-----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, LT18+YWYzxD2l6NZljLhxtMHRN6QxJ0LAh9zElh1W2pn0wyfmHhOmYLReZXn/Yd3 o3F0moSrPWXw2D12sn1sWA== 0000086346-99-000011.txt : 19991117 0000086346-99-000011.hdr.sgml : 19991117 ACCESSION NUMBER: 0000086346-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALANT CORP CENTRAL INDEX KEY: 0000086346 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 133402444 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06666 FILM NUMBER: 99758739 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 October 2, 1999. 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 10, 1999, there were outstanding 10,000,000 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 Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Balance Sheets Condensed Consolidated Statements of Cash Flows Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION SIGNATURE
4 Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 -------- -------- -------- --------- Net sales $ 57,297 $ 80,344 $197,699 $226,651 Cost of goods sold 43,186 59,483 156,987 173,158 ------- -------- -------- -------- Gross profit 14,111 20,861 40,712 53,493 Selling, general and administrative expenses (12,000) (16,678) (41,766) (47,358) Royalty income 193 1,097 1,687 3,774 Goodwill amortization (130) (470) (389) (1,411) (Provision for)/Reversal of division restructuring costs (Note 5) -- -- (4,039) 158 Other income 41 4 463 172 -------- --------- -------- -------- Income/(loss) from continuing operations before interest, income taxes and extraordinary gain 2,215 4,814 (3,332) 8,828 Interest (income)/expense, net (174) 3,580 597 10,505 -------- -------- ------ --------- Income/(loss) from continuing operations before income taxes and extraordinary gain 2,389 1,234 (3,929) (1,677) Income taxes 18 46 77 20 ------- -------- ------- -------- Income/(loss)from continuing operations before extraordinary gain 2,371 1,188 (4,006) (1,697) Discontinued operations (Note 6): Income/(loss)from discontinued operations -- 902 (1,955) (3,079) Extraordinary gain (Note 7) -- -- 24,703 -- ------- ------- ------- ------- Net income/(loss) $ 2,371 $ 2,090 $18,742 $ (4,776) ======== ======= ======= ======== Pro forma basic and diluted income/(loss) per share (Note 8): From continuing operations $ 0.24 $ .12 $(0.40) $ (0.17) From discontinued operations -- .09 (0.20) (0.31) From extraordinary gain -- -- 2.47 -- ------- ------ ------- ------- Pro forma basic and diluted income/(loss) per share $ .24 .21 1.87 $ (0.48) ======= ======= ======= ======== Pro forma weighted average common stock outstanding 10,000 10,000 10,000 10,000 ======= ======== ======== =========
See Notes to Condensed Consolidated Financial Statements. Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 -------- --------- ------- -------- Net income/(loss) $ 2,371 $ 2,090 $ 18,742 $(4,776) Other comprehensive income, net of tax: Foreign currency translation adjustments -- (292) 58 (262) -------- -------- -------- -------- Comprehensive income/(loss) $ 2,371 $ 1,798 $ 18,800 $ (5,038) ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) October 2, January 2, October 3, 1999 1999 1998 (Unaudited) (*) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 10,276 $ 1,222 $ 1,931 Accounts receivable, net 35,689 38,359 57,429 Inventories (Note 3) 37,544 69,590 87,949 Prepaid expenses and other current assets 4,205 5,266 9,244 Assets held for sale (Note 2) 122 28,400 -- Net assets of discontinued operations -- 6,860 27,114 ---------- ---------- ---------- Total current assets 87,836 149,697 183,667 Property, plant and equipment, net 13,640 12,371 27,527 Other assets 13,713 14,061 55,176 ---------- ---------- ---------- Total assets $ 115,189 $ 176,129 $ 266,370 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable $ 630 $ 38,496 $ 76,277 Accounts payable 7,542 2,831 19,105 Chapter 11 liabilities (Note 2) 4,271 143,807 -- Accrued liabilities 12,284 14,344 22,000 Current portion of long term debt -- -- 104,879 Reserve for business restructuring (Note 5) 3,677 3,551 1,495 -------- ---------- ------------ Total current liabilities 28,404 203,029 223,756 Deferred liabilities 3,895 4,010 5,351 Shareholders' equity/(deficiency): Common stock - old (Note 2) -- 15,405 15,405 Common stock - new (Note 2) 10,000 -- -- Additional paid-in capital 206,041 107,249 107,249 Deficit (129,156) (147,897) (80,013) Accumulated other comprehensive income (Note 4) (3,995) (4,053) (3,764) Less - treasury stock, at cost -- (1,614) (1,614) --------- ---------- ---------- Total shareholders' equity/(deficiency) 82,890 (30,910) 37,263 ---------- ---------- ---------- Total liabilities and shareholders' equity/(deficiency) $ 115,189 $ 176,129 $ 266,370 ========== ========== ========== (*) 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 October 2, October 3, 1999 1998 Cash Flows from Operating Activities: Loss from continuing operations $ (4,006) $ (1,697) Adjustments to reconcile loss from continuing operations to net cash provided by/(used in) operating activities: Depreciation 3,648 5,543 Amortization of intangibles 389 1,411 Change in operating assets and liabilities Accounts receivable 2,670 (17,794) Inventories 32,046 (3,172) Prepaid expenses and other current assets 1,061 (5,708) Accounts payable 4,711 (4,784) Accrued liabilities and reserve for business restructuring (1,813) 5,166 Chapter 11 liabilities (19,954) -- Deferred liabilities (115) (31) --------- ----- Net cash provided by/(used in) continuing operating activities 18,637 (21,066) Cash provided by/(used in) discontinued operations 4,905 (12,704) --------- --------- Net cash provided by/(used in) operations 23,542 (33,770) --------- -------- Cash Flows from Investing Activities: Capital expenditures (3,219) (7,865) Proceeds from the sale of assets 28,278 -- Store fixture expenditures (1,739) (839) --------- ------ Net cash provided by/(used in) investing activities 23,320 (8,704) --------- -------- Cash Flows from Financing Activities: Net short-term loans (payments)/borrowings (37,866) 42,477 Other, net 58 (265) -------- -------- Net cash (used in)/provided by financing activities (37,808) 42,212 --------- -------- Net increase/(decrease) in cash and cash equivalents 9,054 (262) Cash and cash equivalents - beginning of year 1,222 2,193 -------- -------- Cash and cash equivalents - end of quarter $ 10,276 $ 1,931 ======== ========
See Notes to Condensed Consolidated Financial Statements.
Salant Corporation and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Nine Months Ended October 2, October 3, 1999 1998 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,031 $ 2,522 Income taxes 77 144 Supplemental investing and financing non-cash transactions: Common Stock issued for Senior Notes 104,879 -- Common Stock issued for pre-petition interest 14,703 -- Common Stock issued for post-petition interest 121 --
See Notes to Condensed Consolidated Financial Statements. SALANT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in Thousands of Dollars, Except Share Data) (Unaudited) Note 1. Basis of Presentation and Consolidation The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Salant Corporation ("Salant") and subsidiaries (collectively, the "Company"). The Company's principal business is the designing, manufacturing, importing and marketing of men's apparel. The Company sells its products to retailers, including department and specialty stores, national chains, major discounters and Company owned retail outlet stores, throughout the United States and Canada. The results of operations for the three and nine months ended October 2, 1999 and October 3, 1998 are not necessarily indicative of a full year's operations. In the opinion of management, the accompanying financial statements include all adjustments of a normal recurring nature, which are necessary to present fairly such financial statements. Significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report to shareholders for the year ended January 2, 1999. Note 2. Financial Restructuring On December 29, 1998 (the "Filing Date"), Salant filed a petition under chapter 11 of title 11 of the United States Code (the "Chapter 11 Case") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") in order to implement a restructuring of its 10-1/2 % Senior Notes due December 31, 1998 (the "Senior Notes"). Salant also filed its Plan of Reorganization (as amended the "Plan") with the Bankruptcy Court in order to implement its restructuring. Salant's major note and equity holders supported the Plan. On April 16, 1999, the Bankruptcy Court entered an order (the "Confirmation Order") confirming the Plan. The effective date of the Plan occurred on May 11, 1999 (the "Effective Date"). As of the Filing Date, Salant had $143,807 of chapter 11 liabilities, consisting of $104,879 of Senior Notes, $14,703 in Senior Note interest and $24,225 of unsecured pre-bankruptcy claims, in addition to loans payable to The CIT Group/Commercial Credit Services, Inc. (CIT). In addition, during the fourth quarter of 1998, Salant accrued estimated fees of $3.2 million for the administration of the chapter 11 proceedings. During the first nine months of 1999, the Company paid certain liabilities that were supported by letters of credit and other liabilities that were approved by the Bankruptcy Court in order to effectuate the sale of non-Perry Ellis assets. As of October 2, 1999 the Company had $4,271 of chapter 11 liabilities. The balance consists primarily of items in which the scheduled amount and the claim amount are not in agreement. The Company is currently in the process of reconciling these amounts. Salant obtained an $85 million debtor-in-possession facility (the "DIP Facility") from its existing working capital lender, CIT, during the chapter 11 case. On May 11, 1999, the Company entered into a syndicated revolving credit facility (the "Credit Agreement") with CIT pursuant to and in accordance with the terms of a commitment letter dated December 7, 1998, which replaced the CIT DIP Facility. 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 a $85 million revolving credit facility, with at least a $35 million letter of credit subfacility. As collateral for borrowings under the Credit Agreement, Salant granted to CIT and a syndicate of lenders arranged by CIT (the "Lenders") a first priority lien on and security interest in substantially all of the assets of Salant. The Credit Agreement has an initial term of three years. The Credit Agreement also provides, among other things, that (i) Salant will be charged an interest rate on direct borrowings of .25% in excess 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 Salant in excess of the borrowing formula but within the $85 million limit of the revolving credit facility. The Company is required under the Credit Agreement to maintain certain financial covenants relating to consolidated tangible net worth, capital expenditures, maximum pre-tax losses / minimum pre-tax income and minimum interest coverage ratios. The Company was in compliance with all applicable covenants at October 2, 1999. Pursuant to the Credit Agreement, Salant will pay the following fees: (i) a documentary letter of credit fee of 1/8 of 1.0% on issuance and 1/8 of 1.0% on negotiation; (ii) a standby letter of credit fee of 1.0% per annum plus bank charges; (iii) a commitment fee of $325 thousand; (iv) an unused line fee of .25%; (v) an agency fee of $100 thousand (only for the second and third years of the term of the Credit Agreement); (vi) a collateral management fee of $8,333 per month; and (vii) a field exam fee of $750 per day plus out-of-pocket expenses. Pursuant to the Plan, on the Effective Date, all of Salant's then existing common stock ("Old Common Stock"), $1.00 par value per share, was cancelled. In accordance with the Plan, 10,000,000 shares of new common stock, $1.00 par value per share (the "New Common Stock"), were issued by Salant as follows: (i) 9,500,000 shares of the New Common Stock were distributed to the holders (the "Noteholders") of Salant's Senior Notes, in full satisfaction of all of the outstanding principal amount, plus all accrued and unpaid interest on the Senior Notes and (ii) 500,000 shares of the New Common Stock were distributed to the holders of Salant's Old Common Stock, in full satisfaction of any and all interests of such holder in Salant. Accordingly, under the Plan, as of the Effective Date, Salant's stockholders immediately prior to the Effective Date, who at that time owned 100% of the outstanding Old Common Stock of Salant, received, in the aggregate, 5% of the issued and outstanding shares of New Common Stock, subject to dilution, and the Noteholders received, in the aggregate, 95% of the issued and outstanding shares of New Common Stock, subject to dilution. The Company reserved 1,111,111 shares (10% of the outstanding shares) of New Common Stock for the Stock Award and Incentive Plan. The authorized capital stock of Salant as of the Effective Date consists of (i) 45,000,000 shares of New Common Stock, $1.00 par value per share and (ii) 5,000,000 shares of Preferred Stock, $2.00 par value per share (the "Preferred Stock"). No Preferred Stock was issued in connection with the Plan. The newly restructured Salant intends to focus primarily on its Perry Ellis men's apparel business and, as a result, is exiting its other businesses, including its Children's Group and non-Perry Ellis menswear divisions. In the first quarter of 1999, the Company sold its John Henry and Manhattan businesses. These businesses include the John Henry, Manhattan and Lady Manhattan trade names, the John Henry and Manhattan dress shirt inventory, the leasehold interest in the dress shirt facility located in Valle Hermosa, Mexico, and the equipment located at the Valle Hermosa facility and at Salant's facility located in Andalusia, Alabama. The Company received $27 million for the sale of trademarks, licenses and equipment in the first quarter of 1999. In the second quarter of 1999, Salant sold the inventory related to the Manhattan and John Henry dress shirt businesses and closed its private label denim facilities. In the first quarter of 1999, Salant also sold its Children's Group, the proceeds of which related primarily to the sale of inventory. Assets held for sale at October 2, 1999 at a net realizable value of $122, consists primarily of property related to the businesses that were exited by the Company. As a result of the above, Salant will now report its business operations as a single segment. Note 3. Inventories
October 2, January 2, October 3, 1999 1999 1998 Finished goods $ 22,756 $ 42,022 $ 57,620 Work-in-Process 8,373 17,225 16,206 Raw materials and supplies 6,415 10,343 14,123 -------- --------- --------- $37,544 $ 69,590 $ 87,949 ======= ======== ========
Note 4. Accumulated Other Comprehensive Income
Foreign Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustment Income Adjustment 1999 Beginning of year balance $(197) $(3,856) $(4,053) Nine months ended October 2, 1999 Change 58 -- 58 ------- ----------- ---------- End of quarter balance $(139) $(3,856) $(3,995) ===== ======= ======= 1998 Beginning of year balance $ 6 $(3,508) $(3,502) Nine months ended October 3, 1998 Change (262) -- (262) ------ ----------- --------- End of quarter balance $(256) $(3,508) $(3,764) ===== ======= =======
Note 5. Division Restructuring Costs In the first quarter of 1999, the Company recorded restructuring provisions of $4,039, primarily for severance costs related to the sale of the John Henry and Manhattan businesses and the closing of the Company's denim facilities. As of October 2, 1999, $3,677 remained in the restructuring reserve, primarily related to future minimum lease payments and severance costs for the discontinued businesses. It is anticipated that these expenditures will be substantially completed by the first quarter of 2000. Note 6. Discontinued Operations In the first quarter of 1999, an additional provision of $1,955 was recorded to account for additional costs incurred in the closing of the Children's Group manufacturing and distribution facilities. The net assets of discontinued operations decreased to a net liability of $536 (included in accrued liabilities) due primarily to the sale and disposal of inventory and the collection of accounts receivable. Net sales of discontinued operations in the first nine months of 1999 and 1998 were $5,574 and $32,407, respectively. Note 7. Extraordinary Gain In the second quarter of 1999, the Company recorded an extraordinary gain of $24,703 related to the conversion of the Senior Notes and the related unpaid interest into equity, as described in Note 2. Pursuant to the Plan, the Noteholders received, in the aggregate, 95% of the issued and outstanding shares of New Common Stock, subject to dilution, in full satisfaction of all of the outstanding principal amount ($104,879), plus all accrued and unpaid interest ($14,824) on the Senior Notes, 9,500,000 shares of the New Common Stock, was distributed to the holders of Salant's Senior Notes. Note 8. Income/(Loss) Per Share Pro forma basic income/(loss) per share is based on the weighted average number of common shares as if the New Common Stock had been issued at the beginning of the earliest period presented. Common stock equivalents are not considered, as the options for the New Common Stock are anti-dilutive. The following is a comparison of basic and diluted income/(loss) per share using the historical shares outstanding. Common stock equivalents are not considered for the Old Common Stock, as the options were cancelled or anti-dilutive. Such computation does not give retroactive effect to the issuance of the New Common Stock.
Three Months Ended Nine Months Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ----- ---- ---- ---- Basic and diluted income/(loss) per share: From continuing operations $0.24 ($0.08) ($0.32) ($0.11) From discontinued operations -- (0.06) (0.16) (0.20) From extraordinary gain -- -- 1.98 -- --------- ---------- -------- ---------- Basic and diluted income/(loss) per share $ .24 ($0.14) $1.50 ($0.31) ======== ======== ======= ======== Weighted average common stock outstanding 10,000 15,170 12,469 15,170 ====== ====== ====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations Third Quarter of 1999 Compared with Third Quarter of 1998 Net Sales Net sales decreased by $23.0 million, or 28.7%, from $80.3 million in the third quarter of 1998 to $57.3 million in the third quarter of 1999. This decrease primarily resulted from a reduction of $26.8 million in sales for the non-Perry Ellis businesses that were being sold or closed. Perry Ellis products experienced a net increase of $3.8 million for the third quarter of 1999 as compared to the third quarter of 1998. Gross Profit The gross profit percentage decreased from 26.0% to 24.6% in the third quarter of 1999, as compared to the third quarter of 1998. The gross profit decrease of 1.4% was primarily attributable to the reduced recovery for off-price sales of Perry Ellis products and losses on the sale of inventories relating to the businesses that the Company has liquidated or sold. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the third quarter of 1999 decreased to $12.0 million (20.9% of net sales) from $16.7 million (20.8% of net sales) for the third quarter of 1998. The decrease in SG&A expenses was primarily a result of the elimination of personnel and overhead costs related to the sale and closure of businesses that have been discontinued. Income from Continuing Operations Before Interest, Income Taxes and Extraordinary Gain Income from continuing operations before interest, taxes and extraordinary gain decreased from $4.8 million in the third quarter of 1998 to $2.2 million for the third quarter of 1999. The decrease of $2.6 million is due primarily to the decrease in sales and the loss of margin on the close-out and disposal of non-Perry Ellis inventories. Interest Income / Expense, Net Net interest income was $174 thousand for the third quarter of 1999 compared with interest expense of $3.6 million for the third quarter of 1998. The decrease in interest expense resulted from the elimination of the Senior Notes, a decrease in short term borrowings and interest income from the cash generated through the sale of the John Henry and Manhattan businesses. Discontinued Operations In the first quarter of 1999, the Company reserved for losses related to the phase out period and the closing of the Children's Group. The $0.9 million income in the prior year was due to the operations of the Children's Group. Net Income In the third quarter of 1999, the Company reported net income of $2.4 million, or $.24 per share, as compared to a net income of $2.1 million, or $.21 per share, in the third quarter of 1998. 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 was $3.5 million (6.1% of net sales) in the third quarter of 1999 as compared to $7.0 million (8.8% of net sales) for the third quarter of 1998. 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 1999 Compared with Year to Date 1998 Net Sales Net sales decreased by $29.0 million, or 12.9%, from $226.7 million in the first nine months of 1998 to $197.7 million in the first nine months of 1999. This decrease primarily resulted from a decrease of $40.2 million related to the sale and disposal of the non-Perry Ellis businesses. Sales of Perry Ellis products experienced an increase of $11.2 million over the first nine months of the prior year. Gross Profit The gross profit percentage decreased from 23.6% in the first nine months of 1998 to 20.6% for the first nine months of 1999. The decrease of 3.0% was due primarily to lower gross profit of non-Perry Ellis products due to the inventory sales of businesses the Company has liquidated or sold. The gross profit percentage for the Perry Ellis business remained basically consistent in first nine months of 1999 as compared to the first nine months of 1998. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the first nine months of 1999 decreased to $41.8 million (21.1% of net sales) from $47.4 million (20.9% of net sales) for the first nine months of 1998. The reduction of SG&A was due to the elimination of overhead and personnel costs associated with the sale and disposal of the non-Perry Ellis businesses. Provision for / Reversal of Division Restructuring Costs In the first nine months of 1999, the Company recorded a restructuring provision of $4.0 million. The provision was primarily for severance costs related to the sale of the John Henry and Manhattan businesses and its exit from the private label denim jeans business. Income / Loss from Continuing Operations Before Interest, Income Taxes and Extraordinary Gain Income from continuing operations before interest and taxes and extraordinary gain was $8.8 million for the first nine months of 1998 as compared to a loss of $3.3 million for the first nine months of 1999. The decrease of $12.1 million is due primarily to restructuring charges, lower sales along with the loss of margin on the close out of inventory from the businesses that will no longer continue as part of the ongoing operations of the Company. Interest Income / Expense, Net Net interest expense was $0.6 million for the first nine months of 1999 compared with interest expense of $10.5 million for the first nine months of 1998. The decrease in interest expense resulted from the elimination of the Senior Notes, decreased short-term borrowings and interest income from the cash generated through the sale of the John Henry and Manhattan businesses. Discontinued Operations In the first nine months of 1999, the Company recorded an additional provision of $2.0 million for expected losses during the phase out period of the Children's Group. The additional amount was required due to additional costs of phasing out the Children's Group's production and distribution facilities. The $3.1 million loss in the prior year was due to the loss from operations of the Children's Group. Extraordinary Gain An extraordinary gain of $24.7 million was recorded due to the exchange of the Senior Notes of $104.9 million and the interest payable of $14.8 million for 9.5 million shares of the Company's New Common Stock. Net Income / Loss In the first nine months of 1999, the Company reported net income of $18.7 million, or $1.87 per share, as compared with a net loss of $4.8 million, or $.48 per share, in the first nine months of 1998. 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 was $4.7 million (2.4% of net sales) in the first nine months of 1999, compared to $15.6 million (6.9% of net sales) in the first nine months of 1998, a decrease of $10.9 million, or 69.9%. 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 Upon commencement of the Chapter 11 Case, Salant filed a motion seeking the authority of the Bankruptcy Court to enter into a revolving credit facility with CIT pursuant to and in accordance with the terms of the Ratification and Amendment Agreement, dated as of December 29, 1998 (the "Amendment") which, together with related documents are referred to as the CIT DIP Facility, effective as of the Filing Date, which would replace the Company's existing working capital facility under the Credit Agreement. On December 29, 1998, the Bankruptcy Court approved the CIT DIP Facility on an interim basis and on January 19, 1999 approved the CIT DIP Facility on a final basis. The CIT DIP Facility provided 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 CIT DIP Facility consisted of an $85 million revolving credit facility, with a $30 million letter of credit subfacility. As collateral for borrowings under the CIT DIP Facility, the Company granted to CIT a first priority lien on and security interest in substantially all of the Company's assets and those of its subsidiaries, with superpriority administrative claim status over any and all administrative expenses in the Company's Chapter 11 Case, subject to a $2 million carve-out for professional fees and the fees of the United States Trustee. On May 11, 1999, the Company entered into a syndicated revolving credit facility (the "Credit Agreement") with CIT pursuant to and in accordance with the terms of a commitment letter dated December 7, 1998, which replaced the CIT DIP Facility described above. 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 a $85 million revolving credit facility, with at least a $35 million letter of credit subfacility. As collateral for borrowings under the Credit Agreement, Salant granted to CIT and a syndicate of lenders arranged by CIT (the "Lenders") a first priority lien on and security interest in substantially all of the assets of Salant. The Credit Agreement has an initial term of three years. The Credit Agreement also provided, among other things, that (i) Salant will be charged an interest rate on direct borrowings of .25% in excess 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 Salant 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 relating to consolidated tangible net worth, capital expenditures, maximum pre-tax losses / minimum pre-tax income and minimum interest coverage ratios. The Company was in compliance with all applicable covenants at October 2, 1999. Pursuant to the Credit Agreement, Salant will pay the following fees: (i) a documentary letter of credit fee of 1/8 of 1.0% on issuance and 1/8 of 1.0% on negotiation; (ii) a standby letter of credit fee of 1.0% per annum plus bank charges; (iii) a commitment fee of $325 thousand; (iv) an unused line fee of .25%; (v) an agency fee of $100 thousand (only for the second and third years of the term of the Credit Agreement); (vi) a collateral management fee of $8,333 per month; and (vii) a field exam fee of $750 per day plus out-of-pocket expenses. On October 2, 1999, direct borrowings and letters of credit outstanding under the Credit Agreement were $0.6 million and $29.1 million, respectively, and the Company had unused availability of $32.4 million. On October 3, 1998, direct borrowings and letters of credit outstanding were $76.3 million and $18.5 million, respectively, and the Company had unused availability of $11.0 million. During the first nine months of 1999, the maximum amount of direct borrowings and letters of credit outstanding under the Credit Agreement was $66.9 million and the maximum amount for the first nine months of 1998 was $100.9 million. The Company's cash provided by operating activities in the first nine months of 1999 was $23.5 million, which primarily reflects the decrease in inventory of $32.0 million, a decrease in accounts receivable of $2.7 million, an increase in accounts payable of $4.7 million and an increase in cash provided by discontinued operations of $4.9 million offset by (i) a decrease in chapter 11 liabilities of $20.0 million, and (ii) a decrease in accrued liabilities and reserve for business restructuring of $1.8 million. Cash provided by investing activities in the first nine months of 1999 was $23.3 million, of which $28.3 million was from the payment for the assets sold relating to the John Henry and Manhattan trademarks and licenses. Also in the first nine months of 1999, the Company used $3.2 million for capital expenditures and $1.7 million for the installation of store fixtures in department stores. During fiscal 1999, the Company plans to spend approximately $7.5 million for capital expenditures and for the installation of store fixtures in department stores. Cash used in financing activities in the first nine months of 1999 was $37.9 million, attributable to payments on short-term borrowings. 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: Disruption of Operations Relating to the Chapter 11 Case. The commencement of the Chapter 11 Case could adversely affect the Company's and its subsidiaries' relationships with their customers, suppliers or employees. If the Company's and its subsidiaries' relationships with customers, suppliers or employees are adversely affected, the Company's operations could be materially affected. The Company anticipates, however, that it will have sufficient cash to service the obligations that it intends to pay during the period prior to and through the consummation of the Plan. Even though the Plan was consummated on May 11, 1999, there can be no assurance that the Company would not thereafter suffer a disruption in its business operations as a result of filing the Chapter 11 Case, particularly in light of the fact that the Company has been a debtor in bankruptcy on two prior occasions. Competition. The apparel industry in the United States is highly competitive and characterized by a relatively small number of multi-line manufacturers (such as the Company) and a large number of specialty manufacturers. The Company faces substantial competition in its markets from manufacturers in both categories. Many of the Company's competitors have greater financial resources than the Company. The Company also competes for private label programs with the internal sourcing organizations of many of its own customers. Apparel Industry Cycles and other Economic Factors. The apparel industry historically has been subject to substantial cyclical variation, with consumer spending on apparel tending to decline during recessionary periods. A decline in the general economy or uncertainties regarding future economic prospects may affect consumer-spending habits, which, in turn, could have a material adverse effect on the Company's results of operations and financial condition. Retail Environment. Various retailers, including some of the Company's customers, have experienced declines in revenue and profits in recent periods and some have been forced to file for bankruptcy protection. To the extent that these financial difficulties continue, there can be no assurance that the Company's financial condition and results of operations would not be adversely affected. Seasonality of Business and Fashion Risk. The Company's principal products are organized into seasonal lines for resale at the retail level during the Spring, Fall and Holiday Seasons. Typically, the Company's products are designed as much as one year in advance and manufactured approximately one season in advance of the related retail-selling season. Accordingly, the success of the Company's products is often dependent on the ability of the Company to successfully anticipate the needs of the Company's retail customers and the tastes of the ultimate consumer up to a year prior to the relevant selling season. Foreign Operations. The Company's foreign sourcing operations are subject to various risks of doing business abroad, including currency fluctuations (although the predominant currency used is the U.S. dollar), quotas and, in certain parts of the world, political instability. Any substantial disruption of its relationship with its foreign suppliers could adversely affect the Company's operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas, which limit the amount of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocation could adversely affect the Company's operations. The Company's operations in Asia are subject to certain political and economic risks including, but not limited to, political instability, changing tax and trade regulations and currency devaluations and controls. The Company's risks associated with the Company's Asian operations may be higher in 1999 than has historically been the case, due to the fact that financial markets in East and Southeast Asia have recently experienced and continue to experience difficult conditions, including a currency crisis. As a result of recent economic volatility, the currencies of many countries in this region have lost value relative to the U.S. dollar. Although the Company has experienced no material foreign currency transaction losses since the beginning of this crisis, its operations in the region are subject to an increased level of economic instability. The impact of these events on the Company's business, and in particular its sources of supply and royalty income cannot be determined at this time. Dependence on Contract Manufacturing. For the year ended January 2, 1999, the Company produced 65% of all of its products (in units) through arrangements with independent contract manufacturers. Upon consummation of the Plan, substantially all of the Company's inventory will be manufactured by independent contractors. 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. Year 2000 Compliance. The Company has completed an assessment of its information systems ("IS"), including its computer software and hardware, and the impact that the year 2000 will have on such systems and Salant's overall operations. The Company has completed its assessment of date critical non-IS and has determined that they are year 2000 compliant. As of November 17, 1998, the Company has completed the implementation of new financial systems that are year 2000 ("Y2K") compliant. In addition, the Company has completed all testing of software modifications to correct the Y2K problems on certain existing software programs, including its primary enterprise systems (the "AMS System") at a total cost of $3.5 million. All business units that were using software that was not Y2K compliant were converted to the modified software by the end of the second quarter of 1999, at a cost of $500 thousand. The Company also identified certain third party hardware and software that was not Y2K compliant. These systems have been converted to systems that are Y2K compliant at an estimated cost of $1.0 million. The funding for these activities has or will come from internally generated cash flow and/or borrowings under the Company's working capital facility. To ensure business continuity, the Company began surveying its suppliers of key goods and services in 1998 for Y2K compliance. The Company continues to follow-up with its key business partners on a global basis to obtain responses to its inquiries. Based on responses received to date, management performed a risk assessment in the second quarter of 1999 and has developed appropriate contingency plans. The Company engaged an outside consultant to compare its plans and actions in preparation for Y2K to best practices and identify areas where the Company might want to take additional steps to minimize Y2K related impact on its business. Those recommendations have been reviewed, implemented as deemed appropriate by management, and the implementation was monitored by the outside consultant. If unforeseen Y2K issues arise, there could be a material adverse effect on the business, financial condition and results of operations of the Company. Management believes that all reasonable steps have been taken to identify and address Y2K related issues. PART II - OTHER INFORMATION NONE Exhibits Number Description 27 Financial Data Schedule 21 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 16, 1999 /s/ Awadhesh Sinha ------------------- --------------------- Awadhesh Sinha Chief Operating Officer And Chief Financial Officer EX-27 2 FDS --
5 1,000 9-MOS JAN-01-2000 OCT-02-1999 10,276 0 57,242 (21,553) 37,544 87,836 27,960 (14,320) 115,189 28,404 0 0 0 10,000 72,890 115,189 197,699 199,386 156,987 199,142 0 4,039 597 (3,929) 77 (4,006) (1,955) 24,703 0 18,742 1.87 1.87
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