-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MFxph9HQXlf55vyOhe++8ESc55GSoxOsXRkPsEUA1MjnJJef5JE3I3iHVvXF7KfB qpvGWaiImBwjGwTmZUOeNg== 0000086346-97-000016.txt : 19980102 0000086346-97-000016.hdr.sgml : 19980102 ACCESSION NUMBER: 0000086346-97-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALANT CORP CENTRAL INDEX KEY: 0000086346 STANDARD INDUSTRIAL CLASSIFICATION: 2320 IRS NUMBER: 133402444 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06666 FILM NUMBER: 97713251 BUSINESS ADDRESS: STREET 1: 1114 AVE OF THE AMERICAS STREET 2: 36TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2122217500 MAIL ADDRESS: STREET 1: 1058 CLAUSSEN RDSTE 101 CITY: AUGUSTA STATE: GA ZIP: 30907 10-Q 1 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 September 27, 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 November 6, 1997, there were outstanding 14,849,853 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 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 Nine Months Ended Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1997 1996 1997 1996 Net sales $110,871 $117,159 $ 280,472 $ 302,595 Cost of goods sold 83,635 88,100 216,881 234,729 -------- -------- --------- --------- Gross profit 27,236 29,059 63,591 67,866 Selling, general and administrative expenses (17,712) (19,661) (59,072) (62,647) Royalty income 1,297 1,586 3,833 4,114 Goodwill amortization (470) (513) (1,411) (1,733) Reversal of/(provision for) restructuring costs (Note 5) -- (152) 1,164 (11,730) Other income 171 45 359 111 -------- -------- --------- --------- Income/(loss) from continuing operations before interest, income taxes and extraordinary gain 10,522 10,364 8,464 (4,019) Interest expense, net 4,490 3,966 11,867 11,524 -------- -------- --------- --------- Income/(loss) from continuing operations before income taxes and extraordinary gain 6,032 6,398 (3,403) (15,543) Income taxes 70 60 174 24 -------- -------- --------- --------- Income/(loss) from continuing operations before extraordinary gain 5,962 6,338 (3,577) (15,567) Discontinued operations (Note 3): Income/(loss) from operations before extraordinary gain -- (3) (8,136) 128 Estimated loss on disposal (750) -- (1,330) -- Extraordinary gain (Note 4) -- -- 600 -- -------- -------- --------- --------- Net income/(loss) $ 5,212 $ 6,335 $ (12,443) $ (15,439) ======== ======== ========= ========= Income/(loss) per share: Income/(loss) per share from continuing operations $ 0.39 $ 0.42 $ (0.24) $ (1.03) Income/(loss) per share from discontinued operations (0.05) -- (0.62) 0.01 Extraordinary gain -- -- 0.04 -- -------- -------- -------- --------- Net income/(loss) per share $ 0.34 $ 0.42 $ (0.82) $ (1.02) ======== ======== ======== ========= Weighted average common stock and common stock equivalents outstanding 15,173 15,113 15,128 15,073 ======== ======== ======== =========
See Notes to Condensed Consolidated Financial Statements. 4
SALANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) Sept. 27, December 28, Sept. 28, 1997 1996 1996 (Unaudited) (*) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,862 $ 1,498 $ 1,789 Accounts receivable, net 65,207 40,133 56,390 Inventories (Note 2) 120,225 98,497 114,068 Prepaid expenses and other current assets 2,798 3,869 3,256 Net assets of discontinued operations (Note 3) -- 6,988 6,860 ---------- ---------- ---------- Total current assets 190,092 150,985 182,363 Property, plant and equipment, net 28,660 25,173 26,123 Other assets 58,290 59,093 59,894 ---------- ---------- ---------- Total assets $ 277,042 $ 235,251 $ 268,380 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable $ 73,021 $ 7,677 $ 40,608 Accounts payable 27,939 27,562 31,880 Accrued liabilities (Note 3) 13,072 17,986 16,543 Current portion of long term debt -- 3,372 -- Reserve for business restructuring (Note 5) 1,642 2,969 4,189 ---------- ---------- ---------- Total current liabilities 115,674 59,566 93,220 Long term debt 104,879 106,231 109,574 Deferred liabilities 8,133 8,863 10,158 Shareholders' equity Common stock 15,405 15,328 15,329 Additional paid-in capital 107,249 107,130 107,130 Deficit (69,590) (57,147) (63,263) Excess of additional pension liability over unrecognized prior service cost (3,182) (3,182) (2,185) Accumulated foreign currency translation adjustment 88 76 31 Less - treasury stock, at cost (1,614) (1,614) (1,614) ---------- ---------- ---------- Total shareholders' equity 48,356 60,591 55,428 ---------- ---------- ---------- Total liabilities and shareholders' equity $ 277,042 $ 235,251 $ 268,380 ========== ========== ========== (*) Derived from the audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
1 SALANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Nine Months Ended Sept. 27, Sept. 28, 1997 1996 ---------- ---------- Cash Flows from Operating Activities: Loss from continuing operations $ (3,577) $ (15,567) Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Depreciation 3,344 3,100 Amortization of intangibles 3,178 2,937 Write-down of fixed assets -- 227 Write-off of other assets -- 6,274 Loss on disposal of fixed assets -- 27 Change in operating assets and liabilities: Accounts receivable (25,074) (21,513) Inventories (21,728) 1,297 Prepaid expenses and other current assets 1,071 1,651 Other assets (206) (825) Accounts payable 377 6,847 Accrued liabilities and reserve for business restructuring (7,029) (1,338) Deferred liabilities (1,482) (1,181) ---------- ---------- Net cash used in operating activities (51,126) (18,064) ---------- ---------- Cash Flows from Investing Activities: Capital expenditures (6,875) (5,027) Store fixture expenditures (2,169) (2,338) Acquisition -- (694) Proceeds from sale of assets -- 54 ---------- ---------- Net cash used in investing activities (9,044) (8,005) ---------- ---------- Cash Flows from Financing Activities: Net short-term borrowings 65,344 26,186 Retirement of long-term debt (3,372) -- Proceeds from exercise of stock options 196 113 Other, net 12 (99) ---------- ---------- Net cash provided by financing activities 62,180 26,200 ---------- ---------- Net cash provided by continuing operations 2,010 131 Cash (used in)/provided by discontinued operations (1,646) 263 ---------- ---------- Net increase in cash and cash equivalents 364 394 Cash and cash equivalents - beginning of year 1,498 1,395 ---------- ---------- Cash and cash equivalents - end of quarter $ 1,862 $ 1,789 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 14,152 $ 15,030 ========== ========== Income taxes $ 174 $ 129 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 1 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 nine months ended September 27, 1997 and September 28, 1996 are not necessarily indicative of a full year's operations. In the opinion of management, the accompanying financial statements include only 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 September 27, 1997 and September 28, 1996, 320,609 and 331,996 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
Sept. 27, December 28, Sept. 28, 1997 1996 1996 Finished goods $78,049 $57,827 $75,737 Work-in-Process 17,146 14,800 15,163 Raw materials and supplies 25,030 25,870 23,168 -------- -------- ---------- $120,225 $98,497 $114,068 ======== ======= ========
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 nine months ended September 27, 1997 was $8,136, which included a second quarter charge of $4,459 for the write-off of goodwill. Net sales of the division were $623 and $2,822 for the three and nine months ended September 27, 1997, respectively. Net sales of the division were $5,439 and $16,208 for the three and nine months ended September 28, 1996, respectively. Additionally, in 1997, the Company recorded a charge of $1,330, including $750 in the third quarter, to accrue for expected losses during the phase-out period. 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 1996, the Company recorded a provision for restructuring of $11,730, including $152 in the third quarter, consisting of (i) $5,718 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) $1,837 primarily related to employee costs in connection with the closing of a manufacturing and distribution facility in Thomson, Georgia, (iv) $714 primarily related to employee costs in connection with the closing of a manufacturing facility in Americus, Georgia and (v) $603 related primarily to other severance costs. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations Third Quarter of 1997 Compared with Third 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 September 27, 1997 and September 28, 1996 and the percentage contribution of each of those segments to total net sales:
Percentage Three Months Ended Increase/ Sept. 27, 1997 Sept. 28, 1996 (Decrease) (dollars in millions) Men's Apparel $82.6 74% $89.5 76% (7.7%) Children's Sleepwear and Underwear 22.0 20% 19.9 17% 10.8% Retail Outlet Stores 6.3 6% 7.8 7% (19.1%) ------- ---- ----- ---- Total $110.9 100% $117.2 100% (5.4%) ====== ===== ====== ====
Sales of Men's apparel decreased by $6.9 million, or 7.7%, in the third quarter of 1997, as compared to the third quarter of 1996. This decrease resulted from (a) a $3.9 million reduction in sales of men's sportswear, which included a $7.8 million planned reduction based upon the Company's decision to eliminate its JJ. Farmer and Manhattan sportswear lines, as offset by a $3.9 million increase in sales of Perry Ellis sportswear product, (b) a $4.1 million decrease in sales of men's accessories, primarily due to the slow-down of the novelty neckwear business and (c) a $2.3 million reduction in sales of men's jeans (other than jeans manufactured for Sears Roebuck & Co. under the Canyon River Blues label). These sales decreases were partially offset by a $3.3 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 $2.1 million, or 10.8%, in the third quarter of 1997, as compared to the third 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 $1.5 million, or 19.1%, in the third quarter of 1997, as compared to the third quarter of 1996. This decrease was primarily due to a decrease in the number of retail outlet stores, from 69 in September 1996 to 62 in September 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 September 27, 1997 and September 28, 1996:
Three Months Ended d Sept. 27, 1997 Sept. 28, 1996 (dollars in millions) Men's Apparel $19.0 23.0% $20.4 22.8% Children's Sleepwear and Underwear 5.6 25.3% 5.9 29.4% Retail Outlet Stores 2.6 42.3% 2.8 36.4% --- --- Total $27.2 24.6% $29.1 24.8% ===== =====
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 decline in the children's segment resulted from the introduction of sportswear product lines in 1997, which carry a slightly lower margin than existing product lines. 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. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the third quarter of 1997 were $17.7 million (16.0% of net sales) as compared with $19.7 million (16.8% of net sales) for the third quarter of 1996. The SG&A expense decrease is primarily related to the elimination of the Company's JJ. Farmer and Manhattan sportswear lines, as previously discussed. Income from Continuing Operations Before Interest, Income Taxes and Extraordinary Gain The following table sets forth the income 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 September 27, 1997 and September 28, 1996:
Three Months Ended Sept. 27, 1997 Sept. 28, 1996 (dollars in millions) Men's Apparel $7.9 9.6% $6.9 7.7% Children's Sleepwear and Underwear 3.7 16.6% 4.3 21.8% Retail Outlet Stores (0.6) (8.9%) (0.6) (7.8%) ------ -------- 11.0 9.9% 10.6 9.1% Corporate expenses (1.5) (1.6) Licensing division income 1.0 1.4 --- --- Income from continuing operations before interest, income taxes and extraordinary gain $10.5 9.5% $10.4 8.8% ===== =====
Interest Expense, Net Net interest expense was $4.5 million for the third quarter of 1997 compared with $4.0 million for the third quarter of 1996. The increase in interest expense resulted from higher average borrowings in the third quarter of 1997 as compared to the third quarter of 1996. Discontinued Operations In the third quarter of 1997, the Company recorded an additional charge of $0.8 million, or $(0.05) per share, to accrue for expected losses during the phase-out period of the Made in the Shade division. Net sales of the division for the three months ended September 27, 1997 and September 28, 1996 were $0.6 million and $5.4 million, respectively. Net Income In the third quarter of 1997, the Company reported net income of $5.2 million, or $0.34 per share, as compared with net income of $6.3 million, or $0.42 per share, in the third quarter of 1996. Earnings Before Interest, Taxes, Depreciation, Amortization and Restructuring Charges Earnings before interest, taxes, depreciation, amortization and restructuring charges was $12.6 million (11.4% of net sales) in the third quarter of 1997, compared to $12.2 million (10.5% of net sales) in the third quarter of 1996, an increase of $0.4 million, or 3%. 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 nine months ended September 27, 1997 and September 28, 1996 and the percentage contribution of each of those segments to total net sales:
Percentage Nine months Ended Increase/ Sept. 27, 1997 Sept. 28, 1996 (Decrease) -------------- -------------- ---------- (dollars in millions) Men's Apparel $232.4 83% $254.9 84% (8.8%) Children's Sleepwear and Underwear 31.9 11% 28.5 10% 11.9% Retail Outlet Stores 16.2 6% 19.2 6% (16.0%) ------- -- ---- -- Total $280.5 100% $302.6 100% (7.3%) ====== ==== ====== ====
Sales of Men's apparel decreased by $22.5 million, or 8.8%, in the first nine months of 1997, as compared to the first nine months of 1996. This decrease resulted from (a) an $12.8 million reduction in sales of men's slacks, of which $8.9 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 $9.7 million reduction in sales of men's sportswear, which included a $15.2 million planned reduction based upon the Company's decision to eliminate its JJ. Farmer and Manhattan sportswear lines, as offset by a $5.5 million increase in sales of Perry Ellis sportswear product, (c) a planned $6.8 million reduction in sales of certain dress shirt lines, which was based upon the Company's decision to eliminate unprofitable businesses and (d) a $6.0 million decrease in sales of men's accessories, primarily due to the slow-down of the novelty neckwear business in the first nine months of 1997. These sales decreases were partially offset by a $10.0 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 $3.4 million, or 11.9%, in the first nine months of 1997, as compared to the first nine months 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 $3.0 million, or 16.0%, in the first nine months of 1997, as compared to the first nine months of 1996. This decrease was primarily due to a decrease in the number of retail outlet stores, from 69 in September 1996 to 62 in September 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 nine months ended September 27, 1997 and September 28, 1996:
Nine months Ended Sept. 27, 1997 Sept. 28, 1996 (dollars in millions) Men's Apparel $50.0 21.5% $53.7 21.1% Children's Sleepwear and Underwear 7.0 21.8% 7.4 25.8% Retail Outlet Stores 6.6 41.0% 6.8 35.2% ------ ------ Total $63.6 22.7% $67.9 22.4% ===== =====
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 decline in the children's segment resulted from the introduction of sportswear product lines in 1997, which carry a slightly lower margin than existing product lines. 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 nine months of 1997 were $59.1 million (21.1% of net sales) as compared with $62.6 million (20.7% of net sales) for the first nine months of 1996. S,G&A expenses in the first nine months 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 nine months 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 quarter of 1997, $0.5 million in 1998 and $0.3 million in 1999. In the first nine months of 1996, the Company recorded a provision for restructuring of $11.7 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) $0.7 million primarily related to employee costs in connection with the closing of a manufacturing facility in Americus, Georgia and (v) $0.6 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 nine months ended September 27, 1997 and September 28, 1996:
Nine months Ended Sept. 27, 1997 Sept. 28, 1996 (dollars in millions) Men's Apparel (a) $13.3 5.7% $ (1.2) (0.5%) Children's Sleepwear and Underwear 1.4 4.4% 3.3 11.5% Retail Outlet Stores (3.2) (19.7%) (3.2) (16.5%) ----- -------- 11.5 4.1% (1.1) (0.4%) Corporate expenses (6.0) (6.2) Licensing division income 3.0 3.3 ------ -------- Income/(loss) from continuing operations before interest, income taxes and extraordinary gain $8.5 3.0% $(4.0) (1.3%) ==== =====-
(a) Includes the reversal of restructuring charges of $1.2 million in 1997 and a restructuring provision of $11.7 million in 1996. The $12.5 million increase in income from continuing operations before interest, income taxes and extraordinary gain in the first nine months of 1997 was primarily a result of the absence of the $11.7 million restructuring charge in the prior year. Interest Expense, Net Net interest expense was $11.9 million for the first nine months of 1997 compared with $11.5 million for the first nine months of 1996. Discontinued Operations In the first nine months of 1997, the Company recognized a charge of $9.5 million, or $(0.62) 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 $1.3 million for estimated losses during the phase-out period. Net sales of the division for the nine months ended September 27, 1997 and September 28, 1996 were $2.8 million and $16.2 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 nine months of 1997, the Company reported a net loss of $12.4 million, or $(0.82) per share, as compared with a net loss of $15.4 million, or $(1.02) per share, in the first nine months 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 $13.8 million (4.9% of net sales) in the first nine months of 1997, compared to $13.7 million (4.5% of net sales) in the first nine months of 1996. 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. 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 September 27, 1997) or 3.00% above the London Late Eurodollar rate (the "Eurodollar Rate", which was 5.7% at September 27, 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 $14.4 million at September 27, 1997 and $23.8 million at September 28, 1996. This decrease resulted from lower sales in the third quarter of 1997 of product lines for which the receivables are sold to CIT. On September 27, 1997, direct borrowings (including borrowings under the Eurodollar option) and letters of credit outstanding under the Credit Agreement were $73.0 million and $24.0 million, respectively, and the Company had unused availability of $12.6 million. On September 28, 1996, direct borrowings and letters of credit outstanding under the Credit Agreement were $40.6 million and $28.8 million, respectively, and the Company had unused availability of $25.5 million. The increase in direct borrowings is primarily related to the increase in inventory of $21.7 million, capital and store fixture expenditures of $9.0 million and the repayment of long term debt of $3.4 million. The decrease in unused availability is related to the higher direct borrowings, as partially offset by an increase in the percentage of inventory available under the asset-based borrowing formula and the lower outstanding letters of credit. During the first nine months of 1997, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $112.9 million at which time the Company had unused availability of $10.5 million. During the first nine months of 1996, the maximum aggregate amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $101.9 million at which time the Company had unused availability of $18.4 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 these two financial covenants contained in the Credit Agreement: Sept. 27, 1997 Credit Agreement Covenants Covenant Level Actual Level Stockholders' Equity no less than $42.5 million $48.4 million Maximum Loss (a) no more than $(15.0) million $(14.7) million (a) 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 nine months of 1997 was $51.1 million, which reflects a $25.1 million increase in inventories and a $21.7 million increase in receivables, a significant portion of which was planned to occur in the first nine months of 1997. Cash used for investing activities in the first nine months of 1997 was $9.0 million, which represented capital expenditures of $6.9 million and the installation of store fixtures in department stores of $2.2 million. During the fourth quarter of 1997, the Company plans to make additional capital expenditures of approximately $0.6 million and to spend an additional $0.5 million for the installation of store fixtures in department stores. Cash provided by financing activities in the first nine months of 1997 was $62.2 million, which represented short-term borrowings under the Credit Agreement of $65.3 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 September 27, 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. 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 materially 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 $177.9 million as of September 27, 1997. This level of indebtedness could materially 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 6. EXHIBITS AND REPORTS ON FORM 8-K Reports on Form 8-K During the third quarter of 1997, the Company did not file any reports on Form 8-K. 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: November 11, 1997 /s/ Philip A. Franzel ------------------- --------------------- Philip A. Franzel Executive Vice President and Chief Financial Officer (Principal Accounting Officer) EX-27 2
5 1,000 9-MOS JAN-03-1998 SEP-27-1997 1,862 0 65,207 0 120,225 190,092 28,660 0 277,042 115,674 104,879 0 0 15,405 32,951 277,042 280,472 284,664 216,881 277,364 0 (1,164) 11,867 (3,403) 174 (3,577) 9,466 600 0 (12,443) .82 .82
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