10-Q 1 form10q2ndquarter2002.txt FORM 10Q 2ND QUARTER 2002 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 29, 2002. 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 July 31, 2002 there were outstanding 8,782,198 shares of the Common Stock of the registrant. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Operations 3 Condensed Consolidated Statements of Comprehensive Income/(Loss) 4 Condensed Consolidated Balance Sheets 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Events 22 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURE 24 Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share data)
Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 Net sales $ 49,648 $ 44,028 $109,923 $ 93,476 Cost of goods sold 35,378 32,384 79,572 71,319 Gross profit 14,270 11,644 30,351 22,157 Selling, general and administrative expenses (13,242) (11,276) (28,646) (24,293) Royalty income 125 77 166 80 Amortization of intangibles (280) (157) (559) (313) Other income/(expense) 201 (14) 204 (28) Income/(loss) before interest and income taxes 1,074 274 1,516 (2,397) Interest income, net 76 33 100 267 Income/(loss) before income taxes 1,150 307 1,616 (2,130) Income taxes benefit 50 -- 47 37 Net income/(loss) $ 1,200 $ 307 $ 1,663 $ (2,093) Basic and diluted income/(loss) per share $ 0.12 $ 0.03 $ 0.17 $ (0.21) Weighted average common stock outstanding - Basic 9,901 9,901 9,901 9,901 Weighted average common stock outstanding - Diluted 9,990 9,901 9,968 9,901
See Notes to Condensed Consolidated Financial Statements. Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited) (Amounts in thousands)
Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 Net income/(loss) $1,200 $ 307 $1,663 $(2,093) Other comprehensive income/(loss), net of tax: Foreign currency translation adjustments (9) 2 (7) 2 Comprehensive income/(loss) $1,191 $ 309 $1,656 $(2,091)
See Notes to Condensed Consolidated Financial Statements. Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
June 29, December 29, June 30, 2002 2001 2001 (Unaudited) (*) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 31,178 $ 19,820 $ 9,227 Accounts receivable, net 15,565 28,544 19,792 Inventories (Note 3) 35,719 34,735 53,814 Prepaid expenses and other current assets 2,294 3,658 2,874 Total current assets 84,756 86,757 85,707 Property, plant and equipment, net 12,098 12,179 12,933 Intangible assets (Notes 2 and 4) 22,991 11,217 11,516 Other assets 7,439 7,579 7,200 Total assets $ 127,284 $ 117,732 $ 117,356 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,148 $ 10,576 $ 9,347 Accrued liabilities 6,915 6,619 6,812 Net liabilities of discontinued operations (Note 7) 481 493 743 Reserve for business restructuring (Note 6) 567 584 862 Total current liabilities 26,111 18,272 17,764 Deferred liabilities 4,434 4,377 4,310 Shareholders' equity: Common stock 10,000 10,000 10,000 Additional paid-in capital 206,040 206,040 206,040 Deficit (114,230) (115,893) (116,110) Accumulated other comprehensive loss (Note 5) (4,873) (4,866) (4,450) Less - treasury stock, at cost (198) (198) (198) Total shareholders' equity 96,739 95,083 95,282 Total liabilities and shareholders' equity $ 127,284 $ 117,732 $ 117,356
(*) 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 29, June 30, 2002 2001 Cash Flows from Operating Activities: Net income/(loss) $ 1,663 $ (2,093) Adjustments to reconcile income/(loss)from continuing operations to net cash provided/(used) by operating activities: Depreciation 2,335 2,249 Amortization 559 313 Change in operating assets and liabilities (net of businesses acquired): Accounts receivable 12,979 (3,204) Inventories (423) (6,584) Prepaid expenses and other assets 1,603 (867) Accounts payable 7,572 (5,451) Accrued and other liabilities 310 (3,893) Reserve for business restructuring (17) (208) Net cash provided/(used) by continuing operations 26,581 (19,738) Cash used by discontinued operations (12) (1) Net cash provided/(used) by operating activities 26,569 (19,739) Cash Flows from Investing Activities: Capital expenditures (1,531) (1,359) Store fixture expenditures (489) (321) Acquisition of a business (13,184) -- Asset purchase -- (4,039) Net cash used by investing activities (15,204) (5,719) Cash Flows from Financing Activities: Other, net (7) 2 Net cash (used)/provided by financing activities (7) 2 Net increase/(decrease) in cash and cash equivalents 11,358 (25,456) Cash and cash equivalents - beginning of year 19,820 34,683 Cash and cash equivalents - end of quarter $ 31,178 $ 9,227 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 46 $ 13 Income taxes $ 5 $ 64 Guaranteed future purchase price payment $ -- $ 250
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. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Salant Corporation and its subsidiaries (collectively, the "Company" or "Salant"). The Company's principal business is the designing, sourcing, importing and marketing of men's apparel and accessories. The Company sells its products to retailers, including department stores, specialty stores and off-price retailers, in addition to its own retail outlet stores. The results of the Company's operations for the six months ended June 29, 2002 and June 30, 2001 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. Certain reclassifications were made to the prior period financial statements to conform to the 2002 presentation. 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 on form 10-K for the fiscal year ended December 29, 2001. New Accounting Standards Effective December 30, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position and no longer be amortized, but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. The Company did not recognize any impairment after completion of the transitional impairment test. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective December 30, 2001. Previously reported net loss/income for the quarter and six months ended June 30, 2001 would have improved by $27 and $54 respectively had amortization of goodwill been discontinued at the beginning of fiscal 2001. In October 2001, the Financial Accounting Standards Board issued ("FASB") SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and was effective for the first quarter in the fiscal year ending December 28, 2002. The adoption of this Statement did not have an impact on the consolidated financial statements. In April 2002, the FASB issued SFAS No.145, "Recession of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections". In addition to amending and rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS No. 145 precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS No. 145 is effective for the first quarter in the fiscal year ending January 3, 2004. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated results of operations or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated results of operations or financial position. Note 2. Acquisition of a Business On January 4, 2002, Salant, through its wholly owned subsidiary, Salant Holding Corporation ("SHC"), acquired from Axis Clothing Corporation ("Axis"), certain of its assets pursuant to an Asset Purchase Agreement dated October 15, 2001 between SHC, Axis and Richard Solomon ("Solomon") an individual. The assets acquired from Axis consisted of, among other things, trademarks, inventory, contract rights, fixed assets and certain office equipment primarily located in California (collectively, the "Axis Assets"). As a result of the acquisition, Salant further diversified its channels of distribution beyond traditional department stores. The results of Axis' operations are included in the statement of operations from the acquisition date. The Company did not assume any accounts payable, accrued liabilities or debt, however it did assume several leases and contracts. In conjunction with the Asset Purchase Agreement, a three-year employment contract was signed between Solomon and SHC, along with SHC signing an agreement to lease office space (at current market rates) from Solomon. The Company has obtained third-party valuations of certain intangible assets. Of the total intangibles acquired, $9,700 has been allocated to trademarks and $2,333 has been allocated to goodwill. Neither the trademarks nor goodwill will be subject to amortization, but will be tested for impairment on a periodic basis. The remaining $300 of miscellaneous intangibles have been amortized over the first six months of 2002. The following table summarizes the estimated fair values of the assets acquired at the date of acquisition: Current assets $ 751 Property, plant, and equipment 100 Intangible assets 300 Trademarks 9,700 Goodwill 2,333 Total assets acquired $13,184 The aggregate purchase price for the Axis Assets was approximately $12,448, plus estimated direct acquisition costs of $736. Of the total purchase price, $10,648 was paid at closing and $1,800 has been placed in escrow and is payable in equal payments over the next 2 years. The purchase price was based upon arms-length negotiations considering (i) the value of the Axis brand, (ii) the quality of the Axis Assets and (iii) the estimated cash flow from the Axis Assets. The principal source of funds for the acquisition of the Axis Assets was from working capital. The following unaudited consolidated pro forma results of operations of the Company for the three months and six months ended June 30, 2001 give effect to the acquisition as if it occurred on January 2, 2001: Three Months Six Months Ended Ended June 30, June 30, 2001 2001 (Unaudited) (Unaudited) Net Sales $ 51,940 $112,346 Net Income $ 721 $ 36 Basic and Diluted Income per Share $ 0.07 $ 0.00 The unaudited pro forma information above has been prepared for comparative purposes only and includes certain adjustments to the Company's historical statements of income, such as the recording of goodwill and increased interest expense, or reduction of interest income, due to the cost of the acquisition. The results do not purport to be indicative of the results of operations that would have resulted had the acquisition occurred at the beginning of the period or of future results of operations of the consolidated entities. Note 3. Inventories June 29, December 29, June 30, 2002 2001 2001 Finished goods $ 23,276 $ 23,188 $ 42,105 Work-in-Process 10,323 9,310 7,943 Raw materials and supplies 4,118 4,047 6,938 Total inventories 37,717 36,545 56,986 Inventory markdown reserves (1,998) (1,810) (3,172) Net inventories $ 35,719 $ 34,735 $ 53,814 Note 4. Intangible Assets In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective December 30, 2001. During the first half of 2002, the Company recorded amortization expense for identified intangible assets with finite lives of $559 and estimated amortization expense for fiscal years 2003 through 2007 will be approximately $650 per year. The intangible assets (unamortized and amortized) are associated with the wholesale segment of the Company and are as follows:
June 29, 2002 December 29, 2001 Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net Amortizable Intangible Assets Licenses $11,161 $(5,241) $ 5,920 $11,161 $(5,039) $ 6,122 Trademarks 4,600 (1,629) 2,971 4,600 (1,572) 3,028 Other 300 (300) -- -- -- -- Total $16,061 $(7,170) $ 8,891 $15,761 $(6,611) $ 9,150 Unamortizable Intangible Assets Goodwill $ 2,333 $ -- $ 2,333 $ --$ -- $ -- Trademarks 11,875 (108) 11,767 2,175 (108) 2,067 Total $14,208 $ (108) $14,100 $ 2,175 $ (108) $ 2,067 Total Intangible Assets $30,269 $(7,278) $22,991 $17,936 $(6,719) $11,217
Note 5. Accumulated Other Comprehensive Income/(Loss) Foreign Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustment Adjustment Income/(Loss) 2002 Beginning of year balance $ (113) $ (4,753) $ (4,866) Six months ended June 29, 2002 change (7) -- (7) End of quarter balance $ (120) $ (4,753) $ (4,873) 2001 Beginning of year balance $ (118) $ (4,334) $ (4,452) Six months ended June 30, 2001 change 2 -- 2 End of quarter balance $ (116) $ (4,334) $ (4,450) Note 6. Restructuring Reserve In the first half of 2002, the Company used $17 of the restructuring reserve primarily for employee costs necessary to complete the shut down of Mexican operations. As of June 29, 2002, the reserve balance was $567 of which $475 was reserved for severance and other employee costs and $92 was reserved for various other restructuring costs. Note 7. Discontinued Operations In the first half of 2002, the net liabilities of discontinued operations decreased by $12, due to the reduction of the reserve for miscellaneous legal fees. As of June 29, 2002, the net liabilities of discontinued operations consist of $450 of reserve for discontinued operations and $31 of miscellaneous liabilities. The reserve for discontinued operations consists of $390 for severance and other employee costs, and $60 of other restructuring costs. Note 8. Segment Reporting The Company operates in two business segments, wholesale and retail. The wholesale apparel segment consists of businesses that design, source, import and market men's apparel and accessories under various trademarks owned or licensed by the Company, or by its customers. The retail segment consists of a chain of retail outlet stores, through which it sells products made under the Perry Ellis trademarks by the Company and other Perry Ellis licensees. As of June 29, 2002, the Company operated 39 Perry Ellis retail outlet stores. The Company's total assets as of June 29, 2002, June 30, 2001 and December 29, 2001 and the results of operations for the six months, and the quarters ending June 29, 2002 and June 30, 2001, by segment, were as follows:
Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 Net Sales Wholesale $ 42,881 $ 38,048 $ 97,802 $ 82,953 Retail 6,767 5,980 12,121 10,523 $ 49,648 $ 44,028 $ 109,923 $ 93,476 Gross Profit Wholesale $ 11,249 $ 8,994 $ 24,989 $ 17,514 Retail 3,021 2,650 5,362 4,643 $ 14,270 $ 11,644 $ 30,351 $ 22,157 Income/(loss) before Interest and Taxes Wholesale $ 1,202 $ 479 $ 2,553 $ (1,339) Retail (128) (205) (1,037) (1,058) $ 1,074 $ 274 $ 1,516 $ (2,397) June 29, June 30, December 29, 2002 2001 2001 Total Assets Wholesale $ 118,744 $ 106,997 $ 108,547 Retail 8,540 10,359 9,185 $ 127,284 $ 117,356 $117,732
Note 9. Subsequent Events On July 15, 2002, the Company purchased 1,118,942 shares of its common stock, par value $1.00 per share, at a price of two and a half dollars ($2.50) per share, for an aggregate purchase price of $2,797. The shares will be held as treasury stock of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations Overview In January of 2001, the Company acquired the assets of Tricots St. Raphael, Inc. ("Tricots"). In January of 2002, the Company made another acquisition with the purchase of the assets of Axis Clothing Corporation ("Axis"). Tricots and Axis are both highly respected better menswear brands distributed primarily through better men's department and specialty stores in the U.S. These acquisitions were an important step in the plan to diversify the Company's distribution channels. The Company's licensed product offerings under the PERRY ELLIS trademarks continue to be the core of the Company's business. Perry Ellis products compete in the highly competitive department store arena of retail. The Company also entered into a licensee agreement in 2001 to develop the Ocean Pacific menswear label and the Company began shipping in January 2002. During 2002, the Company entered into a license agreement to develop the JNCO young men's sportswear label and shipping began in the second quarter of 2002. In 2001, the Company started a private brands division to focus on the development of additional channels of distribution for men's apparel products and in January 2002, the Company made its first delivery. Second Quarter of 2002 Compared with Second Quarter of 2001 Net Sales Net sales increased $5.6 million, or 12.8%, in the second quarter of 2002, as compared to the second quarter of 2001. This increase was the result of net sales generated by newly acquired and licensed wholesale businesses. Net sales for the wholesale segment increased $4.8 million, or 12.7%, in the second quarter of 2002, as compared to the second quarter of 2001. Existing wholesale businesses decreased $4.9 million in the second quarter of 2002, primarily due to a reduction of excess and prior season inventory sales. Newly acquired and licensed wholesale businesses accounted for an increase of $9.7 million for the second quarter of 2002. Net sales for the Perry Ellis retail outlet stores ("retail segment") increased $0.8 million, or 13.2%, in the second quarter of 2002, as compared to the second quarter of 2001. The primary reason for this increase was additional Perry Ellis retail outlet stores opened between June 30, 2001 and June 29, 2002. Gross Profit The gross profit percentage in the second quarter of 2002 increased to 28.7% from 26.4% in the second quarter of 2001. Total wholesale gross profit increased $2.3 million from the second quarter of 2001, and the gross profit percentage for the wholesale segment increased to 26.2% in the second quarter of 2002 from 23.6% in the second quarter of 2001. The increase was primarily the result of lower sales returns and allowances from customers and a decrease in prior-season inventory disposition losses. Total gross profit for the retail segment increased, due to additional stores, by $0.4 million in the second quarter of 2002, from the second quarter of 2001. The retail segment gross profit percentage remained relatively constant at 44.6% for the second quarter of 2002, as compared to the second quarter of 2001 at 44.3%. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses in the first quarter of 2002 increased to $13.2 million (26.7% of sales) from $11.3 million (25.6% of sales) as compared to the second quarter of 2001. The increase in total SG&A was the result of additional expenses related to newly acquired and licensed businesses along with additional retail outlet stores. Income/Loss Before Interest and Income Taxes Income before interest and income taxes was $1.1 million for the second quarter of 2002 as compared to income of $0.3 million for the second quarter of 2001. The increase was primarily the result of higher net sales and improved gross margins contributed by the new businesses. The retail segment's loss from operations before interest and income taxes decreased to $0.1 million in the second quarter of 2002 from a loss of $0.2 million in the second quarter of 2001. Interest Income, Net Net interest income was $76 thousand for the second quarter of 2002 as compared to $33 thousand for the second quarter of 2001. The increase was the result of higher invested cash balances during the quarter due to lower inventory levels and higher receivable collections. Net Income In the second quarter of 2002, the Company reported net income of $1.2 million, or $.12 per share, as compared to income of $0.3 million, or $.03 per share in the second quarter of 2001. Earnings Before Interest, Taxes, Depreciation and Amortization Earnings before interest, taxes, depreciation and amortization charges were $2.6 million (5.1% of sales) for the second quarter of 2002, compared to $1.6 million (3.5% of net sales) in the second quarter of 2001. The Company believes this information is helpful in understanding cash flow from operations that is available for potential acquisitions 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 operations. Year to Date 2002 Compared with Year to Date 2001 Net Sales Net sales increased $16.4 million, or 17.6%, in the first half of 2002, as compared to the first half of 2001. This increase was the result of net sales generated by newly acquired and licensed wholesale businesses. Net sales for the wholesale segment increased $14.8 million, or 17.9%, in the first six months of 2002, as compared to the first six months of 2001. Existing wholesale businesses decreased $12.5 million in the first half of 2002, primarily due to a reduction of sales because of lower levels of excess and prior season inventory. Newly acquired and licensed wholesale businesses accounted for an increase of $27.3 million for the first six months of 2002. Net sales for the retail segment increased $1.6 million, or 15.2%, in the first half of 2002, as compared to the first half of 2001. The primary reason for this increase was the additional Perry Ellis retail stores opened between June 29, 2001 and June 29, 2002. Gross Profit The gross profit percentage in the first half of 2002 increased to 27.6% from 23.7% in the first half of 2001. Total wholesale gross profit increased $7.5 million from the first six months of 2001, and the gross profit percentage for the wholesale segment increased to 25.6% in the first half of 2002 from 21.1% in the first half of 2001. The increase was primarily the result of lower sales returns and allowances and a decrease in prior-season inventory disposition losses. Total gross profit for the retail segment increased, due to additional stores, by $0.7 million in the first six months of 2002, from the first six months of 2001. The retail segment gross profit percentage remained relatively constant at 44.2% for the first half of 2002, as compared to the first half of 2001 at 44.1%. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses in the first six months of 2002 increased to $28.6 million (26.1% of sales) from $24.3 million (26.0% of sales) as compared to the first six months of 2001. The increase in total SG&A was the result of additional expenses related to new businesses and additional retail outlet stores. Income/Loss Before Interest and Income Taxes Income before interest and income taxes was $1.5 million for the first six months of 2002 as compared to a loss of $2.4 million for the first half of 2001. The increase was primarily the result of higher net sales and improved gross margins contributed by the new businesses. The retail segment's loss from operations before interest and income taxes was $1.0 million in the first half of 2002 as compared to a loss of $1.1 million in the first half of 2001. Interest Income, Net Net interest income was $100 thousand for the first half of 2002 as compared to $267 thousand for the first half of 2001. The decrease was the result of lower average invested cash balances due to the acquisition of the Axis Assets and a lower interest rate in the first six months of 2002. This was partially offset by higher cash balances due to lower inventory levels and higher receivable collections. Net Income/Loss In the first half of 2002, the Company reported net income of $1.7 million, or $.17 per share, as compared to the net loss of $2.1 million, or $.21 per share in the first half of 2001. Earnings Before Interest, Taxes, Depreciation and Amortization Earnings before interest, taxes, depreciation and amortization charges were $4.4 million (4.0% of sales) for the first six months of 2002, compared to $0.2 million (0.2% of net sales) in the first half of 2001. The Company believes this information is helpful in understanding cash flow from operations that is available for potential acquisitions 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 operations. Liquidity and Capital Resources On May 11, 1999, the Company entered into a syndicated revolving credit facility, (the "Credit Agreement"), as amended and restated on November 30, 2001, with The CIT Group/Commercial Services, Inc. ("CIT"). Effective May 11, 2002, the Company signed an amendment with CIT to extend the Credit Agreement for an additional three years. The Credit Agreement provides for a general working capital facility, in the form of direct borrowings and letters of credit, up to $85 million subject to an asset-based borrowing formula. The Credit Agreement consists of an $85 million revolving credit facility, with at least a $45 million letter of credit sub-facility. As collateral for borrowings under the Credit Agreement, the Company granted to CIT a first priority lien on and security interest in substantially all of the assets of the Company. The Credit Agreement also provides, among other things, that (i) the Company will be charged an interest rate on direct borrowings of the Prime Rate or at the Company's request, 2.25% in excess of LIBOR (as defined in the Credit Agreement), and (ii) the Lenders may, in their sole discretion, make loans to the Company in excess of the borrowing formula but within the $85 million limit of the revolving credit facility. The Company is required under the agreement to maintain certain financial covenants, including but not limited to, consolidated tangible net worth, capital expenditures, minimum pre-tax income, minimum interest coverage ratio and an annual provision to reduce cash borrowings to zero for 30 consecutive days. The Company was in compliance with all applicable covenants at June 29, 2002. At June 29, 2002, there were no direct borrowings outstanding; letters of credit outstanding under the Credit Agreement were $37.8 million and the Company had unused availability, based on outstanding letters of credit and existing collateral, of $9.7 million and cash of approximately $31.2 million available to fund its operations. At the end of the second quarter of 2001, there were no direct borrowings outstanding; letters of credit outstanding were $23.1 million, and the Company had unused availability of $21.5 million and cash of approximately $9.2 million available to fund its operations. June 29, June 30, 2002 2001 Maximum Availability under Credit Agreement $47.5 $44.6 Borrowings under Credit Agreement -- -- Outstanding Letters of Credit 37.8 23.1 Current Availability under Credit Agreement $ 9.7 $21.5 Cash on Hand 31.2 9.2 Available to fund operations $40.9 $30.7 The Company's cash provided by operating activities for the first six months of 2002 was $26.6 million, which primarily reflects (i) a decrease in net accounts receivable of $13.0 million, (ii) an increase in net inventories of $0.4 million, (iii) a decrease in prepaid and other assets of $1.6 million, (iv) an increase in accounts payable of $7.6 million, (v) an increase in accrued liabilities and reserve for business restructuring of $0.3 million, and (vi) net income from continuing operations of $1.7 million. In addition, non-cash charges for depreciation and amortization totaled $2.9 million. Cash used by investing activities for the first six months of 2002 was $15.2 million, which reflects $13.2 million used to purchase certain assets of Axis Clothing Corporation, $1.5 million for capital expenditures and $0.5 million for store fixtures. During fiscal 2002, the Company plans to make capital expenditures of approximately $5.1 million and to spend $1.0 million for the installation of fixtures in department stores. Working Capital At June 29, 2002, working capital totaled $58.6 million as compared to $67.9 million at the end of the second quarter of 2001 and the current ratio was 3.2:1 as compared to 4.8:1 in the second quarter of 2001. The primary decrease in working capital was due to the purchase of the Axis assets. The components of working capital also changed significantly on June 29, 2002 as compared to June 29, 2001. Cash increased by $22.0 million and current liabilities increased by $8.3 million, which were offset by a decrease in inventory, and the purchase of the Axis Assets. The decrease in inventory is due to increased inventory turnover. Liabilities increased $8.3 million at the end of the second quarter of 2002 as compared to the second quarter of 2001 due to the timing of inventory purchases and receipts. Accounts receivable decreased by $4.2 million due to timing of sales within the quarter. 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, source, import and market its products. Because of the following 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. 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. Trademarks Licensed to the Company. Approximately two-thirds of the Company's net sales are attributable to trademarked products sold under license by the Company. The principal trademarks licensed to the Company are PERRY ELLIS, PORTFOLIO BY PERRY ELLIS, OCEAN PACIFIC and JNCO. The licenses contain provisions related to, among other things, products which may be sold, territories where products may be sold, restrictions on sales to certain levels of distribution, minimum sales and royalty requirements, advertising and promotion requirements, sales reporting, design and product standards, renewal options, assignment and change of control provisions, defaults, cures and termination provisions. The change of control provisions and their potential effect vary with each licensing agreement (see Item 5. Other Events). Assuming the exercise of all renewal options by the Company, The Perry Ellis licenses will expire on December 31, 2015, the Ocean Pacific license will expire on December 31, 2008 and the JNCO license will expire on December 31, 2011. Should any of the Company's material licenses be terminated, outside the normal course of business, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. Strategic Initiatives. In the first quarter of 2002, the Company acquired certain assets and trademarks of Axis which designs, produces, and markets better men's sportswear. In the first quarter of 2001, the Company purchased certain assets and trademarks of Tricots St. Raphael, Inc. which designs, produces, and markets better men's sweaters and sportswear. The Company also entered into a licensee agreement in 2001 to develop the Ocean Pacific menswear label and the Company began shipping in January 2002. During 2002, the Company entered into a license agreement to develop the JNCO young men's sportswear label and shipping began in the second quarter of 2002. In 2001, the Company started a private brands division to focus on the development of additional channels of distribution for men's apparel products and in January 2002, the Company delivered its first shipments. As a result of these acquisitions and licenses, Salant has diversified its operations by expanding into alternate channels of distribution. Management of the Company is continuing to explore various strategic opportunities, including but not limited to, new licensing opportunities and/or acquisitions. Management is also exploring ways to increase productivity and efficiency, and to reduce the cost structures of its respective businesses. Through this process management expects to expand its distribution channels and achieve effective economies of scale. No assurance may be given that any transactions resulting from this process will be announced or completed. Apparel Industry Cycles and other Economic Factors. Historically, the apparel industry 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. To the extent that these difficult financial conditions continue at retail, 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, Transition, 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 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. Although the Company has experienced no material foreign currency transaction losses, 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, could have a material adverse effect on the Company's performance. Dependence on Contract Manufacturing. The Company produces substantially 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. New Accounting Pronouncements. Effective December 30, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position and no longer be amortized, but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. The Company did not recognize any impairment after completion of the transitional impairment test. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective December 30, 2001. Previously reported net income for the quarter and six months ended June 30, 2001 would have increased by $27 and $54 respectively due to the amounts adjusted for the exclusion of goodwill amortization. In October 2001, the Financial Accounting Standards Board issued ("FASB") SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and was effective for the first quarter in the fiscal year ending December 28, 2002. The adoption of this Statement did not have an impact on the consolidated financial statements. In April 2002, the FASB issued SFAS No.145, "Recession of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections". In addition to amending and rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS No. 145 precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS No. 145 is effective for the first quarter in the fiscal year ending January 3, 2004. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated results of operations or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated results of operations or financial position. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on June 21, 2002. b) At the Annual Meeting, the Company's stockholders elected the following two Class Three directors to serve until the Annual Meeting of Stockholders to be held in 2005: Rose Peabody Lynch (Number of shares for: 4,760,940, Number of shares withheld: 2,546,256) and Michael J. Setola (Number of shares for: 4,760,973, Number of shares withheld: 2,546,223). The remaining members of the Board of Directors and their respective terms of offices are as follows: Class One director, Talton R. Embry, whose term expires at the Annual Meeting to be held in 2003 and Class Two directors, G. Raymond Empson and Ben Evans, whose terms expire at the Annual Meeting to be held in 2004. c) At the Annual Meeting, the Company's stockholders also voted upon and approved the ratification of the appointment of Deloitte & Touche LLP as the Company's independent auditors for the 2002, 2003 and 2004 fiscal years (Number of shares for: 4,711,012, Number of shares against: 51,094, Number of shares abstained: 2,545,090, Number of broker non-votes: 0). ITEM 5. OTHER EVENTS On May 16, 2002, the Company's Board of Directors declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of the Company's common stock, par value $1.00 per share (the "Shares"). Each Right, subject to certain exceptions, when it becomes exercisable, entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $2.00 par value (the "Preferred Shares"), of the Company at a price of $15.00 per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment. Initially, the rights will attach to all certificates representing Common Stock and no separate Right certificates will be distributed; provided, however, upon the occurrence of certain events the Rights will separate from the Shares. The description and terms of the Rights are set forth in a Rights Agreement between the Company and Mellon Investor Services LLC, a New Jersey limited liability company, as Rights Agent, dated as of May 17, 2002, which was previously filed with the SEC. A more detailed discussion of the Rights is set forth in the Company's Form 8-K referenced in Item 6 below. On July 12, 2002 Magten Asset Management Corp. ("Magten"), a registered investment advisor, reported on a Form 4 (filed on July 12, 2002) and Amendment No. 4 to Schedule 13D that it had distributed in kind 2,091,347 Shares to investment advisory clients on June 30, 2002 (the Company believes 1,118,942 of such Shares were distributed to Hughes (as defined below)) and sold 1,530 Shares on June 20, 2002. As a result of the distribution and sale of such Shares and Magten's previously reported distribution of 2,545,042 shares on April 15, 2002, Magten has reported that its beneficial ownership of Shares has been reduced since April 15, 2002 from 5,984,850 representing approximately 60.4% of the outstanding shares at such time, to 1,346,930, representing approximately 15.3% of the outstanding Shares as of the date hereof based upon 8,782,198 shares reported outstanding as of July 31, 2002. Talton R. Embry, a managing director and the sole shareholder of Magten, is a director of the Company and also filed a Form 4 on July 12, 2002 reporting the Magten dispositions. On July 15, 2002, the Company, pursuant to a Stock Purchase Agreement dated as of July 11, 2002, by and among the Company, Deutsche Bank Trust Company Americas, as Master Trustee of the Hughes Retirement Plans Trust ("Hughes"), and Hughes Investment Management Company, purchased one million one hundred eighteen thousand nine hundred forty-two (1,118,942) Shares, from Hughes, at a price of two and a half dollars ($2.50) per share, for an aggregate purchase price of $2,797,355. As a result of this transaction, the Company believes Hughes no longer owns any Shares. The Shares acquired from Hughes will be held as treasury stock of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Reports on Form 8-K During the second quarter of 2002, the Company filed an 8-K on May 16, 2002 relating to the adoption of the Company's Shareholder Rights Plan. 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 9, 2002 /s/ Awadhesh K. Sinha Awadhesh K. Sinha Chief Operating Officer and Chief Financial Officer