourcing contract will provide for or eliminate any issues involving year 2000 compliance because all software provided under the outsourcing contract will be year 2000 compliant. The Company anticipates that its cost for such outsourcing will be approximately $9.0 million annually, which is consistent with Salant's current IS expenditures. The Company anticipates that it will complete its outsourcing and systems conversion in time to accommodate year 2000 issues. If the Company fails to complete such conversion in a timely manner, such failure will have a material adverse effect on the business, financial condition and results of operations of the Company. 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. PART II - OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES In contemplation of the Debt Restructuring, the Company elected not to pay the interest payment of approximately $5.5 million that was due and payable under the Senior Secured Notes subject to a 30 day grace period. Because the Company elected not to pay the interest due by the expiration of the applicable grace period, an event of default has occurred, entitling the holders to accelerate the maturity thereof. On April 8, 1998, the Trustee under the Indenture issued a Notice of Default stating that as a result of the Company's failure to make the interest payment, an event of default under the Indenture had occurred on April 1, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Reports on Form 8-K During the first quarter of 1998, the Company filed one Form 8-K dated March 4, 1998, reporting (i) an agreement in principle with its major note and equity holders to restructure its existing long term debt, and (ii) an agreement with its working capital lender to extend the financing under its current credit agreement. Exhibits Number Description 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 15, 1998 /s/ Philip A. Franzel -------------- ----------------------- Philip A. Franzel Executive Vice President And Chief Financial Officer